On today's TSX Breakouts report, there are 37 stocks on the positive breakouts list (stocks with positive price momentum), and 18 securities on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that appeared on the negative breakouts at the beginning of the new year, RioCan Real Estate Investment Trust (REI.UN-T).
On a valuation basis, the REIT is trading at its lowest level in years. The unit price has been under pressure as investors sentiment is negative for securities with retail exposure.
In addition, a rising interest rate environment is putting pressure on interest sensitive securities as you can see from list of securities on the negative breakouts list. Management is currently in the process of transitioning the REIT with its plans to divest over $2-billion of assets in secondary markets and reinvesting the proceeds in primary markets (in major cities). Patient investors may be rewarded as management's strategy unfolds.
The REIT pays an attractive and sustainable distribution, currently yielding 5.7 per cent, with monthly distributions that management aims to increase in the future.
A brief outline on RioCan is provided below that may serve as a springboard for further fundamental research.
The REIT
RioCan owns and operates a portfolio of 294 retail and mixed use properties across the country, including 16 properties that are under development. In terms of geographical revenue breakdown, Ontario is the REIT's largest exposure, accounting for 65.5 per cent of annualized rental revenue, followed by Alberta at 15.2 per cent, Québec at 8.7 per cent, B.C. at 7.9 per cent, eastern Canada at 1.7 per cent, and Manitoba/Saskatchewan at 1 per cent. In terms of its tenant base, Loblaws is its largest tenant, representing 5.1 per cent of its annualized rental revenue as at the end of the third quarter, followed by Canadian Tire at 4.9 per cent, Wal-Mart at 4.4 per cent and Cineplex at 4.1 per cent. Other major tenants include TJX banners (Winners, Marshalls, and HomeSense), Metro, Lowe's, Sobeys, and Dollarama. Its top 10 tenants accounted for 33 per cent of total annualized rental revenue as at Sept. 30.
On Dec. 29, RioCan's unit price tumbled 2.8 per cent on high volume with over 2.4-million units traded, well above the three-month historical daily average trading volume of approximately 1.2-million units. That day, it was announced that Open Text Corp. would to be added to the S&P/TSX 60 Index effective Jan. 2. It had been speculated that RioCan would be added to the large cap index, and speculators unravelled their positions.
Before the market opened on Nov. 3, RioCan reported solid third-quarter financial results. Funds from operations (FFO) per unit came in at 46 cents, up 7.5 per cent from 43 cents reported last year and ahead of the consensus estimate of 44 cents. Same-property net operating income (NOI) continues to expand, rising to 2.4 per cent driven by higher occupancy, higher renewal rate growth, and rent increases. In-place occupancy climbed to 96 per cent, up 2.4 per cent from the prior year.
The retail space has been a challenging industry with the closure of major department chains such as Sears and Target's exit from Canada. In response these challenges, management's key objective is to focus on its six primary markets, large cities that have higher occupancy and rental growth potential. Accordingly, management plans to divest approximately 100 properties located in secondary markets over the next two to three years with sales of these assets anticipated to net approximately $1.5-billion.
Proceeds of the asset sales are expected to be reinvested in the market with RioCan focusing on major markets with about half of the net proceeds to be used to repurchase units. Management's goal is to build a portfolio of high-quality assets in major markets and in doing so, management expects to achieve even higher same-property net operating income leading to future distribution increases.
On a conference call held in October, Chief Executive Officer Edward Sonshine stated, "We have always known that the best assets from a growth perspective are located simply where there is population growth. In Canada, that population growth is essentially in the six major markets of this country. We started the process of concentrating our assets in these major markets well over a decade ago as a result of that thought process, and we have moved to currently having about 75 per cent of our revenue coming from these. By the end of 2019 with this initiative, that percentage will be well over 90 per cent. The simple fact is that while the properties we intend to sell are solid, reliable income properties, their annual NOI growth lags the growth we are able to achieve in our primary market portfolio. At the same time, the current phase of our development program will have sufficient completions over the next few years to more than make up for that which we will be selling."
Looking out to 2020, Mr. Sonshine's expectations for the REIT are, "First, it will have well over 90 per cent of its assets in Canada's six major markets with over 50 per cent of those assets by revenue here in the Greater Toronto area. Two, it will have annual same-property growth of at least 3 per cent, resulting in FFO growth of at least 5 per cent, which will then allow our board to approve appropriate distribution increases, hopefully, annually."
RioCan is scheduled to report its fourth-quarter financial results on Feb. 14. The Street is anticipating FFO per unit of 45 cents.
Distribution policy
RioCan has maintained its monthly distribution at 11.75 cents per unit since the beginning of 2013. This equates to $1.41 per unit on a yearly basis, and an annualized yield of 5.7 per cent. In the first nine months of 2017, the FFO payout ratio was 80.5 per cent.
Management targets a payout ratio of 80 per cent.
Analysts' recommendations
The REIT is covered by 10 analysts, of which eight analysts have buy recommendations and two analysts have 'sector perform' recommendations.
These 10 firms providing research coverage on the REIT are as follows in alphabetical order: Accountability Research, BMO Capital Markets, Canaccord Genuity, CIBC World Markets, Edward Jones, EVA Dimensions, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Revised recommendations
Target prices have been very stable. Furthermore, when analysts have revised their expectations, the changes have been relatively minor. In December, Michael Smith from RBC Capital Markets trimmed his target price by 50 cents to $26.50 from $27. Taking an opposing position, Sam Damiani from TD Securities lifted his target price by $1 to $29 from $28.
Financial forecasts
The Street is forecasting FFO stability for the REIT. The consensus FFO per unit estimate is $1.77 in 2017, and is forecast to rise to $1.80 in 2018 and remain stable at $1.80 in 2019. The adjusted funds from operations (AFFO) per unit estimates for 2017, 2018, and 2019 are $1.57, $1.58, and $1.62, respectfully.
Forecasts have been stable. To illustrate, four months ago, the FFO per unit estimates were $1.75 for 2017 and $1.82 for 2018. The AFFO per unit estimates were $1.54 for 2017 and $1.62 for 2018.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 13.6 times the consensus 2018 estimate. Looking back three years, the current valuation is at its lowest level. Its three-year historical average multiple is approximately 15 times. If the unit price was to expand to a 15 times multiple, this would equate to a unit price of $27 based on the current 2018 consensus estimate.
The average one-year target price is $27.82, implying the unit price may appreciate 13 per cent over the next 12 months. Target prices range from a low of $26.50 (at RBC Capital Markets) to a high of $30 (at BMO Capital Markets). Individual target prices provided by eight firms are as follows in numerical order: $26.50, three at $27, $27.25, $28, $29, and $30.
Insider transaction activity
On Dec. 14, Mr. Sonshine purchased 30,000 units at an average cost per unit of $24.92.
Chart watch
The downside risk looks limited while the upside potential for patient investors appears to be potentially quite rewarding.
Looking back over the past five years, the unit price has bottomed between $23 and $24 and peaked around the $30 level. In terms of key resistance and support levels, the unit price has initial overhead resistance around $27, and after that, there is major overhead resistance around $30. Looking at the downside, there is strong support around the $24 level.
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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.