On today’s Breakouts report, there are 121 stocks on the positive breakouts list (stocks with positive price momentum), and just 14 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that is too small (market capitalization is $99-million) to appear on the breakouts list. However, it is a security that may be of interest to investors seeking reliable income.
With an attractive business model, cash flow and distribution growth, and a conservative payout ratio of 57 per cent, the security discussed today is Fronsac Real Estate Investment Trust (FRO-UN-X).
The REIT has four “buy” recommendations with an anticipated one-year price return of 18 per cent (22 per cent including the yield).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
Quebec-based Fronsac held an interest in 66 properties as of Sept. 30, of which 59 properties are located in Quebec, three properties are in Ontario, and four properties are located in Nova Scotia. These properties are located in high traffic areas.
The REIT has a strong tenant composition with over 100 tenants.
For the first nine months of 2020, its top five tenants based on NOI (net operating income) were Sobeys (13.4 per cent of total NOI), Walmart (12.8 per cent), Tim Hortons (7.5 per cent), Loblaw (7.2 per cent), and Suncor (7 per cent), representing 48 per cent of NOI. The top 10 tenants represented 72.5 per cent of NOI.
Most of its tenants provide essential services and as a result have remained open during the coronavirus pandemic. In the third-quarter, the occupancy rate was 99 per cent.
On Nov. 10, Fronsac announced its plan to acquire five grocery store properties, two in Quebec, two in Nova Scotia, and one in Ontario. The properties are leased to Loblaw stores. To fund this purchase, the REIT concurrently announced it will raising up to $15-million by issuing units at $6.50, as well as raising up to $8-million through a private placement of convertible debentures.
That day, the previously announced 10-for-1 unit consolidation (one unit for ten pre-consolidation units) was completed.
Before the market opened on Nov. 4, the REIT reported solid third-quarter financial results. Recurring funds from operations (FFO) per unit came in at 1.27 cents, up over 24 per cent year-over-year. The debt-to-gross book value stood at 52 per cent. The unit price rallied over 4 per cent that day.
In the earnings release, President and Chief Executive Officer Jason Parravano said: “For another year we have continued to execute our business plan and have delivered year over year per unit FFO growth. That growth has allowed us, for a ninth consecutive year, to increase our per unit distribution this year by 17 per cent. I believe that these two factors together prove the resilience of our model and tenant base in what we can call a challenging year on all fronts. On that note, I am proud to say that our collections for the quarter remained in excess of 99 per cent. In addition, we announced today the consolidation of our units which we believe will attract a wider audience of potential investors thereby resulting in a more efficient market for our units.”
Investment thesis highlights
- Strong growth profile. 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.
- Acquisition growth. Management remains committed to actively pursuing accretive acquisitions.
- Reliable and rising monthly income. Since 2012, distributions have increased at a compounded annual growth rate of 10 per cent. In Jan. 2021, the distribution is increasing 17 per cent. In calendar 2020, 2019, 2018 and 2017, distributions increased by 15 per cent, 10 per cent, 12 per cent and 12 per cent, respectively.
- Insider ownership. Insiders own approximately 18 per cent of the units outstanding.
On Nov. 4, Fronsac announced a 17 per cent distribution increase effective in January. Starting Jan. 2021, the REIT will pay its unitholders a monthly distribution of 2.5 cents per unit, or 30 cents per unit yearly, equating to an annualized yield of 4.5 per cent.
The REIT has routinely announced distribution increases. For instance, prior distribution hikes were announced in Nov. 2019, Nov. 2018, Jan. 2018, March 2017, May 2016, May 2015, and May 2014. Since 2012, Fronsac has increased its distributions by 140 per cent.
For the first nine months of 2020, the adjusted funds from operations (AFFO) payout ratio stood at a conservative 57 per cent, suggesting the monthly distribution is sustainable with room to expand in the future.
This micro-cap security with a market capitalization of $99-million is covered by four analysts and all four analysts have ‘buy’ recommendations.
The firms providing research covering on the REIT are: Canaccord Genuity, Industrial Alliance Securities, Laurentian Bank Securities, and Paradigm Capital.
Earlier this month, Industrial Alliance’s Frederic Blondeau raised his target price to $8 from $7.50.
The consensus FFO per unit estimates are 49 cents in 2020, increasing to 55 cents in 2021. The Street is anticipating the REIT to report AFFO per unit of 46 cents in 2020, rising to 50 cents in 2021.
The REIT is trading at a price-to-FFO multiple of 12.2 times the 2021 consensus estimate and at a price-to-AFFO multiple of 13.3 times the 2021 consensus estimate.
The average 12-month target price is $7.88, implying there is 18 per cent upside potential in the unit price over the next 12 months (a potential 22 per cent total return including the yield). Individual target prices are as follows in numerical order: two at $7.50, $8, and $8.50 (from Corey Hammill, the analyst at Paradigm Capital).
Insider transaction history
Year-to-date, three insiders have reported trading activity in the public market – all purchases.
Between March 25 and June 5, trustee François-Olivier Laplante invested over $330,000 in units of the REIT.
Between April 1 and June 5, chairman of the board of trustees Michel Trudeau invested $67,000 in units of Fronsac. Between 2003 and 2018, Mr. Trudeau served at the president and chief executive officer of Laurentian Bank Securities. He was the vice-chairman of Laurentian Bank Securities between Oct. 2018 and Oct. 2019.
On May 27, chief financial officer Kevin Henley invested approximately $1,000 in units of the REIT.
Year-to-date, the unit price is relatively unchanged, up 1.5 per cent. However, this is significantly higher compared to other REITs. For instance, the S&P/TSX real estate index is down 10 per cent year-to-date.
In the near-term, Fronsac’s unit price may trade sideways between $6.50 and $7.
In terms of key technical resistance and support levels, the unit price has a major ceiling of resistance between $7 and $7.30, near its record closing high of $7.30 reached on July 4, 2019. Looking at the downside, the unit price has strong technical support around $6.50, close to its 50-day moving average (at $6.46). Failing that, there is support around $6.
This security is thinly traded, which can increase price volatility. The three-month historical daily average trading volume is approximately 11,000 units.
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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