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Thursday’s TSX breakouts: Security yielding nearly 5% with a payout ratio of 86%

On today's TSX Breakouts report, there are 14 stocks on the positive breakouts list (stocks with positive price momentum), and 40 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that recently appeared on the negative breakouts list - Killam Apartment Real Estate Investment Trust (KMP.UN-T). Rising interest rates are concerning investors, resulting in downward pressure on interest-sensitive securities such as real estate investment trusts, utility companies, and telecom stocks as you can see from the negative breakouts list.

Right now, the market is not anticipating another rate hike by the Bank of Canada for several months. The implied probabilities of a rate hike announcement are as follows: 12 per cent on March 7, 58 per cent on April 18, rising to 71 per cent on May 30, and the Street is calling for a 90 per cent probability on July 11. That being said, economic news releases can dramatically shift these probabilities.

While macroeconomic concerns persist, on a security level, Killam is delivering solid growth - operating income and distribution growth. For investors seeking income, the recent pullback in the unit price may represent an ideal time to do some homework on the security. Acquisition growth may provide support and potential gains to the unit price in 2018.

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

The REIT

Halifax-based Killam, operates a portfolio of apartments and manufactured home communities. The company has real estate assets located in Alberta, Ontario, New Brunswick, Newfoundland, Nova Scotia, and Prince Edward Island.

After the market closed on Tuesday, Killam reported solid fourth-quarter financial results and announced a distribution hike. Funds from operations (FFO) came in at 22 cents per unit, a penny ahead of expectations and up from 21 cents per unit reported during the same period last year. Same-property net operating income (NOI) rose 4.9 per cent year-over-year. Same-property occupancy was impressive, rising to 97.5 per cent from 96.1 per cent reported last year. Back in November, Killam completed a $77-million bought-deal financing, issuing units at $13.55. Management is putting this money to work, announcing $39-million of acquisitions, which are expected to be completed in the first quarter.

Looking forward, management is guiding to same-property NOI growth of between 1 per cent and 2 per cent in 2018, and remains focused on acquisition growth. On the earnings call, the President and Chief Executive Officer Philip Fraser said, "We entered 2018 with $300-million of acquisition capacity and expect to continue to accretively grow the portfolio, increasing the portion of NOI generated outside Atlantic Canada."

Distribution policy

The REIT currently pays its unitholders a monthly distribution of 5.167 cents per unit, or 62 cents per unit on a yearly basis. However, earlier this week, Killam announced a 3 per cent distribution increase effective for the March distribution, which will be paid in April. The monthly distribution will increase to 5.333 cents per unit or 64 cents per unit on a yearly basis. This equates to an annualized yield of 4.8 per cent.

The AFFO payout ratio was 86 per cent in 2017. The board has not set a formal payout ratio but does assess the distribution on a quarterly basis.

Analysts' recommendations

This small-cap REIT, with a market capitalization just over the $1-billion level, is well-covered by the Street. There are 11 analysts providing research coverage on Killam, of which seven analysts have buy recommendations and four analysts have hold recommendations.

Firms providing analyst coverage are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Echelon Wealth Partners, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.

Revised recommendations

After Killam reported its fourth-quarter financial results, the majority of analysts left their recommendations and target prices unchanged. Those analysts who did revise their expectations made relatively minor adjustments. This week, Dean Wilkinson, the analyst at CIBC Capital Markets, tweaked his target price higher to $15 from $14.50. Mario Saric from Scotia Capital lifted his target price to $14.75 from $14.50.

Financial forecasts

The Street is forecasting FFO per unit of 93 cents in 2018, up from 90 cents reported in 2017, with FFO forecast to rise to 97 cents in 2019. The AFFO per unit consensus estimate is 75 cents in 2018, up from 72 cents reported in 2017, and anticipated to rise to 78 cents in 2019.

Forecasts have been relatively stable. For instance, four months ago, the 2018 consensus FFO per unit estimate was 92 cents and the 2018 consensus AFFO per unit forecast was 73 cents.

Valuation

According to Bloomberg, the REIT is trading at a price-to-FFO (P/FFO) multiple of 13.8 times the 2019 consensus estimate, near its three-year historical average multiple of 13.4 times, and down from its peak multiple of nearly 16 times. The stock is currently trading at a price-to-AFFO multiple of 17.1 times the 2019 consensus estimate.

Over the past two years, the REIT has traded at a forward P/FFO multiple primarily between 12.5 times and 15 times. If the multiple were to contract further, down to a forward P/FFO multiple of 12.5 times the 2019 consensus estimate, this would suggest a unit price of approximately $12.

The average one-year target price is $15.03, implying there is nearly 13 per cent upside potential in the unit price over the next 12 months. When combined with the yield, this equates to a potential total one-year return of over 17 per cent. After the REIT released its quarterly earnings results, 10 analysts updated their financial models and have target prices ranging from a low of $14.75 to a high of $15.50.

Insider transaction activity

According to Bloomberg, there has not been any buying or selling activity reported by insiders over the past year.

Chart watch

Over the past two months, the unit price has been in a steep decline, falling 13 per cent from Dec. 12 until Feb. 9. This week, the unit price has recovered some of its losses, rallying 5 per cent, bouncing out of an oversold condition. Recall, the unit price spiked to a record high in December, on the back of news that it was going to be added to the S&P/TSX Composite Index effective Dec. 18, 2017.

In terms of key resistance and support levels, there is overhead resistance around $14, near its 50-day moving average (at $13.85). After that, there is a ceiling of resistance just below $15, close to its record closing high of $14.69 reached on Dec. 12, 2017. Looking at the downside, there is support around $13. Failing that, there is solid support around $12.

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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, financial forecasts, 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.

Positive BreakoutsFeb. 14 close
AKG-TAsanko Gold Inc $1.27
CFP-TCanfor Corp $30.12
CIGI-TColliers International Group Inc $83.18
CSU-TConstellation Software Inc $815.36
CNL-TContinental Gold Inc $3.97
FM-TFirst Quantum Minerals Ltd $21.09
HNL-THorizon North Logistics Inc $1.77
IFP-TInterfor Corp $24.87
KML-TKinder Morgan $18.79
SEA-TSeabridge Gold Inc $14.87
SHOP-TShopify Inc. $171.49
SII-TSprott Inc $3.01
TGZ-TTeranga Gold Corp $3.80
TSGI-TThe Stars Group Inc. $32.80
Negative Breakouts
AAV-TAdvantage Oil & Gas Ltd $3.67
AQN-TAlgonquin Power & Utilities Corp $12.60
ATD.B-TAlimentation Couche-Tard Inc $61.13
HOT.UN-TAmerican Hotel Income Properties REIT LP $8.73
ARX-TARC Resources Ltd $12.39
ACO.X-TAtco Ltd $42.07
ATP-TAtlantic Power Corp $2.32
BCE-TBCE Inc $55.63
CU-TCanadian Utilities Ltd $34.26
CPX-TCapital Power Corp $22.48
CLR-TClearwater Seafoods Inc $6.34
CCA-TCogeco Communications Inc $72.35
CR-TCrew Energy Inc $1.79
CRR.UN-TCrombie Real Estate Investment Trust $12.79
D.UN-TDream Office Real Estate Investment Trust $21.21
EMA-TEmera Inc $39.69
ENF-TEnbridge Income Fund Holdings Inc $26.88
ECI-TEnerCare Inc $18.46
EXE-TExtendicare Inc $8.32
FTS-TFortis Inc $39.69
H-THydro One Ltd. $20.25
IGM-TIGM Financial Inc $39.21
INE-TInnergex Renewable Energy Inc $13.02
IFC-TIntact Financial Corp $96.85
ITX-TIntertain Group Ltd $13.41
LB-TLaurentian Bank of Canada $51.68
MRD-TMelcor Developments Ltd $14.27
MRC-TMorguard Corp. $169.55
MRG.UN-TMorguard North American Residential REIT $13.25
MRT.UN-TMorguard Real Estate Investment Trust $13.06
MTY-TMTY Food Group Inc. $50.43
BCI-TNew Look Vision Group Inc $33.11
NWC-TNorth West Co Inc $27.22
NPI-TNorthland Power Inc $21.37
NWH.UN-TNorthWest Healthcare Properties REIT $10.59
SJR.B-TShaw Communications Inc $25.56
T-TTELUS Corp $44.28
RNW-TTransAlta Renewables Inc $11.55
TOS-TTSO3 Inc $1.46
VNR-TValener Inc $20.23

Source: Bloomberg

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