On Friday, major North American stock markets rallied.
In the U.S., the Dow Jones Industrial Average gained 0.26 per cent, the S&P 500 index increased 0.41 per cent, and the Nasdaq composite index climbed 0.42 per cent.
In Canada, the S&P/TSX composite index soared 185 points, or 1.20 per cent. There were 201 securities in the TSX Index that advanced, 46 securities declined in value, and three stocks closed the day unchanged.
Year to date, the TSX Index is up 1.93 per cent year. In the U.S., the Dow Jones Industrial Average is up 6.30 per cent year to date, the S&P500 index is up 7.17 per cent, and the Nasdaq composite has rallied 13.33 per cent.
On today's TSX Breakouts report, there are 36 stocks on the positive breakouts list (stocks with positive price momentum), and 25 stocks are on the negative breakouts list (stocks with negative price momentum).
Featured today is a security from the positive breakouts list. The Trust offers investors yield of 5 per cent with a conservative payout ratio. The Trust has a healthy balance sheet with a large cash balance, which could be used to unlock value for unitholders. The security I am referring to is Granite Real Estate Investment Trust (GRT.UN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The REIT
Toronto-based Granite owns and operates primarily industrial, warehouse, and logistics properties across North America and also abroad, in Europe. Magna International Inc. is the REIT's largest tenant, representing 78 per cent of annualized lease payments. The Trust holds a portfolio of 92 properties in nine countries. The occupancy rate stood at 99 per cent as at the end of 2016.
On the fourth-quarter earnings conference call, Michael Forsayeth, the chief executive officer, reiterated management's focus for identifying and pursuing acquisition opportunities that will add value and diversify the Trust's portfolio, saying, "As I said before, in 2017 and beyond, we'll pursue property and portfolio and potentially company acquisitions, with a focus on capitalizing on any regional disparities and market disruptions across our international footprint. We will pursue development opportunities from within Granite's existing portfolio and from acquired real estate assets. We'll look at joint ventures and similar arrangements with our local operating partners. We'll continue the targeted sale of certain noncore properties, primarily tenanted by Magna, and we'll look to doing further investments with our tenants, including Magna in support of their growth."
The Trust has a strong balance sheet. As at Dec. 31, 2016, Granite had cash and cash equivalents of $246.2-million, representing over $5 per unit.
This large cash position may have caught the eye of activists believing there is value to unlock for unitholders. In recent weeks, FrontFour Capital and Sandpiper Group reported taking ownership positions in Granite.
In a report released today, FrontFour and Sandpiper identified Granite REIT as, "a high-quality global portfolio of industrial assets with tremendous long term potential to become a Canadian real estate champion. Today, industrial real estate is one of the most sought-after asset classes with quality product trading below 6 per cent on a cap rate basis globally. Granite, with a quality portfolio and an A- rated primary tenant, continues to trade at an 8 per cent cap rate. This represents a substantial discount to its underlying asset and intrinsic value, despite recent unit price performance."
FrontFour and Sandpiper indicated their intension to nominate "highly-qualified independent trustees with considerable real estate experience" in order to unlock value for unitholders.
Granite will be reporting its first-quarter financial results after the market closes on May 9.
The REIT trades on the Toronto Stock Exchange under the ticker GRT.un and also on the New York Stock Exchange under the ticker GRP.U.
Distribution policy
Granite pays unitholders a monthly distribution of 21.7 cents per unit, or $2.60 per unit on a yearly basis. This translates to an annualized yield of 5.1 per cent.
Management is firmly committed to returning capital to its unitholders, announcing a 6.9 per cent increase to its distribution last December, lifting its distribution to its present level.
Granite has a conservative payout ratio. In 2016, the funds from operations payout ratio was 71 per cent, up from 68 per cent reported in 2015.
Analysts' recommendations
The REIT is covered by seven analysts on the Street. Granite currently has one buy recommendation and six hold recommendations.
The seven firms providing research coverage on the REIT are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, Desjardins Securities, RBC Capital Markets, Scotia Capital, TD Securities, and Veritas Investment Research.
Revised recommendations
Last week, two analysts increased their target prices. Pammi Bir, the analyst at Scotia Capital, raised his target price to $49.50 from $48. Mark Rothschild, the analyst from Canaccord Genuity, lifted his target price to $51.25 from $48.
Financial forecasts
The Street is forecasting funds from operations (FFO) per unit of $3.45 in 2017, up from $3.43 in 2016, and forecast to rise to $3.61 in 2018. The consensus adjusted FFO per unit estimates are $3.18 for 2017, climbing to $3.33 in 2018.
Forecasts have been relatively stable, with minor revisions. For instance, four months ago, the consensus FFO per unit estimates were $3.52 for 2017 and $3.60 for 2018. The Street was forecasting AFFO per unit of $3.20 in 2017 and $3.28 in 2018.
Valuation
The REIT is trading at a premium to historical levels. According to Bloomberg, Granite is trading at a price-to-FFO multiple of 14.1 times the 2018 consensus estimate, which is above its five-year historical average (at 11.8 times). The stock is trading at a price-to-AFFO multiple of 15.5 times the 2018 consensus estimate.
The average 12-month target price is $48.54, implying the share price is fully valued. Individual target prices are as follows in numerical order: $45, $46, $46.50, $47.50, $49.50, $51.25, and $54.
Insider transaction activity
On March 24, Brydon Cruise, who sits on the board of trustees, purchased 10,000 units. On March 17, Granite's chief executive officer, Michael Forsayeth, exercised his rights and received 2,030 units and that day sold 1,097 units at a price per unit of $45.61. The prior day, Mr. Forsayeth exercised his rights and received 3,943 units and sold 2,120 units that same day at a price per unit of $45.23.
Chart watch
The REIT is in an uptrend, closing at an all-time high on Friday. The unit price rallied 2.6 per cent on Friday on solid volume with over 223,000 units traded. The three-month historical daily average trading volume is approximately 166,000 units.
Technically, the REIT is in overbought territory with a relative strength reading of 72. Generally, a reading at or above 70 indicates an overbought condition.
Should the positive price momentum pause, or the unit price retreat, there is downside support around $47, which is close to its 50-day moving average (at $47.05). Failing that, there is strong technical support around $44, near its 200-day moving average (at $43.76).
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The Breakouts file is a technical analysis screen intended to identify companies that are technically breaking out. In addition, this report highlights a company's dividend policy, analysts' recommendations, and provides a brief technical analysis for a security to provide readers with more information.
If a stock appears on the positive breakouts list, this indicates positive price momentum, and that a company may be worthwhile for investors to look at the fundamentals in order to determine if the recent price strength is warranted and will continue. If a security appears on the negative breakouts list, this indicates negative price momentum, and may be indicative of either deteriorating fundamentals or perhaps indicates a buying opportunity.
Securities screened are from the S&P/TSX composite index, the S&P/TSX Small Cap index, as well as Canadian small cap stocks outside of these indexes that have a minimum market capitalization of $200-million.
A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.