Summary
- Cominar is one of the largest REITs in Canada.
- The company grows aggressively through carefully-picked strategic acquisitions.
- One of the biggest acquisitions in the company's history came earlier this week.
- This acquisition will be beneficial for the company in more than one way.
Cominar is a Canadian real estate investment trust with a market cap of $2.5 billion. While the company is not well-known in the US, it is the third largest REIT in Canada. In the last few years, the company made some solid acquisitions that increased value for shareholders, and the company's latest acquisition may be the most important one. This article will discuss the company's recent performances, acquisition strategy, the importance of the latest acquisition and it will try to create an investment thesis around these frameworks.
Overview of Cominar REIT
The company is based in Montreal, Quebec, and all of the company's assets are located in Canada. This REIT was formed in 1998, and it saw tremendous growth through acquisitions. Prior to the acquisition announced this week, the REIT owned and managed assets worth of $6 billion. Some of these assets included office buildings, retail buildings, industrial buildings and other types of buildings, and the number of properties owned by the company had passed 500. Of the hundreds of properties owned by Cominar, only one is managed by an external party, and the rest of the properties are managed by the company. This saves Cominar money in terms of management fees and allows the company to share more profits with shareholders. Furthermore, this strategy allows the company to streamline its management practices and benefit from additional cost-savings.
The company's buildings enjoy a high rate of occupancy and this figure ranges between 92% and 94% depending on the segment. Most of the properties have long-term leases with many years remaining on the contract, and this allows the company to have more visibility in its long term financial status. As a practice, the company rarely invests in properties where it expects occupancy rate to be less than 90%. As a result of this strategy, most of Cominar's properties are located in high-demand areas in Quebec and Ontario where a lot of business activity occurs.
Cominar is committed to pay monthly dividends and the company has a history of growing dividends. This will be discussed in greater detail in the later parts of this article. Cominar's long-term strategy makes a big deal about sustainability, and this explains why the company mostly invests in properties that have high rate of long-term occupancy in high-demand locations. The company is always on the lookout for these types of properties and it is not shy about adding such assets to its portfolio when opportunities present themselves.
In order to buying desirable properties that meet the company's criteria both in terms of quality and price, Cominar also carries out development projects. The company is always seeking to enter in new markets and expand its foot print in Canada in order to maximize shareholder value. Generally speaking, most of the company's growth will come from acquisitions with small portion of growth coming from development projects, as acquisitions of proven properties (i.e., properties with histories of delivering strong results and high long-term occupancy rates) carry less risk and more stability.
The company tracks different types of metrics to ensure long-term success. Some of these metrics include net operating income, same property net operating income, recurring funds from operations per unit, debt ratios including and excluding convertible debt, interest coverage ratios, occupancy rates, retention rate and increase in leasable area. In the table below, you will see the company's performances in 2012 and 2013, and you will be able to compare the performances of these two years.
Notice that net operating income rose in double digits (15.9%) while same-property (i.e., buildings that are owned by the company for at least one year) net operating income fell by 1.3%, which indicates that most of the company's growth in 2013 came from acquisitions. Again, the company's debt ratio rose by 1.2% including convertible debt and by 3.4% excluding convertible debt compared to the previous year. Also the company's average debt interest rate fell slightly from 5.1% to 4.9% during this period.
Basically, the company increased its debt ratio by a couple percentage points while increasing its operating income in double-digits, which may mean that it got a good deal from its acquisitions (it may be too early to tell and we will probably need more data points to prove this argument). Other metrics to pay attention are the occupancy rate and the retention rate. Even though retention rate fell by nearly 6%, the occupancy rate fell by less than 1%. This means that the company has no trouble with replacing old tenants with new tenants. This also means that the company's new acquisitions have high occupancy rates just like its existing properties.
In the last 10 years, the company saw a tremendous growth rate and this became more prominent in the last 2 years as Cominar became more aggressive about buying properties where it saw value. The company's revenues grew by 500% in the last 10 years and they will continue rising this year, especially after this week's acquisitions.
Cominar's growth strategy and game plan
The real estate is a relatively stable industry; however, these days, big changes happen in every industry regardless of economical environment. This forces many companies to become more flexible than they would have been. There are very few ways in which a real estate company can adapt to changes and become flexible. One way is to diversify. Diversification can happen in many ways. A company can buy assets in different markets, different locations, or it can invest in different types of assets. Cominar seems to understand this concept and none of the company's acquisitions look random. For example, whenever Cominar acquires some office space, it also acquires some retail or industrial assets in order to keep a fine balance. If one particular industry sees financial weakness, the company hopes to stay strong by serving other (hopefully stronger) industries in the area.
Before investing in a property, Cominar takes its time to study the property to be assessed. The property's past and current occupancy rates get analyzed, along with its market position. The company hopes that once it makes an acquisition, the newly added building will start contributing to the company's profits from the first day. Some improvements may be made on certain properties to improve their appeal, but most properties will be acquired to generate revenues immediately. In most cases, these properties will have occupants with long-term contracts before the acquisition is completed.
The company is authorized to have a debt-ratio of up to 65%, but it tends to keep its debt ratio around 50% to be safe. The company engages in active debt management which includes selling or repurchasing debt, in addition to refinancing activities in order to reduce the average interest rate while increasing the average maturity of the company's existing debt. As of the end of last year, the company's average interest rate was 4.93% compared to 5.14% in the previous year. Furthermore, the company's average maturity term increased from 3.9 years to 5.0 years during the last year as a result of its active management of debt. Also, the company often issues convertible debt in order to convert some of its debt-holders to its shareholders.
Since the company tends to acquire properties in areas of strong demand, it can often re-negotiate better deals with its tenants once contracts come to a conclusion. Last year, the average net rent of renewed leases was up by 5.9% and this increase did not affect the company's occupancy rate negatively.
In line with its long-term growth strategy, the company acquired a package of 19 properties for a total of $149.8 million, an office building in Fredericton for $5.7 million, an industrial building in Montreal for $12 million and a shopping center in the same city for $60 million. In order to fund these and some future acquisitions as well as manage its debt levels, the company issued 4 separate senior unsecured debt for a total of $550 million, and it used part of this money to redeem a $110 million debt with a relatively high interest rate of 5.80%. Earlier this year, the company acquired 11 office properties for $229 million and a retail complex for $28 million. This acquisition increased the total assets under the company's management to $6.3 billion (including some intangible assets that are worth less than 10% of this total).
Most of the company's operations and assets focus on the region of Montreal in Canada, and this is for a good reason. Montreal has the second largest economy in Canada and the city's economy benefits from a large variety of industries including but not limited to aerospace, pharmaceuticals, software, telecommunications, textile, manufacturing, tobacco, transportation and finance. The city's GDP is approaching $150 billion, and its economic activity continues to grow at a healthy rate. Cominar's operations benefit greatly from the city's stable and healthy economy, and this was part of the company's strategy all along. When a company expands to a new region through either acquisition or development, it studies the new market to ensure that it has a healthy and growing economy. This includes making sure that the city has a well-diversified economy and it does not rely completely on one or two industries.
The last and the biggest acquisition of the company
Earlier this week, Cominar announced the biggest single acquisition of its history. The company is buying a portfolio of properties from Ivanhoe Cambridge for a total of $1.5 billion with a capitalization rate of 6.5%. This acquisition includes 15 landmark properties in Quebec and Ontario. A total of 10 large shopping malls, one retail complex, three office properties and one industrial property will be part of the deal and this will add 5.7 million square feet of high-quality leasable property to the company's portfolio.
These properties were picked for the company because they fit the company's long-term growth strategy and overall growth goals. The acquired properties have an occupancy rate of 97%, and most of the ongoing lease contracts have many years before they expire. This acquisition will increase the company's total assets to $8.1 billion. While the geographical distribution of the company's assets will remain roughly the same, the rate of retail properties in the overall mix will rise from 24% to 38%.
The acquisition includes
Mail Champlain was the largest retail space acquired by Cominar in this package. This property is located in Brossard, Quebec and it houses more than 150 boutiques. The mall has cultural partnerships with certain entities such as Theatre de la Ville and Classica. Theatre de la Ville houses 60 shows every year and it attracts more than 250,000 ticketed-visitors. Classica is an urban festival involving classical music. Every year, more than 50,000 people visit this festival that offers indoor and outdoor concerts. Many of the people that visit these venues also visit Mail Champlain mall and this brings extra revenues for the retail property.
Ivanhoe Cambridge will be taking a stake of $250 million from Cominar as part of this deal. Ivanhoe Cambridge is one of the largest and most recognized property managers in Canada, and this acquisition-partnership will benefit both companies greatly. As a result of this exchange, Ivanhoe Cambridge will become the largest single shareholder of Cominar with a stake of 8.5%. The company will also be given a spot in Cominar's board of directors, and the two companies will be working closely on any future projects where joint acquisitions or land developments could occur. The two companies will also share expertise, and we may actually see them eventually have a merger as their partnership becomes stronger and joining the two companies makes more sense.
Many of the properties that are being acquired by Cominar are strategically located in places where Cominar already has some exposure but the company also had plenty of room to strengthen its presence. In some of those regions where the company possessed a large number of office and industrial properties, it was able to add some retail properties to balance things out.
In addition to the properties that were sold to Cominar, Ivanhoe Cambridge continues to own many properties in Canada, the United States and throughout Europe. In the event that Cominar wants to expand to new markets or regions, the company will be able to buy more properties from Ivanhoe Cambridge, or it will be able to benefit from this company's expertise in many different regions and markets. This is another way this partnership should benefit Cominar.
Closing thoughts
Cominar is one of the largest REITs in Canada and the company continues its impressive growth story through strategic acquisitions. The company is very careful and picky about the acquisitions it makes in order to protect its high occupancy rate and market dominance in many regions. The latest acquisition of $1.5 billion worth of assets from Ivanhoe Cambridge will help the company increase its footprint in eastern Canada, allow Ivanhoe Cambridge to become the largest single stakeholder of the company, and help build a strategic partnership between the companies that will benefit both parties.
Cominar's aggressive but well-planned growth is likely to continue for many years and the company is likely to become one of the most dominant property owners in Canada. This latest acquisition will certainly bring the company closer to its goals.
Currently Cominar pays monthly dividends and the company's annual dividend yield is around 7.50%. As with every REIT, the company has a strong commitment to reward its shareholders through dividends, and those investors who are interested in gaining exposure to the healthy economy of Quebec and Ontario provinces of Canada will most certainly find some value in this company.