On today's TSX Breakouts report, there are 50 stocks on the positive breakouts list (stocks with positive price momentum) and five stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a real estate investment trust that surfaced on the positive breakouts list. The REIT offers investors an attractive 6.3 per cent yield and has an expected one-year total return of 20 per cent. The REIT is trading at an attractive valuation with room for multiple expansion. The security featured today is H&R Real Estate Investment Trust (HR.UN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The REIT
H&R REIT has a diversified portfolio of North American real estate assets containing office properties, retail properties, industrial properties, and residential properties. H&R is Canada's largest diversified REIT with total assets of approximately $14-billion. At the end of June, H&R held a portfolio of 530 properties across North America: 337 in the United States, 102 in Ontario, 43 in Alberta, and 48 in other regions.
In terms of tenants, the REIT is well diversified with only one tenant, Encana Corp., representing more than 10 per cent of estimated annualized gross revenue (at 11.9 per cent). Bell Canada is the second largest tenant, representing 8.4 per cent of H&R's rental income. The top 20 tenants represent 54 per cent of revenue.
After the market closed on Aug. 10, the company reported second quarter financial results that were in-line with the Street's expectations. Funds from operations (FFO) per unit came in at 46 cents, matching the consensus estimate. At quarter end, occupancy stood at 96.3 per cent, up from 95.6 per cent year-over-year. Same-property net operating income (cash basis) increased over 2 per cent year-over-year, largely due to rent increases at H&R's Toronto and Calgary office properties. The unit price rallied nearly 4 per cent the following trading day.
Rising interest rates are a risk factor to consider when looking at interest sensitive securities. Currently, the market is anticipating the Bank of Canada will not raise rates on Oct. 25 with only a 22 per cent probability of a rate hike. The likelihood of a rate increase increases to a 64 per cent probability at the Dec. 6 meeting.
Distribution Policy
The company pays unitholders a monthly distribution of 11.5 cents per unit, or $1.38 yearly per unit. This equates to an annualized yield of 6.3 per cent. In November, management announced a 2 per cent distribution increase, raising it to its current level from 11.25 cents per unit. This was the first increase announced since 2013.
The distribution appears sustainable -- the FFO payout ratio was 74.5 per cent in the second quarter and 74.2 per cent for the first half of 2017.
Analysts' Recommendations
There are 10 firms providing research coverage on this REIT, of which eight analysts have 'buy' recommendations and two analysts have 'sector perform' recommendations.
The 10 firms providing research coverage are as follows in alphabetical order: Accountability Research, BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Desjardins Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Financial Forecasts
The consensus funds from operations (FFO) estimate is $1.84 in 2017, increasing slightly to $1.89 in 2018. The Street is forecasting adjusted funds from operations (AFFO) of $1.60 in 2017 and $1.65 the following year.
In recent months, forecasts have come down. For instance, four months ago, the Street was forecasting FFO of $1.93 in 2017 and $1.84 in 2018.
Valuation
The REIT is commonly valued on a price-to-net asset value basis, price-to-AFFO, or by using a price-to-FFO multiple. The REIT is trading at a price-to-AFFO multiple of just over 13 times the 2018 consensus estimate. According to Bloomberg, H&R REIT is trading at a reasonable valuation on a price-to-FFO basis at a multiple of 11.6 times the consensus 2018 estimate, in-line with its three-year historical average (at 11.5 times) and slightly below its five-year historical average (at 11.9 times).
The one-year consensus target price is $24.92, suggesting there is 14 per cent upside in the unit price over the next 12 months. When combined with the yield, this equates to a potential total return of 20 per cent. Target prices range from a low of $22 from the analyst at Raymond James (implying the REIT is nearly fully valued) to a high of $26.50 from the analyst at BMO Capital Markets (suggesting there is 21 per cent upside potential in the unit price). Individual target prices are as follows in numerical order: $22, $24, $24.25, three at $25, $25.50, two at $26, and $26.50.
Revised Recommendations
In August, half the analysts covering the REIT revised their target prices – all lower.
Neil Downey from RBC Capital Markets cut his target price by $1 to $24. Matt Kornack, the analyst from National Bank Financial, lowered his target price to $25 from $25.75. Mario Saric from Scotia Capital tweaked his target price, reducing it by 25 cents to $24.25. Ken Avalos from Raymond James trimmed his target price to $22 from $24. Michael Markidis from Desjardins Securities lowered his target price to $25 from $26.
Insider Transactions
The most recent transactions reported by insiders occurred in August.
On Aug. 14, Ronald Rutman, chair of the board of trustees, acquired 10,000 units at an average price per unit of $20.8722 for an account in which he has control or direction over (FEZ Financial Corp.), increasing the portfolio's holdings to 1,175,021 units.
Prior to that, on Aug. 11, two board members were buyers in the market. Alex Avery purchased a total of 11,000 units at an average price per unit below $21. In addition, in a relative small transaction, Stephen Sender bought 1,200 units at an average cost per unit of $21.02 for an account in which he has indirect ownership, initiating a portfolio position.
Chart Watch
Year-to-date, the unit price is down 2 per cent, underperforming the S&P/TSX composite real estate sector index, which is up 2 per cent
For the past five years, the unit price has traded principally between $21 and $24. The unit price is currently hovering at the lower end of this trading range. However, over recent weeks, the unit price has been steadily climbing higher.
In terms of key resistance and support levels, the unit price has initial overhead resistance around $22, close to its 200-day moving average (at $22.31). There is a large ceiling of resistance at $24, and after that at $25. Looking at the downside, there is support around $21, near its 50-day moving average (at $21.27). Failing that, there is support around $20, and then at $18.
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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 indices 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.
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