RBC Dominion Securities Inc. Equity Income Guided Portfolio

March 26, 2020 | Change Report Portfolio Advisory Group – Equities

What’s inside 2 Portfolio positions Opportunistically upgrading 3 Methodology along the quality curve We are switching out our 2.5% position in H&R REIT in favour of a 2.5% weight in Allied Properties

H&R Real Estate Investment Trust We are adding a 2.5% position in Allied (HR.UN) has fallen on hard times, Properties Real Estate Investment pinned between depressed oil prices Trust (AP.UN) to the Portfolio as it and lower customer foot traffic as provides us with exposure to a company individuals practice social distancing with prime office buildings in the to combat the spread of COVID-19. , , and As a result, unit prices have declined metro areas at a rare discount to NAV. by north of 60% year to date. The Many of the company’s underlying geopolitical standoff between Russia properties are one-to-four storeys and Saudi Arabia remains fluid, which high, which should provide a strong unfortunately limits our visibility on pipeline for potential redevelopment as the oil outlook. Per annum, H&R REIT urbanization trends continue to unfold. generates approximately $100 million Allied Properties also has a strong of net rents from The Bow office balance sheet with a debt-to-enterprise building in , which is leased value of 32%, amongst the lowest to a single tenant (Ovintiv, OVV), within RBC Capital Markets’ Real Estate and roughly $205 million of net rents coverage universe. Furthermore, only via retail. These two components in 8% of Allied Properties’ NOI derives aggregate represent roughly 39% of from retail, while roughly 70% of NOI H&R REIT’s total net operating income comes from office tenants as of Q4 (NOI). While the units are currently 2019. We recognize that there are some trading at about a 70% discount to concerns with respect to occupancy net asset value (NAV), we believe during an economic downturn, but we opportunistically upgrading along find comfort in the fact that occupancy For an overview of the Portfolio, the quality curve continues to make is around 94% and the remaining please click here. sense in the face of slowing economic average lease term is about six years. Click here for authors’ contact growth, and we are therefore removing Lastly, the units are yielding 4.6% information. the position in H&R REIT from the (approximately 81% payout based on All values in Canadian dollars and Portfolio. RBC Capital Markets’ 2020 estimates), priced as of Mar 24, 2020, market close, unless otherwise noted. which we view as attractive for a high- Produced: Mar 25, 2020 17:10ET quality Real Estate holding. Disseminated: Mar 26, 2020 07:00ET For required disclosures, see page 4. NOT FOR DISTRIBUTION IN THE U.S. 2 | Equity Income Guided Portfolio

Price to Forecasted Forecast Forecast Market Price 52-wk EPS / AFFO / CFPS earnings/AFFO/CFPS Div payout ratio growth in dividend Company name Weight cap (B) 3/24/20 range ($) 2019A 2020E 2021E 2019A 2020E 2021E yield 2019A 2020E 2021E EPS/AFFO growth rate or CFPS to 2021

Interest sensitive

CM Canadian Imp. Bank of Commerce 2.5% $34 $75.10 116 - 68 11.92 9.34 11.15 6.3x 8.0x 6.7x 7.8% 47% 62% 53% -6% 2%

BMO Bank of Montreal 2.5% $42 $64.10 107 - 56 9.43 7.34 9.53 6.8x 8.7x 6.7x 6.6% 43% 58% 46% 1% 4%

BNS Bank of Nova Scotia 2.5% $64 $52.26 77 - 46 7.14 5.00 6.98 7.3x 10.5x 7.5x 6.9% 49% 72% 52% -2% 1%

NA National Bank 5.0% $16 $46.23 75 - 39 6.36 5.29 6.13 7.3x 8.7x 7.5x 6.1% 42% 54% 49% -4% 6%

RY 5.0% $118 $81.75 110 - 72 NA NA NA NA NA NA 5.3% NA NA NA NA NA

TD TD Bank 2.5% $103 $55.89 78 - 49 6.69 4.96 6.13 8.4x 11.3x 9.1x 5.7% 43% 63% 54% -8% 4%

MFC Manulife 5.0% $31 $15.58 28 - 13 2.97 3.04 3.41 5.2x 5.1x 4.6x 7.2% 34% 37% 36% 15% 9%

IFC Intact Financial 2.5% $17 $115.67 158 - 105 6.16 7.65 8.90 18.8x 15.1x 13.0x 2.9% 49% 43% 40% 44% 8%

TRI Thomson Reuters ^ 2.5% $29 $56.80 83 - 52 0.15 2.12 2.26 NMF 26.8x 25.1x 2.5% NMF 73% 74% NMF 16%

AP.UN Allied Properties REIT * 2.5% $4 $35.65 60 - 31 1.93 2.03 2.13 18.5x 17.6x 16.7x 4.6% 83% 81% 77% 10% 0%

FCR.UN First Capital Realty * 2.5% $3 $11.93 23 - 11 1.09 1.04 1.07 10.9x 11.5x 11.1x 7.2% 79% 83% 80% -2% 0%

BCE BCE 5.0% $46 $50.85 65 - 46 3.50 3.58 3.73 14.5x 14.2x 13.6x 6.5% 91% 93% 93% 7% 4%

T TELUS 5.0% $26 $20.48 28 19 1.44 1.57 1.74 14.3x 13.0x 11.8x 5.7% 78% 77% 74% 21% 11%

BIP Brookfield Infr. Partners ^ 2.5% $10 $33.05 56 26 3.40 3.67 4.04 9.7x 9.0x 8.2x 6.5% 59% 59% 57% 19% 7%

FTS Fortis 5.0% $21 $45.90 59 - 42 2.55 2.67 2.85 18.0x 17.2x 16.1x 4.2% 71% 72% 71% 12% 6%

H Hydro One 2.5% $14 $23.11 30 - 20 1.54 1.40 1.48 15.0x 16.5x 15.6x 4.2% 63% 72% 72% -4% 10%

CU Canadian Utilities 2.5% $6 $27.30 43 25 2.23 2.12 2.17 12.2x 12.9x 12.6x 6.4% 76% 82% 82% -3% 3%

Consumer

MRU Metro 2.5% $14 $55.14 59 - 48 2.84 3.10 3.44 19.4x 17.8x 16.0x 1.6% 27% 29% 28% 21% 9%

QSR Restaurant Brands **^ 5.0% $12 $38.63 79 - 25 2.72 2.99 3.30 14.2x 12.9x 11.7x 4.7% 73% 70% 69% 21% 27%

MGA Magna International ^ 2.5% $9 $29.14 57 - 23 6.05 6.61 7.66 4.8x 4.4x 3.8x 5.0% 24% 24% 23% 27% 21%

Industrial

CNR Canadian Nat. Railway 5.0% $76 $108.80 128 - 92 5.80 6.22 6.96 18.8x 17.5x 15.6x 2.1% 37% 37% 36% 20% 10%

Resources

SU Suncor Energy *** 5.0% $27 $17.42 46 - 14 6.93 7.60 8.74 2.5x 2.3x 2.0x 10.7% 24% 25% 23% 26% 8%

CNQ Canadian Natural Resources *** 2.5% $16 $13.69 43 - 10 8.61 8.66 9.37 1.6x 1.6x 1.5x 12.4% 17% 19% 20% 9% 9%

ENB Enbridge * 5.0% $80 $37.39 57 - 33 4.57 4.59 4.89 8.2x 8.1x 7.6x 8.7% 65% 71% 70% 7% 5%

TRP TC Energy 5.0% $52 $55.62 77 - 47 4.14 4.18 4.24 13.4x 13.3x 13.1x 5.8% 72% 78% 84% 2% 10%

PPL Pembina Pipeline * 5.0% $16 $28.52 54 - 15 4.36 4.31 4.45 6.5x 6.6x 6.4x 8.8% 55% 58% 59% 2% 5%

NTR Nutrien ^ 5.0% $17 $28.66 55 - 24 2.15 1.74 2.12 13.3x 16.5x 13.5x 6.3% 82% 103% 85% -1% 0%

Source - RBC Capital Markets estimates, Bloomberg, and Thomson Reuters ^ In U.S. dollars * Adjusted funds from operations (AFFO) instead of earnings per share (EPS) ** Bloomberg estimates *** Cash flow per share (CFPS) Payout ratios based on earnings per share, except as noted above. Dividend growth rate is based on RBC Capital Markets’ or Bloomberg’s 2021 forecast dividend compared to the current annualized dividend. Growth in EPS/AFFO/CFPS are based on the RBC Capital Markets’ 2021 forecast compared to the current annualized dividend. In all jurisdictions where RBC Capital Markets conducts business, we do not offer investment advice on Royal Bank of Canada. Certain regulations prohibit member firms from soliciting orders and offering investment advice or opinions on their own stock. References to Royal Bank are for informational purposes only and not intended as a direct or implied recommendation for investing in Royal Bank and all related securities.

March 26, 2020 | RBC Wealth Management 3 | Equity Income Guided Portfolio Methodology The objective of the Equity Income Guided Portfolio (EIGP) is to provide investors with an attractive rate of current income with the potential for growing cash flow plus long-term capital appreciation by investing in a diversified Portfolio of higher-yielding Canadian securities, such as common stocks, Real Estate Investment Trusts (REITs), and income trusts that trade on the S&P/ TSX Composite Index. This Portfolio consists of approximately 20–30 stocks and may be appropriate for investors who have a moderate risk tolerance in relation to an equity investment. Because of its focus on income and income growth, this Portfolio would ordinarily exhibit greater defensive characteristics relative to the broad equity market during bear markets and may underperform during bull markets.

The top-down strategy process employed by RBC Capital Markets plays a different role in the EIGP process than with our other Guided Portfolios. While the recommended sector “overweights” and “underweights” are taken into consideration, the Investment Committee aims to diversify the Portfolio adequately across the four broader economic sectors (interest sensitive, consumer, industrial, and resources), even though dividends may be modest. In this way, we address one of the most common pitfalls inherent in income investing: investors who focus too narrowly on the size of the dividend will more than likely find themselves heavily concentrated in the Financials and Utilities sectors, which tend to react negatively to rising interest rates.

Once the “sector weights” are established, an eligible universe of securities is determined. Careful consideration is given to identifying a pool of fundamentally preferred companies that have the potential to return, on a sustainable basis, a significant amount of cash flow to investors. The resulting universe will consist of securities with either an attractive dividend yield or a yield that may appear less attractive, but that we believe have strong potential for growth. In addition, companies that, in our view, pay out too high a percentage of their cash flows in dividends or distributions will be excluded.

Additional factors analyzed include a company’s financial strength and debt levels, the amount of cash generated by the business relative to capital expenditure requirements, its longer-term return on capital, the proportion of income paid out versus reinvested, historical and forecast dividend growth rates, and trading liquidity.

The current dividend yield for the S&P/TSX Composite Index is approximately 3.97%; the EIGP currently offers investors a yield of approximately 5.73% plus the potential for capital appreciation and an inflation hedge.

March 26, 2020 | RBC Wealth Management 4 | Equity Income Guided Portfolio Disclosures and disclaimers

Equity Income Guided Portfolio Investment Committee Distribution of Ratings - RBC Capital Markets, LLC Equity Research As of December 31, 2019 Dominick Hardy, CA, CFA, CPA, Portfolio Advisor Investment Banking Services [email protected]; RBC Dominion Securities Inc. Provided During Past 12 Months Patrick McAllister, CFA, Portfolio Advisor Rating Count Percent Count Percent [email protected]; RBC Dominion Securities Inc. Buy [Top Pick & Outperform] 765 51.97 225 29.41 Hold [Sector Perform] 625 42.46 127 20.32 Sunny Singh, CFA, Portfolio Advisor Sell [Underperform] 82 5.57 5 6.10 [email protected]; RBC Dominion Securities Inc. Richard Tan, CFA, Portfolio Advisor Explanation of RBC Capital Markets, LLC Equity Rating [email protected]; RBC Dominion Securities Inc. System An analyst’s “sector” is the universe of companies for Analyst Certification which the analyst provides research coverage. Accordingly, All of the views expressed in this report accurately reflect the rating assigned to a particular stock represents solely the personal views of the responsible analyst(s) about any the analyst’s view of how that stock will perform over the and all of the subject securities or issuers. No part of the next 12 months relative to the analyst’s sector average. compensation of the responsible analyst(s) named herein is, or will be, directly or indirectly, related to the specific Ratings: recommendations or views expressed by the responsible Top Pick (TP): Represents analyst’s best idea in the sector; analyst(s) in this report. expected to provide significant absolute total return over 12 months with a favorable risk-reward ratio. Outperform This report is issued by the Portfolio Advisory Group (“PAG”) (O): Expected to materially outperform sector average over which is part of the retail division of RBC Dominion Secu- 12 months. Sector Perform (SP): Returns expected to be rities Inc. (“RBC DS”). The PAG provides portfolio advisory in line with sector average over 12 months. Underperform services to RBC DS Investment Advisors. Reports published (U): Returns expected to be materially below sector average by the PAG may be made available to clients of RBC DS over 12 months. Restricted (R): RBC policy precludes certain through its Investment Advisors. The PAG relies on a num- types of communications, including an investment recom- ber of different sources when preparing its reports includ- mendation, when RBC is acting as an advisor in certain ing, without limitation, research reports published by RBC merger or other strategic transactions and in certain other Capital Markets (“RBC CM”). RBC CM is not independent circumstances. Not Rated (NR): The rating, price targets and of RBC DS or the PAG. RBC CM is a business name used by estimates have been removed due to applicable legal, reg- Royal Bank of Canada and certain of its affiliates, including ulatory or policy constraints which may include when RBC RBC DS, in connection with its corporate and investment Capital Markets is acting in an advisory capacity involving banking activities. As a result of the relationship between the company. RBC DS, the PAG and RBC CM, there may be conflicts of interest relating to the RBC CM analyst that is responsible Risk Rating: for publishing research on a company referred to in a report The Speculative risk rating reflects a security’s lower level issued by the PAG. of financial or operating predictability, illiquid share trading volumes, high balance sheet leverage, or limited operating Required Disclosures history that result in a higher expectation of financial and/ RBC Capital Markets Distribution of Ratings or stock price volatility. For the purpose of ratings distributions, regulatory rules RBC Capital Markets has fundamental research of the fol- require member firms to assign ratings to one of three rat- lowing companies: ing categories - Buy, Hold/Neutral, or Sell - regardless of a Allied Properties REIT (AP.UN; Outperform; $35.65) firm’s own rating categories. Although RBC Capital Markets, Bank of Montreal (BMO; Sector Perform; $64.10) LLC ratings of Top Pick/Outperform, Sector Perform, and Bank of Nova Scotia (BNS; Sector Perform; $52.26) Underperform most closely correspond to Buy, Hold/Neu- tral and Sell, respectively, the meanings are not the same BCE (BCE; Sector Perform; $50.85) because our ratings are determined on a relative basis. Brookfield Infr. Partners (BIP; Outperform; $33.05) Canadian Imperial Bank of Commerce (CM; Sector Perform; $75.10) Canadian Nat. Railway (CNR; Sector Perform; $108.80) Canadian Natural Resources (CNQ; Outperform; $13.69)

March 26, 2020 | RBC Wealth Management 5 | Equity Income Guided Portfolio

Canadian Utilities (CU; Sector Perform; $27.30) A partner, director or officer of a member company of Enbridge (ENB; Outperform; $37.39) RBC Capital Markets or one of its affiliates, or an analyst First Capital Realty (FCR.UN; Top Pick; $11.93) involved in the preparation of a report on The Bank of Nova Scotia has, during the preceding 12 months, provided Fortis (FTS; Outperform; $45.90) services for The Bank of Nova Scotia for remuneration other H&R Real Estate Investment Trust (HR; Sector Perform; $8.16) than normal course investment advisory or trade execution Hydro One (H; Sector Perform; $23.11) services. Intact Financial (IFC; Top Pick; $115.67) RBC Capital Markets Conflicts Policy Magna International (MGA; Outperform; $29.14) RBC Capital Markets Policy for Managing Conflicts of Inter- Manulife (MFC; Outperform; $15.58) est in Relation to Investment Research is available from us Metro (MRU; Sector Perform; $55.14) on request. To access our current policy, clients should refer National Bank (NA; Outperform; $46.23) to https://www.rbccm.com/global/file-414164.pdf or send a request to RBC Capital Markets Research Publishing, P.O. Nutrien (NTR; Outperform; $28.66) Box 50, 200 Bay Street, Royal Bank Plaza, 29th Floor, South Pembina Pipeline (PPL; Outperform; $28.52) Tower, Toronto, M5J 2W7. We reserve the right to Restaurant Brands (QSR; Outperform; $38.63) amend or supplement this policy at any time. Suncor Energy (SU; Outperform; $17.42) Dissemination of Research & Short Term Ideas TC Energy (TRP; Outperform; $55.62) RBC Capital Markets endeavours to make all reasonable Toronto-Dominion Bank (TD; Sector Perform; $55.89) efforts to provide research simultaneously to all eligible cli- TELUS (T; Outperform; $20.48) ents, having regard to local time zones in overseas jurisdic- Thomson Reuters (TRI; Sector Perform; $56.80) tions. Subject to any applicable regulatory considerations, “eligible clients” may include RBC Capital Markets institu- RBC Capital Markets analysts have received (or will receive) tional clients globally, the retail divisions of RBC Dominion compensation based in part upon the investment banking Securities Inc. and RBC Capital Markets LLC, and affiliates. revenues of RBC Capital Markets. RBC Capital Markets’ equity research is posted to our pro- Portfolio Advisory Group personnel, including the portfolio prietary websites to ensure eligible clients receive coverage advisor or any individuals directly involved in the prepara- initiations and changes in rating, targets and opinions in a tion of the report hold(s) or exercise(s) investment discre- timely manner. Additional distribution may be done by the tion over a long position in the common shares of Allied sales personnel via email, fax or regular mail. Clients may Properties REIT, Brookfield Infrastructure Partners L.P., also receive our research via third party vendors. Please Canadian National Railway Company, Canadian Natural Re- contact your investment advisor or institutional salesper- sources Limited, Canadian Utilities Limited, Enbridge Inc., son for more information regarding RBC Capital Markets First Capital REIT, Fortis Inc., Manulife Financial Corporation, research. RBC Capital Markets also provides eligible clients METRO INC., Nutrien Ltd., Restaurant Brands International with access to SPARC on its proprietary INSIGHT website. Inc., Royal Bank of Canada, Suncor Energy Inc., TC Energy SPARC contains market color and commentary, and may Corporation, TELUS, The Bank of Nova Scotia, and The To- also contain Short-Term Trade Ideas regarding the securities ronto-Dominion Bank. of subject companies discussed in this or other research A household member or members of the Portfolio Advisory reports. A Short-Term Trade Idea reflects the research Group hold(s) or exercise(s) investment discretion over a analyst’s directional view regarding the price of the security long position in the common shares of Canadian National of a subject company in the coming days or weeks, based Railway Company, Fortis Inc., Nutrien Ltd., and Restaurant on market and trading events. A Short-Term Trade Idea may Brands International Inc. differ from the price targets and/or recommendations in our The portfolio advisor responsible for this report or a mem- published research reports reflecting the research ana- ber of his/her team hold(s) or exercise(s) investment discre- lyst’s views of the longer-term (one year) prospects of the tion or control over a long position in the non-convertible subject company, as a result of the differing time horizons, fixed income securities of BCE Inc., Brookfield Infrastructure methodologies and/or other factors. Thus, it is possible Partners L.P., Canadian Utilities Limited, Enbridge Inc., and that the security of a subject company that is considered a Royal Bank of Canada. long-term ‘Sector Perform’ or even an ‘Underperform’ might be a short-term buying opportunity as a result of temporary A household member or members of the portfolio advisor selling pressure in the market; conversely, the security of responsible for this report or a member of his/her team a subject company that is rated a long-term ‘Outperform’ hold(s) a long position in the non-convertible fixed income could be considered susceptible to a short-term downward securities of BCE Inc., Brookfield Infrastructure Partners price correction. Short-Term Trade Ideas are not ratings, L.P., Canadian Utilities Limited, and H&R REIT. nor are they part of any ratings system, and RBC Capital

March 26, 2020 | RBC Wealth Management 6 | Equity Income Guided Portfolio

Markets generally does not intend, nor undertakes any Disclaimer obligation, to maintain or update Short-Term Trade Ideas. The information contained in this report has been compiled by RBC Domin- Short-Term Trade Ideas discussed in SPARC may not be ion Securities Inc. (“RBC DS”) from sources believed by it to be reliable, but no representations or warranty, express or implied, are made by RBC suitable for all investors and have not been tailored to indi- DS or any other person as to its accuracy, completeness or correctness. vidual investor circumstances and objectives, and investors All opinions and estimates contained in this report constitute RBC DS’ should make their own independent decisions regarding judgment as of the date of this report, are subject to change without notice any Short-Term Trade Ideas discussed therein. and are provided in good faith but without legal responsibility. This report is not an offer to sell or a solicitation of an offer to buy any securities. Additionally, this report is not, and under no circumstances should be Conflict Disclosures construed as, a solicitation to act as securities broker or dealer in any In the event that this is a compendium report (covers jurisdiction by any person or company that is not legally permitted to six or more subject companies), RBC DS may choose to carry on the business of a securities broker or dealer in that jurisdiction. provide specific disclosures for the subject companies by This material is prepared for general circulation to Investment Advisors and does not have regard to the particular circumstances or needs of any reference. To access RBC CM’s current disclosures of these specific person who may read it. RBC DS and its affiliates may have an companies, please go to https://www.rbccm.com/ investment banking or other relationship with some or all of the issuers GLDisclosure/PublicWeb/DisclosureLookup.aspx? mentioned herein and may trade in any of the securities mentioned herein entityId=1. either for their own account or the accounts of their customers. RBC DS and its affiliates may also issue options on securities mentioned herein Such information is also available upon request to RBC and may trade in options issued by others. Accordingly, RBC DS or its Dominion Securities, Attention: Manager, Portfolio Advisory affiliates may at any time have a long or short position in any such security Group, 155 Wellington Street West, 17th Floor, Toronto, ON or option thereon. To the full extent permitted by law neither RBC DS nor M5V 3K7. any of its affiliates, nor any other person, accepts any liability whatsoever for any direct, indirect or consequential loss arising from, or in connection The authors are employed by RBC Dominion Securities Inc., with, any use of this report or the information contained herein. No matter a securities broker-dealer with principal offices located in contained in this document may be reproduced or copied by any means Toronto, Canada. without the prior written consent of RBC DS in each instance. In all jurisdictions where RBC Capital Markets conducts business, we do The Global Industry Classification Standard (“GICS”) was developed by not offer investment advice on Royal Bank of Canada. Certain regulations and is the exclusive property and a service mark of MSCI Inc. (“MSCI”) and prohibit member firms from soliciting orders and offering investment Standard & Poor’s Financial Services LLC (“S&P”) and is licensed for use advice or opinions on their own stock. References to Royal Bank are for by RBC. Neither MSCI, S&P, nor any other party involved in making or com- informational purposes only and not intended as a direct or implied rec- piling the GICS or any GICS classifications makes any express or implied ommendation for investing in Royal Bank and all related securities. warranties or representations with respect to such standard or classifica- RBC Dominion Securities Inc.* and Royal Bank of Canada are separate cor- tion (or the results to be obtained by the use thereof), and all such parties porate entities which are affiliated. *Member-Canadian Investor Protection hereby expressly disclaim all warranties of originality, accuracy, complete- Fund. RBC Dominion Securities Inc. is a member company of RBC Wealth ness, merchantability and fitness for a particular purpose with respect to Management, a business segment of Royal Bank of Canada. ®Registered any of such standard or classification. Without limiting any of the forego- trademarks of Royal Bank of Canada. Used under licence. ©2020 Royal ing, in no event shall MSCI, S&P, any of their affiliates or any third party Bank of Canada. All rights reserved. involved in making or compiling the GICS or any GICS classifications have any liability for any direct, indirect, special, punitive, consequential or any other damages (including lost profits) even if notified of the possibility of such damages.

References herein to “LIBOR”, “LIBO Rate”, “L” or other LIBOR abbrevi- ations means the London interbank offered rate as administered by ICE Benchmark Administration (or any other person that takes over the admin- istration of such rate).

March 26, 2020 | RBC Wealth Management