Published on March 14th, 2023 by Aristofanis Papadatos
Primaris Real Estate Investment Trust (PMREF) has three appealing investment characteristics:
#1: It is a REIT so it has a favorable tax structure and pays out the majority of its earnings as dividends.
Related: List of publicly traded REITs
#2: It is a high-yield stock based on its 6.0% dividend yield.
Related: List of 5%+ yielding stocks
#3: It pays dividends monthly instead of quarterly.
Related: List of monthly dividend stocks
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Primaris Real Estate Investment Trust’s trifecta of favorable tax status as a REIT, a high dividend yield, and a monthly dividend make it appealing to individual investors.
But there’s more to the company than just these factors. Keep reading this article to learn more about Primaris Real Estate Investment Trust.
Business Overview
Primaris Real Estate Investment Trust is the only enclosed shopping center-focused REIT in Canada, with ownership interests primarily in dominant enclosed shopping centers in growing markets. Its asset portfolio totals 10.9 million square feet, with a value of approximately C$3.2 billion.
Just like most mall REITs, Primaris REIT is facing a strong secular headwind, namely the shift of consumers from traditional shopping to online purchases. This trend has driven numerous brick-and-mortar stores out of business in recent years. The trend has markedly accelerated since the onset of the coronavirus crisis.
Primaris REIT is doing its best to adjust to the changing business landscape. To this end, the company tries to achieve economies of scale while it is also doing its best to enable and support omni-channel integration.
Source: Investor Presentation
Moreover, Primaris REIT owns and operates shopping centers that constitute the primary retail mode in their markets. The REIT also targets shopping centers with annual sales of at least C$80 million in order to have the critical mass to achieve significant economies of scale.
Source: Investor Presentation
Furthermore, Primaris REIT tries to build multi-location tenant relationships in order to create deeper relationships with its tenants and benefit from such relationships in the long run.
Primaris REIT enjoys strong business momentum right now. Thanks to a sustained recovery from the pandemic, the REIT grew its same-store sales to an all-time high in 2022, with 10.7% growth of same-property net operating income. It thus posted strong funds from operations (FFO) per unit of $1.17. Even better, as occupancy is currently standing at only 91.7%, management is confident that the REIT can grow its FFO per unit significantly in the upcoming years.
Growth Prospects
Primaris REIT has some significant growth drivers thanks to the characteristics of its core markets. In its markets, the population and the average household income are expected to grow by 5.5% and 3.0% per year, respectively, between 2020 and 2025. This means higher revenues for the shopping centers and hence higher revenues for Primaris REIT.
Moreover, as occupancy is currently standing below historical average levels, there is ample room for future growth for this REIT. Management is confident in sustained growth in the upcoming years.
On the other hand, investors should never forget the strong secular headwind from the shift of consumers toward online shopping. While Primaris REIT is doing its best to adjust to the new business environment, the secular shift of consumers will almost certainly continue exerting a strong drag on the business of the REIT. Overall, we find it prudent to assume just a 2.0% average annual growth of FFO per unit over the next five years in order to be on the safe side.
Dividend & Valuation Analysis
Primaris REIT is currently offering a 6.0% dividend yield. It is thus an interesting candidate for income-oriented investors but the latter should be aware that the dividend may fluctuate significantly over time due to the gyrations of the exchange rate between the Canadian dollar and the USD. Thanks to its decent business model, solid payout ratio of 46%, and strong interest coverage of 5.5, the trust is not likely to cut its dividend in the absence of a severe recession.
Notably, Primaris REIT has maintained a stronger balance sheet than most REITs in order to have the sufficient financial strength to endure the secular decline of malls and the effect of a potential recession on its business. We praise management for maintaining a decent balance sheet, with a leverage ratio (Net Debt to EBITDA) of 5.0.
On the other hand, due to the aggressive interest rate hikes implemented by the Fed in response to high inflation, interest expense is likely to rise significantly in the upcoming years. This is a headwind for the vast majority of REITs, including Primaris REIT. If high inflation persists for much longer than currently anticipated, high-interest rates will probably take their toll on the bottom line of Primaris REIT.
In reference to the valuation, Primaris REIT is currently trading for only 8.7 times its FFO per unit in the last 12 months. The cheap valuation has resulted primarily from the risk related to the secular decline of malls, the expected impact of higher interest expense on the bottom line, and the effect of high inflation on the valuation, as high inflation greatly reduces the present value of future cash flows.
Given the headwind from online shopping, we assume a fair price-to-FFO ratio of 11.0 for the stock. Therefore, the current FFO multiple is lower than our assumed fair price-to-FFO ratio. If the stock trades at its fair valuation level in five years, it will enjoy a 4.8% annualized gain in its returns.
Taking into account the 2% annual FFO-per-share growth, the 6.0% dividend, and a 4.8% annualized expansion of valuation level, Primaris REIT could offer an 11.1% average annual total return over the next five years. This is an attractive expected return, especially for investors who expect inflation to subside swiftly to its normal levels. Nevertheless, the stock is suitable only for investors who are comfortable with the risk that comes from the secular decline of malls.
Final Thoughts
Primaris REIT has the advantage of being the only REIT in Canada that is focused on enclosed shopping centers. As the stock offers a 6.0% dividend yield with a solid payout ratio of 46%, it is an attractive candidate for the portfolios of income-oriented investors, particularly given that the stock has an attractive expected return of 11.1% per year over the next five years.
On the other hand, investors should be aware of the risks of this REIT. Due to its focus on malls, Primaris REIT is vulnerable to recessions, while it also faces a strong headwind due to the shift of consumers from brick-and-mortar shops to online purchases. Only the investors who are comfortable with these risks should consider purchasing this stock.
Moreover, Primaris REIT is characterized by exceptionally low trading volume. This means that it is hard to establish or sell a large position in this stock.
Don’t miss the resources below for more monthly dividend stock investing research.
- The Monthly Dividend Stocks List
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