Primaris Reit - Enclosed Mall Spinoff Opportunity
Symbol: PMZ.UN (TSX)
Primaris is a spin-off opportunity that was created by combining a portfolio of enclosed shopping malls from within HR Reit with another enclosed mall portfolio owned by the Healthcare of Ontario Pension Plan (HOOPP).
The newly created public company is an enclosed shopping mall REIT focused on Canadian secondary markets with an average population of 200,000. It was introduced to the TSX in January 2022. HOOPP has a 26% Ownership stake in Primaris giving the new company an institutional endorsement.
HR REIT spun off these "bad assets" into Primaris so that it could become more focused and move away from enclosed shopping malls. This spinoff process has created a deep value opportunity to purchase a real estate investment trust with investment characteristics significantly above the retail sector average.
Diversified Tenant Mix with Durable Pandemic Occupancies
Primaris has 2300 tenants across 35 properties totaling 11.4M square feet of space. It has a five year weighted average lease term and has maintained a 90% committed occupancy rate throughout the pandemic.
The tenants are well diversified with top tenants including Canadian Tire, Walmart and Loblaws. The lease maturity schedule is well spread out over the next five years.
Primaris Reit vs. Canadian Retail Peers
Looking at the large difference between the Primaris investment stats vs. its retail peers it is easy to see these secondary malls outperforming. The 5.7% Yield is above the average and it comes with a below average 70% AFFO payout ratio. The Price to AFFO is estimated at 12.2X for 2022 well below peers. TD has a $17.50 Price Target which puts the target return at 31% well above peers. 30% Discount to the $20 Net Asset Value and an 8% implied cap rate.
32% Net Debt to Gross Asset Value - The low debt represents a large opportunity here with management stressing "disciplined capital allocation" including: Development of excess density intensification, unit repurchases, and distributions to unit holders.
TD has the NAV at $20. Primaris has the NAV at $22.
Low Site Coverage & Intensification Potential
Primaris has intensification potential with 900 acres of land in prime locations within the secondary markets. The site coverage area for the malls is quite low creating an opportunity for intensification development. Developing residential units in mall parking lots can add a lot of value to the medium term.
Primaris plans to self-fund the development with $60+ Million in retained free cash flow each year to develop the properties and create growth.
Its finances are so conservative that it can pay the 5.7% Yield + fund its own intensification development. A true Income + Growth Opportunity.
Value Breakdown
Breaking down the value of Primaris begins by taking the book value of the properties $2.1B and dividing it by the 11.4M SQFT of space. This provides an estimate book value of $184/SQFT and includes the 900 acres of land under the enclosed malls with the low site coverage areas and development potential.
The current share price of approximately $14 is far below the $22 Net Asset Value in Primaris Reit's February 2022 Investor Presentation. If we apply this same discount to the $184/SQFT you are able to buy enclosed malls for $115/SQFT that includes all of the 900 acres of land with future development potential.
This investment is well below replacement cost which would be at least $300-$400/SQFT + Land.
Internal Management Structure + Recent Insider Transactions
The reit has an internal management structure with Alex Avery as CEO (Former EVP Asset Management @ HR Reit and former head of North American research at CIBC Capital Markets)
The new management has been demonstrating conviction with strong Insider Buying - 369,002 Shares - Approximately $5,000,000 in January 2022.
I like managements enthusiasm and financial commitment.
Conclusion
I have purchased a 4% position in Primaris and appreciate the opportunity to get deep value, a high sustainable yield and a side of growth. Over time I believe the market will value Primaris much closer to its retail peers and this reversion to the mean will be a positive tailwind.
My only concern with Primaris is that same property net operating income has been flat, however I believe that the combination of deep value, low debt and intensification opportunities will mitigate this challenge. Primaris Malls are currently between 90-110% of pre-pandemic retail spending levels, indicating that Regional Malls aren't dead, have survived the pandemic and may even have room to improve as the economy reopens.
I view this type of investment similar to Riocan Reit (my largest position) where you are really purchasing high quality land that yields income through retail which can be further developed with residential intensification. If you were to go and purchase the land and then develop and build the mall it would be a lot more expensive than the $115/SQFT it is available at today.
Many people have a negative view towards enclosed malls however cheap real estate investments are hard to come buy and this is one deep value contrarian cigar butt that I am willing to chew on.
Disclaimer: This article should not be taken as legal investing advice. The choice is yours whether to invest in any asset or not (please do your own research).
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Resources
Blog Post on H+R & Primaris - Nelson @ Uproar Capital
Primaris REIT January 2022 Investor Presentation
Primaris Reit Investor Relations (including SEDAR + Management Information Circular)
BNN Bloomberg Interview with CEO Alex Aery Jan 5th 2022
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