Stock to Watch: FAM REIT still a bargain after IPOMichelle Siu/The Globe and Mail
FAM Real Estate Investment Trust
Monday's close : $9.95 a unit, up 20 cents
Trading range since December initial public offering (IPO): $9.33 to $10.05 a share
Annual dividend : 0.75 cents a unit for a yield of 7.5 per cent
Analysts' ratings : none
Recent history : Units of FAM REIT are still trading slightly below its IPO price of $10 a unit. When the REIT went public, its units included a sweetener that also gave investors a warrant (for every four units purchased) to buy more units at $10.50 each before Dec. 28, 2015. FAM, which owns industrial, office and shopping centre properties, is a spinoff from Huntington Capital Corp. The real estate operating company retains a 30 per cent stake the REIT. FAM used its proceeds from the IPO to buy 27 properties from Huntington, which in turn will also earn fees managing the REIT. Huntington, which is looking to become an asset manager over time, recently launched a hostile bid for up to 51 per cent of KEY REIT, formerly Scott's REIT.
Manager insight : FAM REIT was listed just before Christmas with at an IPO price that was lower than its net asset value (NAV) of $10.63 a unit, based on International Financial Reporting Standards (IFRS). The REIT is a bargain because its unit price still trades below its NAV, while there is further upside potential because of its conservative forecasts in its prospectus, says Lee Goldman, a portfolio manager at First Asset Investment Management Inc., which owns units of FAM REIT.
"You are getting it [FAM] at a pretty decent discount to NAV," said Mr. Goldman, who co-runs REIT portfolios with manager Chris Couprie. "Most REITs are trading at NAV or at a premium." In its prospectus, FAM REIT came out with a conservative occupancy rate for 2013, "which we think they can beat," he said. "It assumes 93 per cent occupancy versus 96 to 97 per cent currently. The IPO also assumes only a 75 per cent lease renewal and no lease– up of current vacant space. We think they will beat on both of those metrics."
The IPO forecast for adjusted funds from operations (AFFO) – a key yardstick in the real estate industry – stood at 79 cents a unit for this year, but realistically it is going to be closer to 92 cents based on annualizing the projected first quarter from the prospectus, Mr. Lee said.
To get investors interested, "I think they wanted to be able to beat IPO forecasts," he noted. "It will add some credibility to management. I think the stock will react favourably, as any company, if they come out and beat their forecasts...The problem with a lot of REITs is that, when they come out for an IPO, their assumptions are very aggressive, and they tend to miss the first few quarters."
For a smaller REIT, there is added confidence from having former Canaccord Capital REIT analyst Shant Poladian as its chief executive officer; and board members Gary Samuel, the former CEO and co-founder of Canadian REIT, and Ian MacKellar, former chief financial officer of Cadillac Fairview Corp., he said. His one-year target price, or estimated NAV, is $11 a unit.