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On today’s Breakouts report, there are 18 stocks on the positive breakouts list (stocks with positive price momentum), and 89 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a real estate investment trust (REIT) that is on the cusp of entering correction territory with its unit price down nearly 10 per cent from its record closing high reached last month - Canadian Net Real Estate Investment Trust (NET.UN-X). It does not appear on the breakouts list as it is too small (market capitalization is $130-million), below the $200-million screening threshold.

It is a security that may be of interest to investors seeking reliable income, especially given the recent pullback in the unit price. Canadian Net has an attractive business model, cash flow and distribution growth, attractive 4-per-cent yield, and a conservative payout ratio of 58 per cent. The REIT has a unanimous “buy” recommendation with an anticipated one-year price return of 16 per cent (20-per-cent total return, which includes the yield).

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

The REIT

Quebec-based Canadian Net held an interest in 76 properties as of March 31, of which 65 properties are located in Quebec, four in Ontario, and seven in Nova Scotia. These properties are largely in high traffic areas. Subsequent to the end of the first quarter, the company has purchased other properties as management continues to prudently build its portfolio.

The REIT has a strong tenant composition. In the first quarter of 2021, its top five tenants represented 59 per cent of net operating income with the following breakdown: Loblaw (25 per cent of NOI), Walmart (11 per cent), Sobeys (10 per cent), Suncor (7 per cent), and Tim Hortons (6 per cent). The top 10 tenants represented 78 per cent of NOI. Most of its tenants provide essential services and as a result remained open during the coronavirus pandemic.

On July 15, Canadian Net announced its plans to acquire a grocery store located in Quebec City at a cost of approximately $6.2-million. The acquisition is expected to be completed later this month. To fund this purchase, the REIT concurrently announced its plans to raise $17.5-million in a bought deal financing, issuing 2.35-million units at a price per unit of $7.45. If an over-allotment option is exercised, an additional 352,000 units can be issued, bringing the total proceeds up to roughly $20.1-million.

In late-June, the Trust changed its name to Canadian Net REIT from Fronsac REIT, and the ticker changed to NET-UN from FRO-UN.

Quarterly earnings

On May 20, the Canadian Net reported solid first quarter financial results. Recurring FFO (funds from operations) per unit came in at 14 cents, up 27 per cent year-over-year, and in-line with the consensus estimate. The REIT collected 100 per cent of its rents, and the occupancy rate was 99 per cent. The debt-to-gross book value stood at 56 per cent. The following day, the unit price rallied 3.6 per cent.

Investment thesis

  • Robust growth. Since 2012, FFO per unit has expanded at a compounded annual growth rate of 18 per cent.
  • Attractive business model: Triple net lease and management-free structure. This provides the REIT with cash flow visibility and stability given that tenants assume responsibility for variable costs (e.g. taxes, insurance, maintenance, minor renovations) as well as management of the properties.
  • Well-known and diversified tenant base. Providing defensive (i.e. grocery stores) as well as cyclical exposures (i.e. retail stores).
  • Acquisition growth. Management remains committed to actively pursuing accretive acquisitions.
  • Reliable and rising monthly income.
  • Low payout ratio. Last quarter, the AFFO payout ratio stood at 58 per cent.
  • Attractive valuation. The REIT is trading at a discount relative to historical levels.
  • Insider ownership. Insiders own approximately 15 per cent of the units outstanding.
  • Risks to be aware of: 1) Low liquidity – with few units traded on a daily basis, this can increase price volatility. 2) Frequent financings. In 2020, the REIT completed two offerings, rising over $41-million. Last week, another financing was announced.

Distribution policy

The REIT pays its unitholders a monthly distribution of 2.5 cents per unit, or 30 cents per unit yearly, equating to a current annualized yield of 4 per cent.

The REIT has routinely announced distribution increases. In November of 2020, Canadian Net announced its 10th consecutive annual increase. For the past five consecutive years, double-digit distribution hikes were announced: Nov. 2020 (17.4 per cent), Nov. 2019 (15.1 per cent), Nov. 2018 (10.1 per cent), Jan. 2018 (12 per cent hike), and March 2017 (11.8 per cent). Since 2012, Canadian Net has increased its distributions by 140 per cent.

In the first quarter of 2021, adjusted funds from operations (AFFO) payout ratio stood at a conservative 58 per cent, suggesting the monthly distribution is sustainable with room to expand in the future.

Analysts’ recommendations

This micro-cap security has a unanimous “buy” recommendation from four analysts.

The firms providing research covering on the REIT are: Canaccord Genuity, iA Capital Markets, Laurentian Bank Securities, and Paradigm Capital.

Revised recommendations

In May, all four analysts covering the REIT raised their target prices.

  • Canaccord’s Brendon Abrams to $8.50 from $7.75.
  • iA’s Frederic Blondeau to $8.75 from $8.
  • Laurentian Bank’s Yash Sankpal by 50 cents to $8.25.
  • Paradigm’s Corey Hammill to $9 (the high on the Street) from $8.50.

Financial forecasts

The consensus FFO per unit estimates are 61 cents in 2021, up from 49 cents reported in 2020, and expected to rise to 66 cents in 2022. The Street is anticipating the REIT to report AFFO per unit of 56 cents in 2021 and 60 cents in 2022.

Financial forecasts have been rising for 2022. To illustrate, four months ago, the consensus FFO per unit estimates were 59.5 cents for 2021 and 60 cents for 2022. The consensus AFFO per unit estimates were 56 cents for 2021 and 55 cents for 2022.

Valuation

The REIT is trading at a price-to-FFO multiple of 11.3 times the 2022 consensus estimate, a discount to its historical average (looking back to Dec. 2019) of 11.9 times. Canadian Net is trading at a price-to-AFFO multiple of 12.4 times the 2022 consensus estimate.

The average 12-month target price is $8.625, implying there is 16 per cent upside potential in the unit price over the next 12 months (a potential 20 per cent total return including the yield).

For comparison purposes, small-cap peer Plaza Retail REIT (PLZ-UN-T) is trading at price-to-FFO multiples of 11.7 the 2022 consensus estimate. However, modest growth is expected for Plaza, according to Refinitiv. The consensus FFO per unit estimates are 37 cents in 2021, up from 35 cents reported in 2020, and 39 cents in 2022. As at March 31, Plaza’s top tenants based on monthly base rents were: Loblaw/Shoppers Drug Mart (24.7 per cent), Dollarama (5.7 per cent), KFC (4.8 per cent), Canadian Tire Group (3.7 per cent), TJX Group (3.6 per cent), and Sobeys Group (3.5 per cent).

Insider transaction history

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

Chart watch

Year-to-date, the unit price is up 11 per cent. On June 23, the unit price closed at a record high of $8.25.

Since closing at an all-time high, the unit price has declined 9.6 per cent with the REIT on the cusp of entering correction territory. Given the pullback, the REIT is nearing oversold territory. The relative strength index (RSI) is at 33. Generally, an RSI reading at or below 30 reflects an oversold condition.

In terms of key technical resistance and support levels, the unit price has a major ceiling of resistance between $8 and $8.25. Looking at the downside, the unit price has strong technical support around $7, close to its 200-day moving average (at $7.10).

This security is thinly traded, which can increase price volatility. It can also make selling or buying a large position a challenge without moving the unit price materially. The three-month historical daily average trading volume is approximately 12,000 units.

Please note that 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.

POSITIVE BREAKOUTSJuly 16 close
AND-TAndlauer Healthcare Group Inc. $40.34
EMA-TEmera Inc $58.07
EXF-TEXFO Inc $7.52
FSV-TFirstService Corp $227.71
GDI-TGDI Integrated Facility Services Inc. $59.11
WN-TGeorge Weston Ltd $124.52
IPL-TInter Pipeline Ltd $20.94
L-TLoblaw Cos Ltd $80.21
MRU-TMetro Inc $62.28
ML-TMillennial Lithium Corp. $3.43
RCI-B-TRogers Communications Inc $67.22
SMU-UN-TSummit Industrial Income REIT $18.82
SPB-TSuperior Plus Corp $15.68
TRI-TThomson Reuters Corp $129.04
TF-TTimbercreek Financial Corp. $9.67
TSU-TTrisura Group Ltd. $43.66
TC-TTucows Inc. $102.58
WCN-TWaste Connections Inc. $155.17
NEGATIVE BREAKOUTS
VNP-T5N Plus Inc $2.69
RZZ-XAbitibi Royalties Inc. $22.84
AT-TAcuityAds Holding Inc. $9.78
AFN-TAg Growth International Inc $33.19
AXU-TAlexco Resource Corp. $2.68
ADW-A-TAndrew Peller Ltd $9.15
ASM-TAvino Silver & Gold Mines Ltd. $1.29
BDGI-TBadger Infrastruture Solution $33.04
BU-TBurcon NutraScience Corp $3.00
CTC-A-TCanadian Tire Corp Ltd $188.02
CWB-TCanadian Western Bank $33.56
CFP-TCanfor Corp $24.26
WEED-TCanopy Growth Corp. $24.72
CRDL-TCardiol Therapeutics Inc. $2.70
CLS-TCelestica Inc $9.26
CERV-TCervus Equipment Corp $14.34
CEU-TCES Energy Solutions Corp. $1.61
CHE-UN-TChemtrade Logistics Income Fund $6.43
CGG-TChina Gold International Resources Corp. $3.14
CMG-TComputer Modelling Group Ltd $4.67
CMMC-TCopper Mountain Mining Corp $3.36
CPG-TCrescent Point Energy Corp $4.26
DML-TDenison Mines Corp $1.26
DSV-TDiscovery Silver Corp. $1.90
DHT-UN-TDRI Healthcare Trust $8.90
ELD-TEldorado Gold Corp $11.85
EFL-TElectrovaya Inc. $1.06
EMX-XEMX Royalty Corp. $3.61
EDR-TEndeavour Silver Corp $6.34
EFR-TEnergy Fuels Inc $5.88
EGLX-TEnthusiast Gaming Holdings Inc. $5.73
EQX-TEquinox Gold Corp. $8.14
FR-TFirst Majestic Silver Corp $16.35
FM-TFirst Quantum Minerals Ltd $24.64
FVI-TFortuna Silver Mines Inc $6.09
FURY-TFury Gold Mines Limited $1.33
GIL-TGildan Activewear Inc $41.66
GLO-TGlobal Atomic Corp. $2.44
GSC-TGolden Star Resources Ltd. $3.01
GOLD-TGoldMining Inc. $1.68
GCM-TGran Colombia Gold Corp. $4.75
HWX-THeadwater Exploration Inc. $3.74
HEXO-THEXO Corp. $5.54
HIVE-XHIVE Blockchain Technologies Ltd. $2.72
IAG-TiA Financial Corporation Inc. $65.93
IMG-TIAMGOLD Corp $3.53
III-TImperial Metals Corp $4.26
IMV-TIMV Inc. $1.77
IFP-TInterfor Corp $26.19
ITP-TIntertape Polymer Group Inc $27.14
JAG-TJaguar Mining Inc. $5.14
LAS-A-TLassonde Industries Inc $171.00
LUG-TLundin Gold Inc $10.15
MG-TMagna International Inc $107.26
MRE-TMartinrea International Inc $12.29
MMX-TMaverix Metals Inc. $6.49
LEAF-TMedReleaf Corp. $0.30
MTA-TMetalla Royalty & Streaming Limited $10.04
TPX-B-TMolson Coors Canada Inc. $64.24
NEPT-TNeptune Wellness Solutions Inc. $1.05
NOU-XNouveau Monde Graphite Inc. $8.57
NVO-TNovo Resources Corp. $2.01
PAAS-TPan American Silver Corp $34.21
PTM-TPlatinum Group Metals Ltd $3.78
PBL-TPollard Banknote Ltd. $49.21
PGM-XPure Gold Mining Inc. $1.20
STC-XSangoma Technologies Corp. $2.83
SAP-TSaputo Inc $36.34
SVM-TSilvercorp Metals Inc $6.21
SIL-TSilverCrest Metals Inc. $9.64
ZZZ-TSleep Country Canada $27.28
SII-TSprott Inc $46.52
SJ-TStella-Jones Inc $43.04
STGO-TSteppe Gold Ltd. $1.72
TVE-TTamarack Valley Energy Ltd. $2.28
TKO-TTaseko Mines Ltd $2.20
TER-CNTerrAscend Corp. $11.49
TRQ-TTurquoise Hill Resources Ltd $17.21
TWC-TTWC Enterprises Ltd. $17.50
U-TUranium Participation Corp. $5.11
URE-TUr-Energy Inc $1.35
VLNS-TValens Company Inc. $2.38
VMD-TViemed Healthcare Inc. $8.31
VYGR-CNVoyager Digital Ltd. $14.56
WM-TWallbridge Mining Company Limited $0.51
WBR-TWaterloo Brewing Ltd. $6.41
WPRT-TWestport Fuel Systems Inc. $5.05
WTE-TWestshore Terminals Investment Corp $16.75
WPK-TWinpak Ltd. $37.69

Source: Bloomberg and The Globe and Mail

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