Is SmartCentres Real Estate Investment Trust (TSX:SRU.UN) A Bargain Following Its Leasing Update?

Why SmartCentres REIT’s latest leasing update matters for income investors

SmartCentres Real Estate Investment Trust (TSX:SRU.UN) has drawn fresh attention after reporting 98.1% occupancy, strong leasing activity, and average rent increases of 12% on renewals. This has reinforced interest in its monthly distributions and yield profile.

Despite the strong leasing news, SmartCentres Real Estate Investment Trust’s recent share price has softened a little, with a 30 day share price return of 5.46% and a 90 day share price return of 5.27% from a last close of CA$27.52. Over a longer horizon the picture has been more supportive for income holders, with a 1 year total shareholder return of 9.91% and a 3 year total shareholder return of 41.65%, which suggests momentum has come through gradually rather than in sharp spikes.

Scan beyond SmartCentres Real Estate Investment Trust to compare its income profile with a hand picked 3 dividend fortresses that also focus on resilient cash flows and consistent payouts.

SmartCentres Real Estate Investment Trust now trades at CA$27.52 against analyst targets near CA$30.08 and an indicated intrinsic value gap of about 32%. Is the current price already close to fair value, or is it still meaningfully below it?

Price to earnings of 25.3x for SmartCentres REIT: Is it justified?

On a simple valuation check, SmartCentres Real Estate Investment Trust trades on a P/E of 25.3x, which screens as expensive compared with both its Retail REIT peers and the wider North American Retail REITs industry.

The P/E ratio compares the current share price with reported earnings per unit. For a REIT like SmartCentres Real Estate Investment Trust, a higher P/E usually implies investors are willing to pay more today for each dollar of current earnings. This can occur when investors expect steadier or improving profitability or place a premium on income visibility.

Here, the earnings record has been under pressure, with earnings declining by 26.4% per year over the past 5 years and a further decline of 31.7% over the past year, while profit margins of 16.4% are below last year’s 24.3%. Against that backdrop, a 25.3x P/E compared with a 24x industry average and a 17.9x peer average indicates the market is assigning SmartCentres Real Estate Investment Trust a richer earnings multiple than many comparable Retail REITs, despite weaker historical profit trends and a low 3.1% return on equity.

In other words, the P/E sits above both the sector and peer benchmarks. This suggests investors are accepting a higher price tag for each dollar of earnings than the level implied by peers and industry averages, rather than pricing the stock in line with those reference points.

See what the numbers say about this price — find out in our valuation breakdown.

Result: Price-to-earnings of 25.3x (OVERVALUED)

However, SmartCentres Real Estate Investment Trust’s elevated P/E and relatively low 3.1% return on equity leave little cushion if earnings or occupancy weaken from current levels.

Find out about the key risks to this SmartCentres Real Estate Investment Trust narrative.

Another view on SmartCentres REIT’s value

The P/E ratio presents SmartCentres Real Estate Investment Trust as expensive, yet our DCF model suggests the opposite. At CA$27.52, the units are trading about 32.1% below an estimated fair value of CA$40.54, which frames the same cash flows as potentially undervalued. Which lens do you trust more?

Look into how the SWS DCF model arrives at its fair value.

Simply Wall St performs a discounted cash flow (DCF) on every stock in the world every day (check out SmartCentres Real Estate Investment Trust for example). We show the entire calculation in full. You can track the result in your watchlist or portfolio and be alerted when this changes, or use our stock screener to discover 14 high quality undervalued stocks. If you save a screener we even alert you when new companies match - so you never miss a potential opportunity.

Next Steps

If the mix of income appeal and valuation debate around SmartCentres Real Estate Investment Trust feels finely balanced, you may want to review the detailed breakdown of 2 key rewards and 4 important warning signs.

Looking for more investment ideas beyond SmartCentres REIT?

SmartCentres Real Estate Investment Trust may be on your radar already, but you do not want to miss other stocks that could strengthen and diversify your portfolio.

• Target quality by reviewing companies that screen as 14 high quality undervalued stocks and might offer a more attractive entry point on current fundamentals.
• Protect your downside by checking out a 11 resilient stocks with low risk scores that emphasises resilience and steadier business profiles.
• Stay ahead of the crowd by scanning a 9 high quality undiscovered gems that highlights lesser known stocks with strong underlying metrics.

This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.

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