Wednesday’s TSX breakouts: REIT with a 9.8% yield sees bullish 'golden cross'

There are 43 securities on the positive breakout list (securities with positive price momentum) and seven securities on the negative breakouts list (stocks with negative price momentum). It is quite clear that dividend securities and defensive names are sought by investors. Bank stocks such as TD Bank, National Bank, Bank of Nova Scotia and National Bank are on the positive breakouts list, along with several real estate investment trusts (REITs), four utility stocks, a telecom play, Telus, and several gold stocks. Income and defense are two key themes clearly at play.

Discussed below is yet another REIT, the third REIT featured this week. Slate Office REIT (SOT.UN-T), which recently surfaced on the positive breakouts list.

A brief outline is provided that may serve as a springboard for further fundamental research.

The REIT

Slate Office REIT's portfolio consists of 34 properties, 28 office properties and six non-office properties, located across Canada. The REIT's portfolio is geographically diversified with 37 per cent of Slate's gross leasable area in Ontario, 25 per cent in New Brunswick, 12 per cent in Nova Scotia, 12 per cent in Newfoundland, 9 per cent in Manitoba, 3 per cent in Alberta, and 2 per cent in Saskatchewan.

In terms of customer diversification, the top 10 tenants represented 45 per cent of base rental receipts at the end of 2015. Manitoba Telecom Services was the largest tenant, representing 8.7 per cent of base rental receipts, followed by the Government of Canada at 8 per cent, and Bell Canada at 8.5 per cent.

Earlier this month, Slate Office reported weaker-than-expected fourth-quarter results. Core funds from operations (FFO) came in at 24 cents per unit, below the consensus estimate of 28 cents, but well above 13 cents reported during the same period last year. The occupancy rate has been declining, which is not positive, and was 85.4 per cent at the end of 2015. The occupancy rate, excluding redevelopment was 89.7 per cent. In terms of its balance sheet, its debt to gross book value stood at 61 per cent.

Returning Capital to Unitholders

The Trust pays unitholders a monthly distribution of 6.25 cents per trust unit, or 75 cents per year. This equates to an annualized yield of 9.8 per cent. Slate has maintained the distribution at this level since 2013.

Management has focused on lowering its payout ratio. In 2015, the AFFO payout ratio was 95.9 per cent and the AFFO payout ratio declined to 89.7 per cent in the fourth quarter.

Last year, management repurchased 579,973 trust units under its share-buyback program at an average price of $7.35 per unit.

Valuation

The REIT is valued on a price-to-adjusted funds from operations basis. According to Bloomberg, the REIT is trading at price-to-AFFO multiple of 9.1 times the consensus 2017 estimate. Valuations vary depending on analysts' assumptions. There is very little variability amongst analysts' forecasts. Analysts' target prices range from a low of $7.75 to a high of $8. Individual target prices are as follows: two at $7.75, $7.90, and two at $8.

Analysts' Recommendations

Slate Office has three buy recommendations and two hold recommendations. There are no sell recommendations. The average one-year price target amongst these analysts is $7.88, suggesting that the unit price is nearly fully valued.

The consensus FFO estimate is $1.01 in 2016, and $1.04 in 2017. The consensus AFFO forecast is 81 cents in 2016, and 84 cents in 2017. FFO and AFFO are anticipated to be relatively stable.

Chart Watch

Slate Office's price chart appears very promising. What is quite attractive about the chart is that a "golden cross" may occur shortly.

The unit price has been in a steady downtrend. Last year, the unit price declined 7 per cent.  However, the REIT is seeing a shift with positive price momentum in 2016. Year-to-date, the Slate Office's unit price is up over 8 per cent.

Slate's 50-day moving average (at $7.08) may soon cross above its 200-day moving average (at $7.11). When a shorter-term moving average crosses above a longer-term moving average, it is a positive, bullish technical indicator called a "golden cross."

The REIT's next resistance level is around $8, and after that around $8.65. There is large overhead resistance at $9.

There is downside support just above $7, where the Trust's 50-day and 200-day moving averages both lie.

The relative strength index is at 72, suggesting the REIT is in overbought territory. Generally, a reading of 70 or higher indicates an overbought condition. That being said, a security can remain overbought for some time.

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.

A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Below is a list of securities in the S&P/TSX composite index and the S&P/TSX Small Cap index that are technically breaking out, reaching new 55-day highs or lows. Securities on the positive breakouts list have displayed positive price momentum during this period. Securities on negative breakouts list have experienced negative price momentum.