Smart REIT Valuation – Initial Coverage $TSE:SRU.UN

Benjamin Graham taught that Intelligent Investors must do a thorough fundamental analysis of investment opportunities to determine their intrinsic value and inherent risk.  This is best done by utilizing a systematic approach to analysis that will provide investors with a sense of how a specific company compares to another company or by reviewing the 10 Stocks for Using A Benjamin Graham Value Investing Strategy – February 2017.  By using the ModernGraham method one can review a company’s historical accomplishments and determine an intrinsic value that can be compared across industries.  What follows is a stock analysis showing a specific look at how Smart REIT (TSE:SRU.UN) fares in the ModernGraham valuation model.

Company Profile (obtained from Google Finance): Smart Real Estate Investment Trust, formerly known as Calloway Real Estate Investment Trust, open-ended mutual fund trust. The Trust develops, leases, constructs, owns and manages shopping centers in Canada, both directly and through its subsidiaries, Smart Limited Partnership, Smart Limited Partnership II and Smart Limited Partnership III. The Trust owns approximately 140 shopping centers with total gross leasable area of over 31.1 million square feet and approximately 10 development properties, located in communities across Canada. Its objectives are to provide Unitholders with stable and growing tax-deferred cash distributions through the acquisition, development and operation of a portfolio of unenclosed retail centers. Its retail properties include Alliston SmartCentre, Aurora North SmartCentre, Bradford SmartCentre, Centennial Parkway Plaza, Fredericton North SmartCentre, Kenaston Common SmartCentre, Mascouche North SmartCentre and New Westminster SmartCentre.

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Downloadable PDF version of this valuation:

ModernGraham Valuation of TSE-SRU.UN – February 2017

Stage 1: Is this company suitable for the Defensive Investor or the Enterprising Investor?

What kind of Intelligent Investor are you?

Defensive Investor; must pass 6 out of the following 7 tests.
1. Adequate Size of the Enterprise Market Cap > $2Bil $4,284,083,448 Pass
2. Sufficiently Strong Financial Condition Current Ratio > 2 0.36 Fail
3. Earnings Stability Positive EPS for 10 years prior Pass
4. Dividend Record Dividend Payments for 10 years prior Pass
5. Earnings Growth Increase of 33% in EPS in past 10 years using 3 year averages at beginning and end 257.17% Pass
6. Moderate PEmg Ratio PEmg < 20 14.91 Pass
7. Moderate Price to Assets PB Ratio < 2.5 OR PB*PEmg < 50 1.34 Pass
Enterprising Investor; must pass 4 out of the following 5 tests, or be suitable for the Defensive Investor.
1. Sufficiently Strong Financial Condition Current Ratio > 1.5 0.36 Fail
2. Sufficiently Strong Financial Condition Debt to NCA < 1.1 -12.35 Fail
3. Earnings Stability Positive EPS for 5 years prior Pass
4. Dividend Record Currently Pays Dividend Pass
5. Earnings Growth EPSmg greater than 5 years ago Fail

Stage 2: Determination of Intrinsic Value

EPSmg $2.20
MG Growth Estimate -4.25%
MG Value $0.00
Opinion Overvalued
MG Grade B+
MG Value based on 3% Growth $31.84
MG Value based on 0% Growth $18.66
Market Implied Growth Rate 3.20%
Current Price $32.73
% of Intrinsic Value N/A

Smart REIT qualifies for both the Defensive Investor and the Enterprising Investor. The Defensive Investor is only initially concerned with the low current ratio. The Enterprising Investor has concerns regarding the level of debt relative to the current assets, and the lack of earnings growth over the last five years. As a result, all value investors following the ModernGraham approach should feel comfortable proceeding with the analysis.

As for a valuation, the company appears to be Overvalued after seeing its EPSmg (normalized earnings) decline from $3.68 in 2012 to an estimated $2.2 for 2016. This level of demonstrated earnings growth does not support the market’s implied estimate of 3.2% annual earnings growth over the next 7-10 years. As a result, the ModernGraham valuation model, based on the Benjamin Graham value investing formula, returns an estimate of intrinsic value below the price.

At the time of valuation, further research into Smart REIT revealed the company was trading below its Graham Number of $33.18. The company pays a dividend of $1.65 per share, for a yield of 5%, putting it among the best dividend paying stocks today. Its PEmg (price over earnings per share – ModernGraham) was 14.91, which was below the industry average of 31.91, which by some methods of valuation makes it one of the most undervalued stocks in its industry. Finally, the company was trading above its Net Current Asset Value (NCAV) of $-30.54.

Smart REIT performs fairly well in the ModernGraham grading system, scoring a B+.

Stage 3: Information for Further Research

Net Current Asset Value (NCAV) -$30.54
Graham Number $33.18
PEmg 14.91
Current Ratio 0.36
PB Ratio 1.34
Current Dividend $1.65
Dividend Yield 5.05%
Number of Consecutive Years of Dividend Growth 3


Useful Links:

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Most Recent Balance Sheet Figures

Balance Sheet Information 9/1/2016
Total Current Assets $163,554,000
Total Current Liabilities $451,775,000
Long-Term Debt $3,559,045,000
Total Assets $8,647,605,000
Intangible Assets $52,128,000
Total Liabilities $4,885,050,000
Shares Outstanding (Diluted Average) 154,615,000

Earnings Per Share History

EPS History
Next Fiscal Year Estimate $2.01
Dec2015 $1.75
Dec2014 $1.67
Dec2013 $2.04
Dec2012 $6.81
Dec2011 $1.43
Dec2010 $4.65
Dec2009 $0.24
Dec2008 $0.95
Dec2007 $0.33
Dec2006 $0.26
Dec2005 $0.55
Dec2004 $0.51
Dec2003 $1.29
Mar2002 $0.86
Mar2001 $0.23
Mar2000 $0.18
Mar1999 $0.23

Earnings Per Share – ModernGraham History

EPSmg History
Next Fiscal Year Estimate $2.20
Dec2015 $2.44
Dec2014 $2.96
Dec2013 $3.42
Dec2012 $3.68
Dec2011 $1.91
Dec2010 $1.87
Dec2009 $0.47
Dec2008 $0.56
Dec2007 $0.44
Dec2006 $0.56
Dec2005 $0.71
Dec2004 $0.73
Dec2003 $0.74
Mar2002 $0.41
Mar2001 $0.17
Mar2000 $0.12

Recommended Reading:

Other ModernGraham posts about the company

None. This is the first time ModernGraham has covered the company.

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The author did not hold a position in any company mentioned in this article at the time of publication and had no intention of changing that position within the next 72 hours.  See my current holdings here.  This article is not investment advice; any reader should speak to a registered investment adviser prior to making any investment decisions.  ModernGraham is not affiliated with the company in any manner.  Please be sure to review our detailed disclaimer.






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