Smart REIT

Sound bite for Twitter and StockTwits is: A bit on the pricey side. It would not be my first choice for a REIT. Liquidity Ratio is rather low and this makes the company vulnerable in bad times. See my spreadsheet on Smart REIT.

I do not own this stock of Smart REIT (TSX-SRU.UN, OTC-CWYUF). Once you have 5 or 6 stocks, you might want to consider a REIT for diversification. REITs are an easy way to investment in real estate. I am therefore following a few REIT stocks and in 2009 I decided to look at a few on the Dividend Achiever's List. Unfortunately, this stock is no longer on the Dividend Achiever's List.

REITs do not seem to consistently increase dividends over the longer term has been my experience. This stock raised their dividend for a time prior to 2009. There were no increases between 2009 and 2013, inclusive. They have started to raise dividends again in 2014 and in 2015. The last increase was for 3.1%. The 5 and 10 year dividend growth is at 0.78% and 1.62% per year.

The Bank of Canada has been saying that inflation is low at around 1.41% and 1.70% over the past 5 years for Total and Core inflation and around 1.65% and 1.72% over the past 10 years for Total and Core inflation. By this measure, the growth over dividends over the past 10 years at 1.62% looks fine. However, I know no one that believes inflation is that low, including myself. Food, rent and real estate seems a lot higher. In any event, what one expects from REITs is that the dividends would grow at the rate of inflation over the longer term. According to what the Bank of Canada says, this REIT has done this over the past 10 years.

As with many REITs, this company gives good dividends. The current dividend yield is 4.72% and the 5 year median dividend yield is 5.69% with an historical median of 6.05%. You may not want to include these when you are building a portfolio, but they probably should be considered once you start withdrawing money from your portfolio.

I think that comparing the distributions to FFO (Funds from Operations) or AFFO (Adjusted Funds from Operations) is quite valid for REITs. In 2015 the Dividend Payout Ratio for AFFO was 80.95 and for FFO was 76.3%. The 10 year median for AFFO was at 91.31% and for FFO was at 86.74%. Generally, you expect DPRs to be between 75% and 95% for REITS.

They have increased their outstanding share a lot over the years. Trust Units have grown by 6.2% and 8.3% per year over the past 5 and 10 years. For me, I would be more interested in the per share values. This has affected Revenues the most. The growth in Revenue is at 6.3% and 12.8% per year over the past 5 and 10 years. However, growth in Revenue per Share is very low over the past 5 years. Growth in Revenue per Share is at 0.06% and 4.2% per year over the past 5 and 10 years.

The 5 year running averages over the past 5 years confirm this with a 5 year growth of 0.5%. Also Revenue grew at 10% in 2015, but the Revenue per Share declined by 2.6% in 2015. There was a big increase in shares in 2015 and outstanding shares grew by 12.9%. Some 68% of the units issued were for cash, with another 18.9% because of converted debentures. Some 11% was because of DRIP and this is common for this stock to issue trust units re DRIP each year.

What I really do not like is that the Liquidity Ratio is very low. Current assets less current liabilities give a ratio of 0.25. In other words current assets do not come close to covering current liabilities. For this company they do not pay all their distributions in cash as some are under DRIP. Also part of the current liabilities is the current portion of their debt.

They have this debt covered. So, if you include in this ratio cash flow less distributions paid in cash and take out the current portion of their debt you get a Ratio of 1.35. Not great, but acceptable. The problem with low Liquidity Ratios is that companies are vulnerable in bad times. Unfortunately, this is not the only REIT with low Liquidity Ratios.

You cannot get a good handle on REIT's stock price when dealing with Price/Earnings per Share Ratio. I prefer to use the Price/FFO Ratio or Price/AFFO Ratio. The 5 year low, median and high median P/AFFO Ratios are 13.89, 15.24 and 16.60. The current P/AFFO Ratio is 18.41 based on a stock price of $34.97 and 2016 AFFO estimate of $1.90. The current P/AFFO Ratio is some 21% higher than 5 year median P/AFFO and is above the 5 year median high of 16.60. This testing would suggest that the stock price is relatively expensive.

The new accounting rules of IFRS affected EPS for REITs quite strongly in some cases. For the Graham Price on this stock I am using FFO in the calculation rather than EPS. For 2015 I have a Graham Price of $34.92. The 10 year low, median and high median Price/Graham Price Ratios are 0.84, 0.91 and 0.99. The current P/GP Ratio is 1.00 based on a stock price of $34.947. This testing would suggest that the stock price is relatively expensive. However, it is just inside the expensive range.

I get a 10 year median Price/Book Value per Share Ratio of 1.33. The current P/B Ratio is 1.43 a value some 7.3% higher. The current P/B Ratio is based on a BPVS of $24.41 and a stock price of $34.97. This stock price testing suggests that the stock price is relatively reasonable but above the median.

The historical dividend yield is 6.05%. The current dividend at 4.72% is some 22% lower. The current dividend yield is based on dividends of $1.65 and a stock price of $34.97. This testing would suggest that the stock price is relatively expensive.

When I look at analysts' recommendations, I find Buy and Hold recommendations. Most of the recommendations are a Hold and the consensus is a Hold. The 12 month stock price is $37.41. This implies a total return of 11.70% with 4.72% from dividends and 6.98% from capital gains.

Joseph Solitro of Motley Fool likes this REIT because of the good quality of its portfolio and good earnings. Cynthia Vaughn on Community Financial News talks about 6 research firms giving this stock a Hold rating. Barry Critchley in the Financial Post talks about this company's recent selling of Convertible Debentures.

I will have only one entry for this stock this year. However, I did a more complete report on this company in 2015 and you can see that report here and here.

The last stock I wrote about was about was High Liner Foods (TSX-HLF, OTC-HLNFF)... learn more . The next stock I will write about will be Just Energy Group Inc. (TSX-JE, NYSE-JE)... learn more on Monday, September 19, 2016 around 5 pm.

Smart REIT is the largest owner of large-format unenclosed retail properties in Canada. Its web site is here Smart REIT.

This blog is meant for educational purposes only, and is not to provide investment advice. Before making any investment decision, you should always do your own research or consult an investment professional. I do research for my own edification and I am willing to share. I write what I think and I may or may not be correct.

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