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Inside the Market Friday’s TSX breakouts: A security with robust price appreciation combined with rising distributions

On today’s TSX Breakouts report, there are 40 stocks on the positive breakouts list (stocks with positive price momentum), and 10 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that remains in an uptrend, closing at an all-time high on Thursday and appearing on the positive breakouts list. Long-term investors have enjoyed price appreciation in combination with a rising distribution. The security that has increased its distributions annually by 5 per cent or more for the past seven consecutive years. Industry fundamentals remain supportive for continued growth. The security highlighted today is InterRent Real Estate Investment Trust (IIP.UN-T).

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

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The REIT

InterRent holds a portfolio of mid-sized, multi-family residential properties located primarily in Ontario.

At the end of the third-quarter, the REIT had 9,235 suites, up from 8,605 suites reported the prior year. Its top four regions by suites were: the Ottawa/Gatineau (National Capital Region) region represented 32 per cent of its suites, the Hamilton/Niagara region at 19 per cent, Montreal at 18 per cent, and the Greater Toronto Area at 14 per cent. The balance of the portfolio represented western, northern and eastern Ontario districts.

Before the market opened on Oct. 30, InterRent reported solid third-quarter financial results that gave the unit price a 1 per cent lift. Funds from operations (FFO) per unit came in at 11.8 cents, relatively in-line with the Street’s expectations. Adjusted funds from operations (AFFO) was 10 cents, also in-line with the consensus estimate. Stabilized net operating income (NOI) increased 12 per cent year-over-year (stabilized suites are those owned by the REIT for more than 24 months). Average monthly rent per suite from stabilized units increased 7 per cent year-over-year. Overall occupancy for stabilized units was relatively steady at 96.8 per cent. Debt to gross book value stood at 39.1 per cent at the end of the quarter, down from over 47 per cent reported in Dec. 2017. The unit price rose 15 cents that day to close at $12.42.

In the earnings release, chief executive officer Mike McGahan commented on the strong operational results stating, “The multifamily sector has continued to see strong rental demand through Q3 [third-quarter]. Our team within all regions have worked very hard to ensure that we continue to offer clean, safe and well-maintained homes and best in class service for our residents and our communities. The strong market and tireless effort of our team has led to significant rental growth, NOI improvement and FFO/AFFO growth. There continues to be very strong demand for the asset class which has resulted in further cap rate compression in core markets across Ontario and Quebec”.

In the recent Management’s Discussion and Analysis, management provided a positive outlook for the fourth-quarter, “Strong rental demand has continued post quarter end with vacancy on a per suite basis as of October 30th below 3 per cent for the portfolio”.

The company is expected to report their fourth-quarter results in late Feb. The consensus FFO estimate is 11 cents per unit.

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In Sept. 2018, InterRent REIT was added to the S&P/TSX Composite Index.

Distribution policy

InterRent pays its unitholders a monthly distribution of 2.4167 cents per unit or 29 cents per unit on a yearly basis, translating to an annualized yield of 2.1 per cent.

During the first nine months of 2018, the payout ratio stood at 63 per cent, suggesting the distribution is sustainable with room to expand. In Nov., management announced a 7 per cent increase to its monthly distribution, lifting it to its current level from 2.25 cents per unit. This was the seventh consecutive year that InterRent has increased its distribution by at least 5 per cent.

Analysts’ recommendations

This small-cap REIT, with a market capitalization of $1.47-billion, is well covered by the Street with 13 analysts actively following InterRent, of which eight analysts have buy recommendations and five analysts have hold recommendations.

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The firms providing recent research coverage are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, Echelon Wealth Partners, GMP, Industrial Alliance Securities, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.

Revised recommendations

So far this month, five analysts have revised their target prices – all higher.

Mark Rothschild, the analyst from Canaccord Genuity, increased his target price to $14.50 from $13.50. Frederic Blondeau from Echelon Wealth Partners bumped his target price higher by 50 cents to $14.50. Ken Avalos from Raymond James lifted his target price to $14 from $12. Brad Sturges, the analyst from Industrial Alliance, raised his target price to $14 from $13.25 but reduce his recommendation to a “hold” from a “buy.” Michael Smith from RBC Capital Markets raised his target price to $13.50 from $13 but cut his recommendation to a “sector perform” from an “outperform” rating.

Financial forecasts

The Street is forecasting steady growth for the REIT. The consensus FFO per unit estimate is 44 cents in 2018, up from 42 cents in 2017, and forecast to rise to 49 cents in 2019. The consensus AFFO per unit estimates are 38 cents in 2018 and 43 cents in 2019.

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Forecasts have been relatively stable over recent months. For instance, three months ago the consensus FFO per unit estimates were 46 cents for 2018 and 49 cents for the following year.

Valuation

The REIT is not cheap. According to Bloomberg, the REIT is trading at a price-to-FFO multiple of over 27 times the 2019 consensus estimate. Looking over the past three years, its average forward multiple is 20 times with its peak multiple at 30 times.

The average 12-month target price is $13.71, implying the unit price is fairly valued. Target prices are quite concentrated. Individual target prices are as follows in numerical order: $12.40 (low on the Street is from Himanshu Gupta, the analyst at GMP), two at $13, four at $13.50, four at $14, and two at $14.50 (the highs on the Street are from Frederic Blondeau, the analyst from Echelon Wealth Partners and Mark Rothschild, the analyst at Canaccord Genuity).

Insider transaction activity

Looking back to the beginning of Sept 2018, there has not been any buying or selling activity in the public market reported by insiders.

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Chart watch

Real estate investment trusts are off to a strong start in 2019 with all REIT’s in the S&P/TSX composite index realizing positive returns so far this year. There are three residential REIT’s on the positive breakouts list.

From a long-term perspective, InterRent’s chart is very attractive with a unit price that has climbed to over $13 from below $2 in 2011. Long-term investors have been rewarded with strong unit price appreciation combined with a rising distribution.

Looking at key resistance and support levels, the stock price has initial overhead resistance around $14. In terms of downside support, there is initial technical support around $13, near its 50-day moving average (at $12.98). Failing that, there is support around $12.

While this is a small-cap security, the REIT has reasonable liquidity. The three-month historical daily average trading volume is approximately 545,000 units.

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.

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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 Breakouts Jan. 24 close
AGF-B-T AGF Management Ltd $5.42
ASR-T Alacer Gold Corp $3.04
AD-T Alaris Royalty Corp $18.82
AP-UN-T Allied Properties REIT $46.59
BLDP-T Ballard Power Systems Inc $4.27
BLX-T Boralex Inc $18.48
CAE-T CAE Inc $27.66
CU-T Canadian Utilities Ltd $33.92
CPX-T Capital Power Corp $28.97
CG-T Centerra Gold Inc $6.66
CHW-T Chesswood Group Ltd $11.34
CVG-T Clairvest Group Inc. $50.49
CSU-T Constellation Software Inc $961.36
CRON-T Cronos Group Inc. $21.00
DSG-T Descartes Systems Group Inc $41.07
DIV-T Diversified Royalty Corp $3.02
ECN-T ECN Capital Corp. $3.69
FC-T Firm Capital Mortgage Investment Corp $13.53
FCR-T First Capital Realty Inc $20.33
FSV-T FirstService Corp $104.96
GMP-T GMP Capital Inc $2.29
HR-UN-T H&R Real Estate Investment Trust $22.06
INE-T Innergex Renewable Energy Inc $14.30
IFP-T Interfor Corp $16.62
IIP-UN-T InterRent REIT $13.51
ITP-T Intertape Polymer Group Inc $19.82
KMP-UN-T Killam Apartment REIT $16.94
KL-T Kirkland Lake Gold Inc $37.57
NVU-UN-T Northview Apartment REIT $26.55
OTEX-T Open Text Corp $47.06
QSR-T Restaurant Brands International Inc $84.97
SIA-T Sienna Senior Living Inc $17.30
SRU-UN-T SmartCentres Real Estate Investment Trust $32.77
SUM-T Solium Capital Inc $13.28
SMU-UN-T Summit Industrial Income REIT $10.37
TXG-T Torex Gold Resources Inc $14.03
TC-T Tucows Inc. $94.10
VNR-T Valener Inc $20.78
WFT-T West Fraser Timber Co Ltd $74.30
WEF-T Western Forest Products Inc $2.13
Negative Breakouts
CLR-T Clearwater Seafoods Inc $5.04
CNL-T Continental Gold Inc $1.76
GWR-T Global Water Resources Inc. $12.48
IDG-T Indigo Books & Music Inc $10.42
LNF-T Leon's Furniture Ltd. $14.63
MAV-T MAV Beauty Brands Inc. $8.14
MUX-T McEwen Mining Inc. $2.18
PL-T Pinnacle Renewable Holdings Inc. $10.92
WFC-T Wall Financial Corp. $22.01

Source: Bloomberg

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