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Inside the Market Monday’s TSX breakouts: A REIT with 7% yield, double-digit earnings growth and a unanimous ‘buy’ call

On Friday in the U.S., the Dow Jones Industrial Average declined 0.29 per cent, the S&P 500 index slipped 0.08 per cent, and the Nasdaq composite index increased 0.19 per cent. The downdraft may continue today.

In Canada, the S&P/TSX composite index added 9 points, or 0.06 per cent. There were 151 securities in the TSX Index that advanced, 96 securities declined in value, and four stocks closed the day unchanged

The TSX Index is up 1.01 per cent year-to-date.

On today's TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum), and 18 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is a REIT with an unanimous 'buy' call from five analysts, double-digit earnings growth expected, and an attractive 7 per cent yield. The REIT is just shy of appearing on the positive breakouts list. The security I am referred to is Automotive Properties Real Estate Investment Trust (APR.UN-T).

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

The REIT

The REIT holds a portfolio of over 30 properties located in major cities across the country, specifically the Greater Vancouver Area, Calgary, Edmonton, Regina, the Greater Toronto Area, and Montreal. In terms of geographical exposure, as at September 30, 48 per cent of its cash net operating income stemmed from the Greater Toronto Area and Barrie, 18 per cent from the Greater Vancouver Area, 14 per cent from Calgary, 13 per cent from Regina, 5 per cent from Edmonton, and 2 per cent from Montreal.

The REIT hold properties with diversified brands including Chrysler, Ford, General Motors, Kia, Nissan, Honda, Hyundai, Madza, Mitsubishi, Toyota, Volkswagen, Acura, Audi, BMW, Infiniti, Aston Martin, Bentley, Lamborghini, Land Rover, Lincoln, Porsche, Maserati, McLaren and Mercedes-Benz. As at September 30, 54 per cent of the brands were in the mass market segment, 33 per cent were classified in the luxury market, with ultra-luxury bands making up the balance, or 13 per cent.

Management is focused on growth and sees opportunities to purchase properties from third parties, given the highly fragmented industry, or from the Dilawri Group, which is Canada's largest auto dealership group. The Dilawri Group is the largest tenant representing approximately 93 per cent of REIT's cash net operating income. The Dilawri Group holds a 38 per cent interest in the REIT.

Fixed annual rent escalators of 1.5 per cent are included in most of the property leases, allowing for steady adjusted funds from operations growth. The average lease term is roughly 13.6 years.

Last month, the REIT raised $46-million through the issuance of REIT units at a price of $10.85 per unit. Proceeds raised were used to reduce the REIT's debt levels.

Distribution policy

The REIT pays unitholders a monthly distribution of 6.7 cents per unit, or 80.4 cents on a yearly basis. This equates to an attractive annualized yield of 7.4 per cent. Management has maintained the distribution at this level since mid-2015.

The distribution appears sustainable. In 2016, the AFFO payout ratio was 87 per cent.

Analysts' recommendations

There are five firms providing research coverage on this small cap REIT, with a market capitalization of $285-million. All five analysts have "buy" recommendations.

The five firms providing research coverage are as follows in alphabetical order: Canaccord Genuity, CIBC World Markets, Desjardins Securities, Industrial Alliance Securities, and TD Securities.

Revised recommendations

Analysts' recommendations have remained stable, with no changes in recommendations nor target prices over the past four months. In November, several analyst revised their target prices higher. David Chrystal, the analyst from Desjardins Securities, lifted his target price to $11.75 from $11, and Jonathan Kelcher, the analyst from TD Secuirites, raised his target price to $12 from $11.50.

Financial forecasts

The Street is forecasting solid growth for the company. The consensus funds from operations (FFO) per unit estimates are $1.01 for 2017, rising over 10 per cent to $1.12 in 2018. The Street is expecting adjusted funds from operations (AFFO) per unit of 91 cents in 2017 and $1.03 the following year.

Revisions have been modest but to the downside. For instance, three months ago, the consensus FFO per unit estimates were $1.08 for 2017 and $1.16 for 2018. The consensus AFFO per unit forecasts were 96 cents for 2017 and $1.05 for 2018.

Valuation

According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 10.8 times the 2017 consensus estimate, near its peak multiple. Over the past year, the stock has traded at a forward P/FFO multiple ranging from a low of 8.5 times to a high of just under 11 times.

Individual target prices range from a low of $11.25 to a high of $12. The average one-year target price is $11.50, implying there is 6 per cent upside potential in the unit price over the next 12 months. Individual target prices are as follows in numerical order: three at $11.25, $11.75, and $12.

Insider transaction activities

So far in 2017, only one insider transaction activity has been reported. On Feb. 9, Burgundy Asset Management Ltd., with over a 10 per cent ownership position, purchased 800,000 units at a price of $10.7998 per unit. This purchase increased Burgundy's ownership position up to 3,207,700 units.

Chart watch

Year-to-date, the unit price is up just 2 per cent. The unit price is little changed from its initial public offering price of $10 (from mid-2015).

The unit price has initial overhead resistance around $11, close to its record closing high of $11.22 reached on January 17.

In terms of downside support, there is initial support around $10.50, close to its 200-day moving average (at $10.56). Failing that, there is support around $10.

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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.

TSX breakouts

Positive BreakoutsMarch 24 close
AQN-TAlgonquin Power & Utilities Corp $12.77
AYA-TAmaya Inc $22.63
ACO/X-TAtco Ltd $51.19
BDT-TBird Construction Inc $10.16
BTB.UN-TBTB Real Estate Investment Trust $4.75
CU-TCanadian Utilities Ltd $38.95
CLS-TCelestica Inc $19.17
DDC-TDominion Diamond Corp $16.99
EMA-TEmera Inc $47.37
EMP.A-TEmpire Co Ltd $19.50
FSV-TFirstService Corp $78.93
FTS-TFortis Inc $43.83
WN-TGeorge Weston Ltd $116.04
JE-TJust Energy Group Inc $8.22
L-TLoblaw Cos Ltd $72.59
MAL-TMagellan Aerospace Corp $19.21
MEQ-TMainstreet Equity Corp $36.50
MRT.UN-TMorguard Real Estate Investment Trust $15.68
NFI-TNew Flyer Industries Inc $47.05
NWH.UN-TNorthWest Healthcare Properties REIT $11.02
PKI-TParkland Fuel Corp $29.10
SIS-TSavaria Corp. $12.78
SHOP-TShopify Inc. $92.30
SOX-TStuart Olson Inc $6.02
TCL.A-TTranscontinental Inc $24.72
VNR-TValener Inc $21.62
Negative Breakouts
AFN-TAg Growth International Inc $50.52
AGT-TAGT Food & Ingredients Inc $29.97
BTE-TBaytex Energy Corp $4.22
CS-TCapstone Mining Corp $1.21
FTT-TFinning International Inc $24.12
GS-TGluskin Sheff + Associates Inc $17.56
KDX-TKlondex Mines Ltd $5.64
MND-TMandalay Resources Corp $0.58
BCI-TNew Look Vision Group Inc $26.88
NGQ-TNGEx Resources Inc $1.10
PSK-TPrairieSky Royalty Ltd $27.48
RAY.A-TStingray Digital Group Inc. $8.40
SCB-TStreet Capital Group Inc $1.53
TDG-TTrinidad Drilling Ltd $2.17
TRQ-TTurquoise Hill Resources Ltd $4.05
WRG-TWestern Energy Services Corp $2.18
Y-TYellow Pages Ltd $7.46
UFS-TDomtar Corp. $50.03

Source: Bloomberg/Jennifer Dowty

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