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analysis

On today’s Breakouts report, there are three stocks on the positive breakouts list (stocks with positive price momentum), and 70 stocks are on the negative breakouts list (stocks with negative price momentum).

Featured today is a REIT that surfaced on the positive breakouts list in late-April when its unit price closed at a 2022 high of $13.93 on April 20 - Nexus Industrial Real Estate Investment Trust (NXR.UN-T). Since then, the unit price has pulled back sharply, declining 8 per cent over the past seven trading sessions.

With a unanimous buy recommendation from seven analysts, this REIT has a current yield of 5 per cent and the average target price implies a potential price return of 17 per cent over the next year. This is a REIT to watch as its unit price slides with equity markets remaining under pressure.

A brief outline on this REIT is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The REIT

Ontario-based Nexus Industrial REIT owns a portfolio of 106 industrial, office and retail properties located across the country.

In terms of its asset class mix, based on fourth-quarter net operating income (NOI), industrial properties represented 80.6 per cent, retail properties made up 13.7 per cent and office properties comprised 5.7 per cent of NOI.

In terms of its geographical breakdown, based on fourth-quarter net operating income, 28.8 per cent stemmed from Alberta, 23.5 per cent stemmed from Québec, 19 per cent from Saskatchewan, 17.9 per cent from Ontario, 5 per cent from New Brunswick, 3.6 per cent from B.C., 1.1 per cent from Manitoba, 0.9 per cent from the Northwest Territories and 0.2 per cent from PEI.

In the fourth-quarter Management’s Discussion and Analysis, the top three tenants, based on annualized base rent, were identified as Loblaws (15.3 per cent), Westcan Bulk Transport (6.7 per cent) and Sobeys (4.7 per cent). The top 10 tenants represented 44 per cent of annualized base rent. The weighted-average remaining lease term for tenants is 6.27 years.

A key objective by management is to transition the REIT to a pure-play industrial REIT. In March 2021, the REIT changed its name to Nexus Industrial REIT from Nexus REIT, reflecting management’s commitment to increasing its portfolio of industrial assets.

Investment thesis

  • Attractive yield. Current annualized yield of 5 per cent.
  • Focus on industrial properties: High demand for warehousing and storage rental space and limited supply support rising rental rates. Growth in e-commerce supports demand for industrial properties.
  • Potential multiple re-rating: Multiple expansion as the REIT continues to dispose non-core retail and office properties and increases its industrial assets. Industrial REIT’s are valued at a higher multiple given the positive supply/demand fundamentals.
  • Acquisition growth: Its total assets increased by $948-million in 2021 to $1.7-billion. In 2021, the REIT invested $674-million in acquisitions ($416-million industrial properties were acquired in the fourth quarter alone), expanding its industrial portfolio. Subsequent to Dec. 31, the REIT completed $237-million in industrial property acquisitions as noted in the fourth-quarter MD&A. On the earnings call, chief executive officer Kelly Hanczyk said, “I’m still looking at 2022 as a pretty strong acquisition year.”
  • Rising rents. In 2022, 7 per cent of total leased gross leasable area (GLA) expires, and 10 per cent of totaled leased GLA expires in the following year, when rental rate increases can be put through.
  • High occupancy. As at Dec. 31, occupancy stood at 96 per cent.
  • Potential key risks to consider: 1) rising interest rates; 2) multiple contraction in the REIT sector; 3) building delays due to supply chain challenges; and 4) frequent equity financings to fund its growth: completed a $148-million bought deal financing in Nov. 2021, and raised $295-million in 2021 through three financings.

Distribution policy

The REIT pays its unitholders a monthly distribution of 5.333 cents per unit, or 64 cents per unit on a yearly basis. This equates to a current annualized yield of 5 per cent.

Last quarter, the normalized AFFO payout ratio was 96.5 per cent. In 2021, the normalized AFFO payout ratio was 94.7 per cent.

Quarterly earnings

Before the market opened on March 16, the REIT reported its fourth-quarter financial results. Normalized funds from operations (FFO) per unit was 19.3 cents, relatively in-line with the consensus estimate of 19.6 cents. Normalized adjusted FFO per unit was 17.2 cents, just below the consensus estimate of 18.5 cents. Same-property net operating income increased 1.7 per cent year-over-year. As at Dec. 31, the net asset value was $12.18, up from $10.15 reported last year. The debt-to-gross book value stood at 41 per cent. On the fourth-quarter earnings call, management indicated that this ratio may increase to approximately 45 per cent by the end of the first-quarter.

In the earnings release, CEO Kelly Hanczyk said, ”2021 was a banner year for Nexus. We successfully accessed the capital markets three times in 2021 to fuel the rapid growth of the REIT. We have both grown our market capitalization and high graded our industrial portfolio and have executed on our strategy of becoming a pure-play industrial REIT. We continued to deploy capital in the first quarter of 2022, closing on acquisitions of nine properties in six transactions for an aggregate purchase price of $236.5 million while maintaining liquidity to continue to acquire.”

Before the market opens on Fri. May 13, management will be releasing its first-quarter financial results and hosting an earnings call at 11 a.m. (ET). The consensus FFO per unit estimate is 20 cents.

Analysts’ recommendations

This small-cap REIT is covered by seven analysts and all seven analysts have buy recommendations.

The firms providing research coverage on the REIT are: Canaccord Genuity, Desjardins Securities, Echelon Wealth Partners, iA Capital Markets, Laurentian Bank, National Bank Financial and Raymond James.

Revised recommendations

In April, two analysts raised their expectations:

  • Desjardins’ Kyle Stanley raised his target price to $15.25 from $14.50.
  • National Bank’s Matt Kornack increased his target price to $15 from $14.25.

Financial forecasts

The consensus FFO per unit estimates are 83 cents in 2022, up from 77 cents reported in 2021, and 90 cents in 2023. The consensus AFFO per unit forecasts are 76 cents in 2022, up from 69 cents reported in 2021, and 83 cents for the following year.

Financial forecasts have been relatively steady over the past several months. Three months ago, the consensus FFO per unit estimates were 82 cents for 2022 and 90 cents for 2023.

Valuation

According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 14.2 times the 2023 consensus estimate. The REIT is trading at a price-to-AFFO multiple of 15.5 times the 2023 consensus estimate.

This multiple may expand as it management continues to execute on its objective divesting its office and retail assets and acquiring industrial properties.

In comparison, its industrial REIT peers trade at higher valuations. Summit Industrial Income REIT (SMU.UN-T), a pure-play industrial REIT with a geographical focus in the Greater Toronto Area and Greater Montreal Area, trades at a price-to-FFO multiple of 24.5 times the 2023 consensus estimate, according to Refinitiv. Granite REIT (GRT.UN-T), a pure-play industrial REIT with 134 industrial assets located in North America and Europe, trades at a price-to-FFO multiple of 20.1 times the 2023 consensus estimate, according to Refinitiv. Dream Industrial REIT (DIR-UN-T), a pure-play industrial REIT with 239 industrial assets located in North America and Europe, trades at a price-to-FFO multiple of 15.6 times the 2023 consensus estimate, according to Refinitiv.

The average 12-month target price is $14.96, implying the unit price has 17 per cent upside potential over the next year (or a potential total return of 22 per cent including the 5 per cent yield). Individual target prices are: $14 (from Canaccord’s Mark Rothschild), $14.50, two at $15, $15.25, and two at $15.50 (from iA Capital Markets’ Gaurav Hathur and Raymond James’ Brad Sturges).

Insider transaction activity

Year-to-date, there has not been any buying or selling activity in the public market reported by insiders.

Chart watch

In April, Nexus Industrial REIT was the second best performing security in the S&P/TSX Small Cap Real Estate Sector Index with a gain of 0.3 per cent, compared to a loss of 5.3 per cent for the sector. April was a weak month for this sector with 19 of the 22 members realizing losses.

Since mid-2021, the unit price has been trading largely between $11 and $14. With continued market pressure, the unit price may decline to support around $12, near its 200-day moving average. Failing that, there is support around $11 and then around $10.

This small-cap REIT can be thinly traded. The three-month historical daily average trading volume is approximately 326,000 units.

Year-to-date, the unit price is relatively unchanged, up 1.5 per cent.

ESG Risk Rating

Looking at three ESG rating providers, Sustainalytics, Bloomberg and MSCI, none of these providers has an ESG risk rating for this REIT.

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SIS-TSavaria Corp15.34
SIA-TSienna Senior Living Inc13.89
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Source: Bloomberg and The Globe and Mail

This report is not an investment recommendation.

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.

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