On today's TSX Breakouts report, there are 25 stocks on the positive breakouts list (stocks with positive price momentum), and 20 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that appears on the negative breakouts list and is technically oversold with a relative strength index reading of 21. Investors sentiment is negative on the REIT given its retail exposure. The security is trading at a significant discount relative to its historical valuation. It offers investors a steady distribution, yielding 5.8 per cent. Nine analysts have buy recommendations with expectations that the unit price will rally over 20 per cent during the next 12 months. The security highlighted below is RioCan Real Estate Investment Trust (REI.UN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The company
RioCan owns and operates a portfolio of 300 retail and mixed use properties across the country, including 15 properties that are being developed. RioCan is an industry leader with the largest portfolio of shopping centres across the country. In terms of geographical revenue breakdown, Ontario is the REIT's largest exposure, accounting for 64 per cent of annualized rental revenue, followed by Alberta at 15.1 per cent, B.C. at 9 per cent, Quebec at 8.6 per cent, eastern Canada at 1.9 per cent, and Manitoba/Saskatchewan at 1 per cent.
Before the market opened on May 12, the company reported better-than-expected first quarter financial results. The company reported funds from operations (FFO) per unit of 44 cents, surpassing the consensus estimate of 41 cents. Same property net operating income (NOI) increased 1.5 per cent year-over-year. On the first quarter earnings conference call, John Ballantyne, the senior vice-president of asset management, guided to same-property NOI growth of between 1 per cent and 2 per cent in 2017. As of quarter end, occupancy stood at 96.2 per cent, up from 94.8 per cent reported last year. Average rental rates increased 8.2 per cent year-over-year. That day, the unit price was relatively unchanged, declining 8 cents, or 0.3 per cent, to close at $25.56.
Exposure to retailers has been a challenge for RioCan, which had to deal with Target and now Sears store closures. Retailers hardships have dampened investor sentiment for this REIT. On June 23, management issued a press release stating that they anticipate a "minimal impact" from the Sears store closures. Edward Sonshine, the chief executive officer stated, "We would expect that there will be minimal disruption or financial impact as we work through the seven locations that have been announced to be closed. In all but one case, these are smaller retail stores that will not require redevelopment as was the case with Target." RioCan has nine Sears locations in its portfolio, of which, seven are to be closed. As at the end of the first quarter, the seven stores represented 0.4 per cent of RioCan's total annualized rental revenue.
RioCan is scheduled to report its second quarter financial results after the market closes on Thursday August 3. The consensus FFO per unit estimate is 42 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 5.8 per cent. In the first quarter, the FFO payout ratio was 83.9 per cent.
Mr. Sonshine stated during the recent earnings call that, "Our target is to distribute less than 80 per cent of our FFO. While we are slightly above that target this quarter, we're confident that, barring any unforeseen events, we will be below that 80 per cent target by the fourth quarter. That will permit the board of RioCan to consider whether it is appropriate to increase the distribution in 2018."
Analysts' recommendations
The REIT is covered by 10 analysts, of which nine have buy recommendations and one analyst has a hold recommendation.
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.
Financial forecasts
The Street is forecasting FFO stability for the REIT. The consensus FFO per unit estimate is $1.72 in 2017, and forecast to rise to $1.81 in 2018. The adjusted funds from operations (AFFO) per unit estimates for 2017 and 2018 are $1.53 and $1.62, respectfully.
Forecasts have been revised higher. To illustrate, three months ago, the FFO per unit estimates were $1.69 for 2017 and $1.76 for 2018. The AFFO per unit estimates were $1.52 for 2017 and $1.59 for 2018.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 14 times the consensus 2017 estimate. This is just above its three-year historical average multiple of 15.8 times.
The average one-year target price is $29, implying the unit price may appreciate over 20 per cent within the next 12 months. Target prices are quite concentrated, ranging from a low of $28 to a high of $30.
Revised recommendations
Last month, Michael Smith, the analyst from RBC Capital Markets, reduced his target price to $29 from $30 but maintained his 'outperform' recommendation.
Insider transaction activities
Looking back over the past three months, only one insider has traded units in the public market - Stuart Baum, the vice-president of human resources. On June 21, Mr. Baum accumulated 1,600 units at an average price per unit of $24.98. Prior to that, on June 7, he bought 2,000 units. With these trades, he initiated a portfolio position.
Chart watch
Year-to-date, the unit price is down 9 per cent making the REIT is one of the worst performing securities in the S&P/TSX composite real estate sector index. On Tuesday, the unit price closed at a 52-week low.
In terms of key resistance and support levels, the unit price has a ceiling of resistance between $25.50 and $26, near its 50-day moving average (at $25.48) and its 200-day moving average (at $26.14). After that, there is resistance around $27. There is downside support around $24, and failing that, around $23, near its lowest closing price over the past five years ($22.76 on January 12, 2016).
On a technical basis, the unit price appears oversold with the relative strength index at 21. Generally, a reading at or below 30 indicates an oversold condition.
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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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