On today’s TSX Breakouts report, there are 17 stocks on the positive breakouts list (stocks with positive price momentum), and 26 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a REIT that appeared on the positive breakouts list last Tuesday with its unit price closing at a record high - Crombie Real Estate Investment Trust (CRR-UN-T).
The REIT is positioned to benefit from operational improvements from its main tenant, Sobey’s, which represents 55 per cent of the REIT’s revenue. In addition, Crombie’s capital recycling program is expected to result in net asset value and earnings growth, targeted to be between 3 per cent and 5 per cent. The REIT offers its investors an attractive 5.5 per cent yield with a payout ratio of 90 per cent last quarter.
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
Nova Scotia-based Crombie holds a portfolio focused on grocery and drug-store anchored properties across Canada. At the end of the second quarter, the portfolio held 284 properties.
In terms of geographic breakdown, the REIT’s largest provincial exposures as a percentage of gross leaseable area were Nova Scotia (27 per cent), Alberta (18 per cent), Ontario (12 per cent) and Québec (11 per cent) as at June 30.
Sobeys is Crombie’ dominant tenant representing 55 per cent of annual minimum rent as at June 30. The second largest tenant was Shoppers Drug Mart, representing 4.2 per cent of total annual minimum rent. Other tenants include Dollarama, the Province of Nova Scotia, the Government of Canada, Cineplex, GoodLife Fitness, and banks such as Canadian Imperial Bank of Commerce, Bank of Nova Scotia, and Bank of Montreal.
The weighted average lease term is 10 years. Between 2020 and 2028, less than 5 per cent of its leases (as a percentage of the total gross leaseable area) mature in a given year – limiting its risk.
After the market closed on Aug. 7, the company reported second-quarter earnings results that were relatively in-line with expectations.
FFO (funds from operations) per unit came in at 29 cents, a penny shy of the consensus estimate. Same-property NOI (net operating income) growth was a healthy 3.2 per cent. Occupancy stood at 95.9 per cent. During the second quarter, Crombie received gross proceeds of $186-million from property sales. After the quarter, the partial disposition of a 15-property portfolio provided the REIT with net proceeds of $102.6-million. Debt-to-gross book value continued to improve, declining to 49.2 per cent. The unit price declined 7 cents, or 0.5 per cent, to $15.45 from $15.52 the following trading day.
Empire Company Ltd. is a major shareholder. As at June 30, Empire had a 41.5 per cent economic and voting interest.
At Crombie’s investors day held on Oct. 10, Mike Vels, chief financial officer of Empire, said, “We always get the question from shareholders, here and there when Michael [the chief executive officer of Empire, Michael Medline] and I are doing investor relations, “So how do you feel about your percentage holding in Crombie?” And the answer is, and it’s exactly the same answer every single time, “We’re very happy with it. We have no plans to change it. We’re super happy with the relationship. It’s a relationship that makes sense for both companies, and it is all about the people and it is about the relationship. We do not control Crombie but we have a great relationship between the two teams that we believe will add value to both companies.”
At the investor day, Crombie’s chief operating officer Glenn Hynes said that management targets annual growth in FFO, AFFO and NAV (net asset value) per unit to be between 3 per cent and 5 per cent.
Given the REIT’s robust development activity and with the unit price trading near an all-time high, this has many investors speculating about a potential future equity financing. During the investor day presentation, Mr. Hynes stated, “Importantly, we've not raised traditional equity in over three years, and we retained many tens of millions of dollars of NAV by recycling capital instead of raising equity when we were trading materially below NAV.” However, given the nearly 30 per cent year-to-date rally in the unit price, it is no longer trading at a large discount to its NAV. Furthermore, the anticipated cost of the development pipeline is between $4-billion and $5.8-billion.
The REIT is expected to report its third-quarter financial results after the market closes on Nov. 6. The consensus FFO per unit estimate is 29 cents.
Distribution policy
The REIT pays its unitholders a monthly distribution of 7.417 cents per unit, or 89 cents per unit on a yearly basis. This equates to a current annualized yield of 5.5 per cent.
The monthly distribution has been maintained at this level since mid-2008.
In the second quarter, the AFFO payout ratio stood at 90 per cent and was 89 per cent for the first half of 2019.
Analysts’ recommendations
This security with a market capitalization of $2.45-billion is covered by 10 analysts, of which five analysts have buy recommendations and five analysts have neutral recommendations.
The 10 firms providing research coverage on the REIT are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC Worldl Markets, Desjardins Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, TD Securities and Veritas Investment Research.
Revised recommendations
Earlier this month, three analysts revised their expectations – all higher.
Canaccord’s Mark Rothschild raised his target price to $17.50 from $16.50. TD Securities’ Sam Damiani lifted his target price by 50 cents to $17.50. Mario Saric of Scotiabank raised his target price to $17 from $16.25.
Financial forecasts
The consensus FFO per unit estimates are $1.18 in 2019 and $1.23 in 2020. The Street is anticipating AFFO per unit to come in at $1.00 in 2019 and $1.03 in 2020.
Earnings expectations have declined for this year and next year as management advances its capital recycling program, divesting lower growth and non-core assets and expanding its property development pipeline (currently at 33 properties, of which 20 properties are located in Vancouver, Toronto and Montreal) in order to lay the foundation for the REIT’s future growth. For instance, three months ago, the Street was forecasting FFO per unit of $1.22 for 2019 and $1.26 for 2020. The AFFO per unit estimates were $1.04 for 2019 and $1.08 for the following year.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 13.2 times the 2020 consensus estimate, near peak levels. The REIT is trading at a price-to-AFFO multiple of 15.7 times the 2020 consensus estimate.
The average one-year target price is $16.92, implying the unit price is nearly fully valued with almost 5 per cent upside potential over the next 12 months. Individual price targets are quite concentrated and are as follows in numerical order: $16 (the low on the Street is from RBC’s Pammi Bir), $16.25, six at $17, and two at $17.50 (the high on the Street is from Canaccord’s Mark Rothschild and TD’s Sam Damiani).
Insider transaction history
Year-to-date, only one insider has reported transactions in the public market.
Between June 26 and Aug. 28, Jason Shannon, who sits on the board of trustees, reported three purchases (buying 10,000 units each time). He acquired a total of 30,000 units at an average price per unit of approximately $15.42 for an account in which he has indirect ownership (JPS Holdings Limited), initiating a position in this account. The cost of these purchases, not including commission charges, totaled over $462,000.
Chart watch
Year-to-date, the unit price has steadily climbed higher, rallying 29 per cent. On Oct. 8, the unit price closed at an all-time high of $16.26. Given this solid return, the positive price momentum may soon need to pause in order to digest these gains.
Looking at key technical resistance and support levels, the next ceiling of resistance is around $17. Should the unit price retreat, there is technical support around $15.50, which is close to its 50-day moving average (at $15.70). Failing that, there is downside support around $14.50, near its 200-day moving average (at $14.47).
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.
Jennifer Dowty