Pat McKeough recently replied to an Inner Circle member looking for an opinion on Cominar REIT. The large commercial landlord has sold non-core properties to pay down its debt. But it still faces risk, says Pat.
Q: Hi Pat: What is your opinion on Cominar REIT?
A: COMINAR REIT (symbol CUF.UN on Toronto; www.cominar.com) is Quebec’s largest owner of commercial buildings.
In all, the trust holds 542 properties—134 office buildings, 173 shopping malls and 235 industrial and mixed-use buildings. These holdings contain a total of 45.0 million square feet of leasable space in Montreal (56% of the total), Quebec City (23%), Ontario (13%), the Atlantic provinces (6%) and Western Canada (2%). Cominar’s occupancy rate is 92.5%.
The trust continues to grow by acquisition. Revenue jumped 179.8%, from $317.7 million in 2011 to $889.2 million in 2015.
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Cominar’s earnings rose from $2.74 a unit (or a total of $177.5 million) in 2011 to $3.13 a unit (or $342.2 million) in 2012. Due to higher depreciation charges and other costs, earnings then fell to $2.03 a unit (or $255.0 million) in 2013, and to $1.47 a unit (or $199.5 million) in 2014. However, earnings rebounded to $1.62 a share (or $272.4 million) in 2015.
Cash flow per unit declined from $1.56 in 2011 to $1.55 in 2012, but rose to $1.58 in 2013 and to $1.66 in 2014. Cash flow then fell to $1.60 a unit in 2015.
As part of a new strategy, Cominar is selling some of its less-important properties. In the three months ended March 31, 2016, the trust sold 24 retail properties in Quebec for a total of $71.7 million. After the quarter, it sold five more retail properties for $39.3 million.
Due to these sales, the trust’s revenue in the quarter fell 3.5%, to $221.4 million from $229.4 million a year earlier. Earnings declined 4.3%, to $68.1 million from $71.2 million. With more units outstanding, per-unit earnings fell 7.0%, to $0.40 from $0.43. Cash flow per unit also declined 7.0%, to $0.41 from $0.44.
Cominar is using the cash from its asset sales to pay down its debt, which totaled $4.4 billion as of March 31, 2016. That’s a high 1.5 times its market cap. The trust also held cash of $3.5 million.
The REIT pays monthly distributions of $0.1225 per unit, for an 8.6% annualized yield. It paid out 89.6% of its cash flow as distributions in the latest quarter.
Cominar’s concentration in Quebec makes it riskier than the REITs we recommend as buys in our newsletters. They are more widely diversified across Canada. If you hold units in the trust, you can offset that risk by limiting your Quebec exposure elsewhere in the portfolio.
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I’m from Montreal and Cominar is a very big name there. I have owned the REIT for a long time and plan to hold onto it.