Problems may lie ahead for the highly leveraged TSX small caps on our list
SmallCapPower | July 17, 2017: Last week we discussed some companies who should benefit from rising interest rates, and today we talk about ones who could struggle. REITs and utility stocks generally struggle in high interest rate environments due to the excessive leverage they take on. These companies pay out most of their earnings so they typically need to lever up to grow their business. Since they have so much debt on their books, their costs will increase with interest rates, and their stock prices could decline. Today we have identified four TSX small caps operating in the Real Estate or Utility sector that have an excessive amount of leverage.
Temple Hotels Inc. (TSX: TPH) – $4.15
Specialized REITs
Temple Hotels Inc. is a Canada-based company engaged in owning and operating hotel property investments in Canada. The Company’s segments include Fort McMurray, Other Alberta and Other Canada. The Company invests, directly and indirectly, in hotel properties and assets. The primary business activity of the Company is the acquisition and development of hotel properties and the management of the acquired/developed properties. The hotel portfolio of the Company consists of over 30 hotel and investment properties, which are owned by the Company, comprising approximately 3,880 rooms.
- Debt: $529,016,000
- Debt/Equity: 1985%
- Interest Coverage: 0.52x
Innergex Renewable Energy Inc. (TSX: INE) – $14.47
Electric Utilities
Innergex Renewable Energy Inc is a Canada-based renewable power producer. The Company is a developer, owner and operator of renewable power-generating facilities with a focus on hydroelectric, wind power and solar photovoltaic (PV) projects. It operates through four segments: hydroelectric generation, wind power generation, solar power generation and site development. Its portfolio of assets consists of interests in approximately three groups of power-generating project. It has over 30 facilities with a net installed capacity of over 710 megawatts. The Company owns interests in approximately 30 hydroelectric facilities.
- Market Cap: $2,701,473,000
- Debt/Equity: 574%
- Interest Coverage: 1.43x
Boralex Inc. (TSX: BLX) – $21.30
Electric Utilities
Boralex Inc. is a power producer that develops, constructs and operates renewable energy power stations. The Company’s segments include wind, hydroelectric, thermal and solar. It operates an asset base with a capacity of approximately 1,260 megawatts (MW), of which over 1,090 MW are under its control, consisting of approximately 490 MW in Canada, over 520 MW in France and over 80 MW in the Northeastern United States. It operates approximately 870 MW wind power portfolio of assets in France and Canada. It also owns the rights to portfolio of wind power projects in France. It is also a wind power operator in Canada with an installed capacity of approximately 550 MW in Quebec and Ontario.
- Market Cap: $1,753,000,000
- Debt/Equity: 353%
- Interest Coverage: 0.89x
Caribbean Utilities Company Ltd. (TSX: CUP.U) – $13.17
Electric Utilities
Caribbean Utilities Company, Ltd. is engaged in generating, transmitting and distributing electricity in its license area of Grand Cayman, Cayman Islands. The Company uses diesel generation to produce electricity for Grand Cayman. Its power system consists of 20 generating units, including 17 diesel engines, two gas turbines and one steam turbine with a combined capacity of approximately 160 megawatts (MW). In addition, it has four mobile units, each with a capacity of approximately 1.5 MW. Its system consists of eight transformer substations, approximately 387 miles of overhead high-voltage and over 50 miles of underground high-voltage transmission and distribution (T&D) lines, and approximately 10 miles of high-voltage submarine cable in Grand Cayman.
- Market Cap: $339,437,878
- Debt/Equity: 115%
- Interest Coverage: 4.32x
Disclosure: Neither the author nor any of the principals at Small Cap Power, or their family members, own shares in any of the companies mentioned above.
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