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On today’s TSX Breakouts report, there are 67 stocks on the positive breakouts list (stocks with positive price momentum), and nine securities are on the negative breakouts list (stocks with negative price momentum).

Nearly 20 per cent of the securities rallying are REITs. Among them, apartment REITs are bouncing back after experiencing some weakness in late 2019.

Discussed today is a REIT that is on the positive breakouts list - Killam Apartment Real Estate Investment Trust (KMP-UN-T).

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The investment rationale for this REIT is: 1) earnings growth from acquisitions and development projects; 2) strong operating results. The REIT is delivering solid same-property net operating income growth through its rent increases and high occupancy; and 3) an attractive yield with a conservative payout ratio of 83 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

Halifax-based Killam, operates a portfolio of apartments (89 per cent of net operating income - NOI), manufactured home communities (6 per cent of NOI), and commercial properties (5 per cent of NOI). Of note, 33 per cent of NOI stems from relatively young buildings that have been constructed in the past ten years, which often requires less maintenance and can charge higher rents.

Killam has real estate assets located in Nova Scotia (40 per cent of NOI), Ontario (24 per cent of NOI), New Brunswick (19 per cent of NOI), Alberta (6 per cent of NOI), Prince Edward Island (6 per cent of NOI), and Newfoundland (5 per cent of NOI). On Jan. 15, management announced the $54-million purchase of an 161-unit apartment complex located in Victoria, B.C. This purchase also allows for future redevelopment - adding 315 units on the 16 acre property.

In November, Killam completed a $114-million equity financing, issuing a total of 5,750,000 units at a price of $19.90 per unit. Management has earmarked this money to paying down its debt, fund development projects and future acquisitions.

On Dec. 16, the company completed two acquisitions, adding properties in Edmonton (an apartment with 105-units) and Moncton (an apartment building with 48-units) to its portfolio. The balance sheet is healthy with a debt-to-gross book value of 46 per cent after the financing.

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Killam’s development pipeline is robust. The Shorefront development in P.E.I., a 78-unit apartment, is anticipated to be completed in mid-2020. The second phase of the Gloucester City Centre development in Ottawa, the Latitude, a 209-unit property, is expected to be completed in mid-2021. Finally, the Kay, a 128-unit apartment building in Mississauga is also under construction and just broke ground in the third quarter of 2019.

The company will be releasing its fourth-quarter 2019 financial results after the market closes on Feb. 12. Management will be hosting an earnings call the following day at 10 a.m. ET.

The consensus FFO per unit estimate is 25 cents.

Last quarter, Killam reported solid financial results.

Funds from operations (FFO) came in at 27 cents per unit, in-line with the consensus estimate. Same-property apartment net operating income (NOI) rose 4.4 per cent year-over-year with 7.8-per-cent growth in the Ontario market, 5.5-per-cent growth in Halifax, and 4.3-per-cent growth in New Brunswick. Rents increased 3.4 per cent on average for the apartment portfolio. Same-property apartment occupancy remains high at 97.3 per cent, up from 96.9 per cent reported last year.

Distribution policy

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The REIT currently pays its unitholders a monthly distribution of 5.5 cents per unit, or 66 cents per unit on a yearly basis. This equates to an annualized yield of 3.2 per cent.

The AFFO (adjusted funds from operations) payout ratio was 83 per cent for the first nine months of 2019, suggesting that the distribution is sustainable with room to increase in the future.

Analysts’ recommendations

This REIT with a market capitalization of under $2-billion level is well-covered by the Street. After Killam reported its third-quarter financial results, 12 analysts issued research reports, of which nine were buy recommendations and three were neutral recommendations.

The firms providing recent research coverage on the REIT are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Industrial Alliance Securities, Laurentian Bank Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, TD Securities and Veritas Investment Research.

Revised recommendations

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In December, Desjardins’ Michael Markidis trimmed his target price by 50 cents to $21. Raymond James’ Johann Rodrigues upgraded his recommendation to an “outperform” from “market perform” and lifted his target price to $22 from $21.

Financial forecasts

The Street is forecasting FFO per unit of 98 cents in 2019 with FFO forecast to rise to $1.03 in 2020. The AFFO per unit consensus estimate is 80 cents in 2019 and anticipated to rise to 86 cents in 2020.

Valuation

According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 19.8 times the 2020 consensus estimate, above its three-year historical average multiple of 16.9 times, but below its peak multiple of nearly 22 times. Killam is currently trading at a price-to-AFFO multiple of over 23 times the 2020 consensus estimate.

Units of Killam trade at a significant discount relative to its industry peers. For instance, units of Canadian Apartment Properties REIT (CAR-UN-T) are currently trading at a P/AFFO multiple and P/FFO multiple of 30 times and 25 times the 2020 consensus estimates, respectively. Units of Minto Apartment REIT (MI-UN-T) are trading at a P/AFFO multiple and P/FFO multiple of 30.6 times and 26.7 times the 2020 consensus estimates, respectively.

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The average one-year target price is $21.29, implying there is nearly 5 per cent upside potential in the unit price over the next 12 months. When combined with the yield, this equates to a potential total one-year return of 8 per cent.

Individual target prices are quite concentrated and are as follows in numerical order: $19.75, two at $20.50, three at $21, $21.75, and five at $22.

Insider transaction activity

On Dec. 27, Nancy Alexander, vice-president – investor relations, invested approximately $50,000 in the REIT. She purchased 2,600 units at a price per unit of $19.18, increasing this account’s holdings to 4,083 shares.

On Dec. 17, chief financial officer Dale Noseworthy sold 1,354 units in the public market at a price per unit of $18.85.

Chart watch

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The unit price of Killam has snapped back, rising 7 per cent year-to-date and is closing in on its record closing high of $21.10 reached on Oct. 9, 2019. This year-to-date gain is relatively in-line with its peers. For instance, the unit price of Canadian Apartment Properties REIT is up 7 per cent year-to-date, and the unit price of Minto Apartment REIT is up nearly 6 per cent year-to-date.

On Wed., Killam’s unit price rallied 1.4 per cent on high volume with over 1.4-million units traded. This is well above its three-month historical daily average trading volume of approximately 620,000 units.

In terms of key resistance and support levels, there is overhead resistance around $21, near its record closing high of $21.10 reached in Oct. 2019. After that, there is a ceiling of resistance around $22. Looking at the downside, there is initial technical support around $19.50, near its 50-day moving average (at $19.41) and 200-day moving average (at $19.54). Failing that, there is support around $18.50.

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 BreakoutsJan. 22 close
AGF-B-TAGF Management Ltd $6.80
AD-TAlaris Royalty Corp $22.45
AQN-TAlgonquin Power & Utilities Corp $19.69
AP-UN-TAllied Properties REIT $55.22
AIF-TAltus Group Ltd $43.54
ATZ-TAritzia Inc. $25.26
ACO-X-TAtco Ltd $52.09
BTO-TB2Gold Corp $5.56
BMO-TBank of Montreal $104.43
BLX-TBoralex Inc $26.71
BRE-TBridgemarq Real Estate Services $15.57
BTB-UN-TBTB Real Estate Investment Trust $5.37
CAR-UN-TCanadian Apartment Properties REIT $56.69
CU-TCanadian Utilities Ltd $40.29
CPX-TCapital Power Corp $35.74
CCL-B-TCCL Industries Inc $58.65
CHP-UN-TChoice Properties REIT $14.99
CUF-UN-TCominar Real Estate Investment Trust $14.77
DSG-TDescartes Systems Group Inc $60.89
UFS-TDomtar Corp. $52.33
DIR-UN-TDream Industrial REIT $14.04
D-UN-TDream Office REIT $32.60
ECN-TECN Capital Corp. $5.05
EMA-TEmera Inc $59.71
EMX-TEMX Royalty Corp. $2.45
ENB-TEnbridge Inc $53.67
ENGH-TEnghouse Systems Ltd $52.43
ET-TEvertz Technologies Ltd $18.53
FSZ-TFiera Capital Corp $12.88
FC-TFirm Capital Mortgage Investment Corp $15.10
FSV-TFirstService Corp $131.36
FTS-TFortis Inc $57.54
GIL-TGildan Activewear Inc $39.51
GRT-UN-TGranite Real Estate Investment Trust $70.98
H-THydro One Ltd. $26.28
IMV-TIMV Inc. $5.46
INE-TInnergex Renewable Energy Inc $18.60
IIP-UN-TInterRent REIT $16.90
KMP-UN-TKillam Apartment REIT $20.36
KXS-TKinaxis Inc $110.12
LSPD-TLightspeed POS Inc. $43.92
MI-UN-TMinto Apartment REIT $24.45
MRG-UN-TMorguard North American Residential REIT $19.25
MRT-UN-TMorguard Real Estate Investment Trust $12.42
MTY-TMTY Food Group Inc. $61.88
NFI-TNew Flyer Industries Inc $30.13
NGT-TNewmont Goldcorp Corp. $57.46
NPI-TNorthland Power Inc $29.03
NVU-UN-TNorthview Apartment REIT $31.42
OLA-TOrla Mining Ltd. $2.28
PPL-TPembina Pipeline Corp $50.66
PTS-TPoints International Ltd $20.03
PIF-TPolaris Infrastructure Inc. $14.21
PBH-TPremium Brands Holdings Corp $94.48
QBR-B-TQuebecor Inc $33.98
RCI-B-TRogers Communications Inc $66.67
SEA-TSeabridge Gold Inc $18.28
SHOP-TShopify Inc. $610.31
STN-TStantec Inc $39.57
T-TTELUS Corp $51.98
TRI-TThomson Reuters Corp $103.50
X-TTMX Group Ltd $119.51
RNW-TTransAlta Renewables Inc $16.43
WJX-TWajax Corp $15.93
WCN-TWaste Connections Inc. $128.29
XBC-TXebec Adsorption Inc. $2.93
Y-TYellow Pages Ltd $10.50
Negative Breakouts
ERF-TEnerplus Corp $7.55
XTC-TExco Technologies Ltd $7.76
HSE-THusky Energy Inc $9.14
ISV-TInformation Services Corp. $14.55
LAS-A-TLassonde Industries Inc $149.56
NTR-TNutrien Ltd. $60.36
TOY-TSpin Master Corp. $34.10
TMR-TTMAC Resources Inc. $2.74
TXG-TTorex Gold Resources Inc $17.35

Source: Bloomberg

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