Since June, I have been cautious on equity markets, and as a result have been recommending a large number of real estate investment trusts (REIT) and high-dividend-paying stocks. For today's column, I did a screen looking at stocks that are breaking out from their respective highs over the past 40 days and the list was relatively small. Many securities with positive price breakouts were high-dividend-paying securities such as Extendicare, BCE and Rogers Communications, as well as Choice Properties REIT, which is discussed below.
Headed by a strong leadership team, Choice Properties REIT has 515 properties, with Loblaw as the major tenant with its banners such as Loblaws, Fortinos, Zehrs, No Frills, Maxi, and Real Canadian Superstore. As of the end of June, Loblaw represented approximately 91 per cent of annual base rent.
Stable Income Generation
The REIT has stable cash flows from its long-term leases. Last quarter, Choice Properties reported funds from operations (FFO) of 24 cents, a 5.3-per-cent year-over-year increase. Occupancy rose to 98.5 per cent from 97.7 per cent the previous year. The weighted average lease term on Loblaw leases is approximately 12.5 years with the first maturity at Loblaw not occurring until the year 2023. Choice Properties has contractual rental rate increases built into Loblaw leases.
Accelerating Growth
In 2016, the REIT has 15 development projects planned, which are anticipated to add approximately 755,000 square feet to gross leasable area. This is a large step-up from this year – in 2015, 10 projects are expected to be completed, adding over 100,000 square feet.
Balance Sheet Strength
At the end of the second quarter, the debt-to-total assets ratio was at a reasonable level of 45 per cent. In addition, Choice Properties has more than $400-million in undrawn bank credit lines available, providing management with sufficient financial flexibility to create additional value through acquisitions and development projects.
Dividend Policy
Choice Properties pays unitholders a sustainable monthly distribution of 5.4167 cents per unit or 65 cents a year, equating to an annualized yield of 5.5 per cent.
At the end of the second quarter, the adjusted funds from operations (AFFO) payout ratio was 85 per cent, down from 88 per cent last year.
Valuation
The REIT trades at a price-to-AFFO multiple of nearly 15 times the 2016 consensus estimate, and at this level, appears fully valued.
Chart Watch
Given this REIT only began trading in July, 2013, historical information is limited.
Near-term, this REIT appears overbought. Year to date, the unit price of Choice Properties has appreciated more than 13 per cent, a stellar return. When combined with the dividend yield, this investment has delivered a solid total return.
In 2014, the REIT traded in a tight trading range, largely between $10.40 and $11. In early 2015, the unit price rallied and appears to be consolidating largely in the $11 to $11.65 range.
There is technical resistance at $12, and downside support around $11.40, near its 50-day moving average, and then at $11.20, at its 200-day moving average, and failing that at $11.
The average daily volume is modest at just over 200,000 units over the past three months.
Analysts' Recommendations
According to Bloomberg, there are 10 analysts whom have updated their recommendations on this company in 2015. One analyst currently has a "buy" recommendation with a $12 one-year target price; the remaining nine analysts have "hold" recommendations. One-year target prices range from $11.50 to $12.50, implying the trust units are nearly fully valued at current levels.
The consensus AFFO estimate is 78 cents in 2015, expanding by less than 4 per cent to 80 cents per unit in 2016.
The Bottom Line
A solid defensive investment for investors seeking income but with modest growth. For instance, in the last quarter, same-property net operating income increased by 0.8 per cent year over year.
In the near term, the trust units appear to have gotten ahead of themselves. On a valuation basis, the units are trading at a high multiple. On a technical basis, the units are trading near a record high. In other words, don't chase this REIT – wait for the unit price to come down, and accumulate units with a staggered approach given the stock market's volatility.
Choice Properties will be reporting third-quarter results after the market closes on Nov. 10, with a conference call scheduled for the following day.
As always, I strongly encourage readers to consult a financial adviser, and to do their own proper due diligence before taking any investment action.
Jennifer Dowty, CFA, Globe Investor's in-house equities analyst, writes exclusively for our subscribers at Inside the Market. E-mail any stock suggestions that you want profiled to jdowty@globeandmail.com.