On today’s TSX Breakouts report, there are 42 stocks on the positive breakouts list (stocks with positive price momentum), and 12 stocks are on the negative breakouts list (stocks with negative price momentum).
Canadian Tire Corp. Ltd. (CTC-A-T) surfaced on the positive breakouts list with the share price up 9 per cent over the past nine trading days. However, in this report, I am featuring a related security - CT Real Estate Investment Trust (CRT.UN-T), which holds a portfolio of properties with Canadian Tire as its anchor tenant.
This is a security that is best suited by investors seeking reliable income. While the unit price may only appreciate modestly in the near-term, the monthly distribution is dependable. The average 12-month target price suggests the unit price has a potential total return of nearly 15 per cent, including its attractive current yield of 5.8 per cent.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
CT REIT owns income-producing properties with Canadian Tire stores being its largest tenant representing 91.6 per cent of annualized base minimum rent as at June 30. The REIT’s portfolio consists of over 300 properties located across the country, 349 retail properties, four industrial properties, one mixed-used commercial property, and three development properties as at June 30.
Highlighted below are several of the REIT’s attractive characteristics:
* Reliable income. For investors seeking stable income, CT REIT offers an attractive current yield of 5.8 per cent and conservative payout ratio. Earlier this month, management announced a 2 per cent distribution increase, lifting its monthly distribution to 6.693 cents per unit effective with its September distribution from 6.562 cents per unit. A distribution increase has been announced during the fourth quarter of every calendar year since 2014.
Management has confidence in the REIT’s future cash flow generation. On the earnings call, president and chief executive officer Ken Silver remarked on the unexpected distribution increase, “I think the Board’s decision to raise the distribution at this point by 2 per cent is clearly viewed by the Board as being both prudent and a positive reflection of the resiliency and predictability of the REIT’s results”.
* Anchored by a strong national retailer. CT REIT benefits from its relationship with a leading national retailer – Canadian Tire. As of May 9, all Canadian Tire store had reopened. Canadian Tire provides the REIT with cash flow reliability and earnings growth opportunities through the expansion of the Canadian Tire retail store network. Last quarter, CT REIT completed the expansion of three existing Canadian Tires stores. Furthermore, CT REIT has average annual rent increases built into the property leases at Canadian Tires stores of 1.5 per cent, on average, providing the REIT with predictable same-store net operating income growth. In addition to the annual rent escalations, CT REIT has long-term leases.
* Solid fundamentals. After the market closed on Aug. 4, CT REIT reported strong second-quarter financial results that were in-line with expectations. The REIT reported funds from operations (FFO) of 29 cents per unit, up 1 per cent year-over-year. Adjusted funds from operations (AFFO) came in at 25.6 cents per unit, up 2.8 per cent from 24.9 cents per unit reported during the same period last year. Same property net operating income increased 1.6 per cent year-over-year, and occupancy was high at 99.3 per cent at quarter-end. In July, rent collections were high at 98.5 per cent. Book value per unit was $14.67 as at June 30.
* Financial health. The REIT’s balance sheet is strong providing CT REIT with the financial flexibility to fund future growth. At the end of the second-quarter, the debt-to-gross book value stood at 42 per cent. The company has approximately $320-million in cash and available credit facilities.
* Management is exercising prudence. Company leaders are taking a conservative stance in terms of investments and deploying capital. In the opening remarks on the earnings call, Mr. Silver remarked, “While significant risks remain in the external environment, we are cautiously moving forward. We are planning for the future and [are] open to making new investments but are in no rush to do so.”
When asked about acquisition opportunities on the earnings call, chief operating officer Kevin Salsberg had this to say, “We’re being patient for two reasons. One, there is just not a lot out there to go after right now, quite frankly.” Secondly, he stated, “I think vendors and buyers are still far apart on their expectations in terms of pricing, that bid-ask spread is still wide…But I do expect in the back half of the year, hopefully, that the market will loosen up a little and there will be a little bit more volume on both marketed deals and off-market opportunities.”
CT REIT is expected to report its third-quarter financial results during the first week of November. The consensus FFO per unit and AFFO per unit estimates are 30 cents and 26 cents, respectively.
Distribution policy
The REIT pays its unitholders a monthly distribution 6.693 cents per unit or 80.316 cents per unit on a yearly basis. This equates to a current annualized yield of 5.8 per cent.
The AFFO payout ratio was 77 per cent in the second-quarter, and 77.3 per cent for the first half of 2020.
Analysts’ recommendations
According to Bloomberg, seven analysts cover the REIT, of which four analysts have buy recommendations and three analysts have neutral recommendations.
The firms providing research coverage on the REIT are: BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, National Bank Financial, RBC Dominion Securities, Scotiabank, and TD Securities.
Revised recommendations
In August, five analysts tweaked their expectations - all slightly higher.
- TD’s Sam Damiani lifted his price target to $15.50 from $15.
- Scotia’s Himanshu Gupta raised his target price by 50 cents to $15.50.
- BMO’s Jenny Ma hiked her target price by $1 to $15.50.
- RBC’s Pammi Bir bumped his target price to $15 from $14.
- CIBC’s Dean Wilkinson raised his target price by 25 cents to $15.
Financial forecasts
Steady earnings growth is forecast for CT REIT. The consensus FFO per unit estimate is $1.19 for 2020, up from $1.175 reported in 2019, and forecast to climb to $1.23 in 2021. The consensus AFFO per unit estimates are $1.03 in 2020 and $1.08 in 2021.
Financial forecasts have been relatively stable with minor downward revisions. For instance, four months ago, the consensus FFO per unit estimates were $1.21 for 2020 and $1.25 for 2021. The AFFO per share estimates were $1.05 for 2020 and $1.10 for 2021.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 11.3 times the 2021 consensus estimate. This valuation is relatively in-line with its three-year historical average multiple but below its peak multiple of approximately 14 times during this period. On a price-to-AFFO basis, the REIT is trading at 12.9 times the 2021 consensus estimate.
The average one-year target price is $15.14, suggesting the unit price has 9 per cent upside potential over the next 12 months. In combination with the 5.8 per cent yield, this would represent a potential total return of nearly 15 per cent. Analysts’ target prices are quite concentrated. Individual target prices are as follows in numerical order: $14 (the low on the Street is from Desjardins’ Michael Markidis), two at $15, and four at $15.50.
Insider transactions
Year-to-date, only two insiders have traded units in the public market and both management executives were buyers.
Most recently, on May 21, chief financial officer Lesley Gibson purchased 8,000 units at a price per unit of $12.70. The cost of this investment exceeded $101,000.
On May 12, chief operating officer Kevin Salsberg acquired 4,300 units at a price per unit of $12.50. On March 9, Mr. Salsberg bought 4,270 units at a cost per unit of $15.25.
Chart watch
The real estate sector is one of the worst performing sectors in the S&P/TSX composite index, declining 19 per cent year-to-date.
Year-to-date, CT REIT’s unit price is down 14 per cent. However, for the past three months, the unit price has been holding steady, consolidating or trading sideways, largely between $13 and $14.
In terms of key resistance and support levels, the unit price has a major ceiling of resistance around $15. Looking at the downside, the 50-day moving average has proven to be a strong support level, which is current at $13.80. Failing that, there is support around $13.
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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Jennifer Dowty