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Tuesday’s TSX breakouts: A REIT yielding 7.9% gains momentum as its unit price approaches a record high

On today’s TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum), and 64 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a REIT that is a dime away from setting a new record closing high and resurfacing on the positive breakouts list. Analysts anticipate the security may deliver a total return of nearly 13 per cent (including the attractive 7.9 per cent yield) over the next year. The REIT provides investors with potential diversification benefits providing exposure to two European markets - France and Germany.

The security discussed today is Inovalis Real Estate Investment Trust (INO.UN-T).

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A brief outline is provided below that may serve as a springboard for further fundamental research.

The REIT

Toronto-based Inovalis REIT holds a portfolio of office properties located in Europe. The REIT currently has an interest in 14 office properties, of which eight properties are located in France and six properties are located in Germany. The weighted average occupancy rate across the 14 properties stood at 96.8 per cent as at June 30.

Inovalis has a diversified tenant composition with 67 tenants from various industries. Its top five tenants at its 14 properties occupy approximately 50 per cent of the gross leasable area. Amongst its top five tenants are Orange (formerly France Telecom), Facility Services Hannover, Daimler AG, Hitachi Power, and Arrow Central Europe.

All lease contracts have rental indexation based on indices such as the German Consumer Price Index (CPI) and France’s Construction Costs Index (CCI). Lease maturities accelerate in the years ahead with 4.6 per cent of the REIT’s total gross leasable area expiring in 2018, 7.5 per cent expiring in 2019, 14.7 per cent in 2020, and 22.7 per cent expiring in 2021.

On August 9, the company reported its second-quarter financial results. Funds from operations (FFO) per unit came in at 21 cents, two cents below the Street’s expectations. Adjusted funds from operations (AFFO) per unit was 22 cents.

On the pre-recorded earnings call, chief executive officer David Giraud provided a positive market outlook, stating: “In France, €9.1-billion was invested in the Greater Paris Region over the course of the first half of 2018 representing a 69 per cent increase and a level of investment activity almost twice as high as the long-term average. We note that Paris is currently suffering from a lack of supply of office space, with office vacancy rate of approximately 2.1 per cent in Central Paris. The REIT's portfolio is well positioned to take advantage of this demand, and stands to benefit from the continued compression of cap rates in the region.”

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He added, “In Germany, the labor market has continued to provide positive signal, with unemployment falling to 5.2 per cent in May 2018 compared to 5.5 per cent in March 2018. The improving situation in the labor market is anticipated to strengthen private consumption within the German economy and sustain the high level of demand for commercial properties.”

On July 16, the International Monetary Fund released its updated world economic outlook. The IMF is forecasting France’s economy to grow 1.8 per cent in 2018 and 1.7 per cent in 2019. The economic outlook for Germany is slightly higher with the economy expected to strengthen 2.2 per cent in 2018 and 2.1 per cent in 2019.

The company has a foreign exchange hedging program in order to mitigate currency risk.

Distribution policy

The REIT pays its unitholders a monthly distribution of 6.875 cents per unit, or 82.5 cents per unit on a yearly basis. This equates to an annualized yield of 7.9 per cent. Inovalis REIT has maintained its distribution at this level since 2013.

The AFFO payout ratio was just under 94 per cent in the second quarter and 92 per cent during the first half of 2018. The payout ratio is in-line with management’s guidance of a payout ratio between 88 per cent and 94 per cent.

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Analysts’ recommendations

This small-cap REIT with a market capitalization of $232-million is covered by five analysts, of which two analysts have buy recommendations and three analysts have hold recommendations.

The five analysts covering the company are from the following firms in alphabetical order: BMO Capital Markets, Desjardins Securities, Echelon Wealth Partners, GMP Securities, and National Bank Financial.

Revised recommendations

Last month, two analysts revised their target prices – both slightly lower.

Troy MacLean, the analyst from BMO Capital Markets, trimmed his target price to $11 from $11.35 but maintained his ‘outperform’ recommendation. Frederic Blondeau from Echelon Wealth Partners reduced his target price by 25 cents to $10.25, the low on the Street.

Financial forecasts

The consensus FFO per unit estimate is 90 cents in 2018, increasing to 94 cents in 2019. The Street is forecasting AFFO per unit to be 90 cents in 2018, rising to 93 cents the following year.

Several months ago, in June, the Street was forecasting FFO per unit of 93 cents in 2018 and 95 cents in 2019. The consensus AFFO per unit estimates were 89 cents in 2018 and 91 cents in 2019.

Valuation

The REIT is trading at a price-to-AFFO multiple of 11 times the consensus 2019 estimate.

According to Bloomberg, the one-year consensus target price is $10.94, suggesting there is 5 per cent upside in the unit price over the next 12 months. The potential total return is nearly 13 per cent, factoring in the 7.9 per cent yield. Target prices are quite concentrated, ranging from a low of $10.25 (from the analyst at Echelon Wealth Partners) to a high of $11.50 (from the analyst at GMP Securities). Individual target prices are as follows in numerical order: $10.25, $10.75, two at $11, and $11.50.

Insider transaction activity

Year-to-date, there has only been one transaction in the public market reported by an insider.

On March 16, Jo-Ann Lempert, who was appointed to the Board of Trustees in Sept. 2017, purchased 1,000 units at a price per unit of $9.86, initiating a portfolio position.

Chart watch

In April 2013, the units began trading on the Toronto Stock Exchange. Given the REIT’s brief trading history that only goes back several years, technical analysis is somewhat limited.

More than five years after the initial public offering (IPO), the unit price is still trading close to its $10 IPO price. However, the unit price finally appears to be gaining positive momentum. Year-to-date, the REIT is up nearly 5 per cent, and the unit price is just nine cents away from its record closing high of $10.53 set on Aug. 28.

In terms of key resistance and support level, the unit price has an initial ceiling of resistance around $10.50, and after that around $11. Should the unit price retreat, there is strong downside support around $10, close to its 50-day moving average (at $10.26) and its 200-day moving average (at $10.09).

Liquidity is low for this small-cap REIT. The three-month historical daily average trading volume is approximately 30,000 units. Low liquidity can increase unit price volatility.

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 Breakouts Sept. 10 close
AD-T Alaris Royalty Corp $19.25
AP.UN-T Allied Properties REIT $44.39
APH-T Aphria Inc. $21.68
ATA-T ATS Automation Tooling Systems Inc $22.71
DOO-T BRP Inc $71.11
CAR.UN-T Canadian Apartment Properties REIT $47.17
TRST-T CannTrust Holdings Inc. $11.75
CPX-T Capital Power Corp $28.64
CJT-T Cargojet Inc $78.90
CRH-T CRH Medical Corp $5.72
UFS-T Domtar Corp. $69.19
EMH-T Emerald Health Therapeutics Inc. $5.42
FSV-T FirstService Corp $114.56
GRT.UN-T Granite Real Estate Investment Trust $56.36
HWO-T High Arctic Energy Services Inc $4.26
HEXO-T Hydropothecary Corp. $7.74
MTY-T MTY Food Group Inc. $63.30
OGI-T Organigram Holdings Inc. $7.27
PKI-T Parkland Fuel Corp $41.84
QTRH-T Quarterhill Inc. $1.96
RFP-T Resolute Forest Products Inc. $19.02
RVX-T Resverlogix Corp $3.90
REI.UN-T RioCan Real Estate Investment Trust $25.51
SW-T Sierra Wireless Inc $26.07
FIRE-T Supreme Cannabis Co Inc. $2.27
WMD-T WeedMD Inc. $2.36
Negative Breakouts
AAV-T Advantage Oil & Gas Ltd $3.26
ALC-T Algoma Central Corp $13.20
AKG-T Asanko Gold Inc $0.98
BAD-T Badger Daylighting Ltd $27.77
ABX-T Barrick Gold Corp $12.83
BHC-T Bausch Health Companies Inc. $27.18
BTE-T Baytex Energy Corp $3.49
CFW-T Calfrac Well Services Ltd $4.42
CCO-T Cameco Corp $12.38
CNE-T Canacol Energy Ltd $4.00
CSH.UN-T Chartwell Retirement Residences $15.00
CUF.UN-T Cominar Real Estate Investment Trust $11.95
CMG-T Computer Modelling Group Ltd $8.43
DHX-T DHX Media Ltd $2.10
DPM-T Dundee Precious Metals Inc $2.72
ELD-T Eldorado Gold Corp $1.11
ECA-T Encana Corp $15.80
FRX-T Fennec Pharmaceuticals Inc. $11.25
FM-T First Quantum Minerals Ltd $14.54
FVI-T Fortuna Silver Mines Inc $5.53
FNV-T Franco-Nevada Corp $79.12
FRII-T Freshii Inc. $4.50
WN-T George Weston Ltd $98.87
GS-T Gluskin Sheff + Associates Inc $16.39
GMP-T GMP Capital Inc $2.30
G-T Goldcorp Inc $13.27
XAU-T GoldMoney Inc. $2.52
GWO-T Great-West Lifeco Inc $30.89
HNL-T Horizon North Logistics Inc $2.24
HBM-T HudBay Minerals Inc $5.64
IMG-T IAMGOLD Corp $4.83
IBG-T IBI Group Inc. $4.61
IMO-T Imperial Oil Ltd $38.66
IPL-T Inter Pipeline Ltd $23.02
KEL-T Kelt Exploration Ltd $8.00
K-T Kinross Gold Corp $3.60
KL-T Kirkland Lake Gold Inc $23.85
MAG-T MAG Silver Corp $9.58
MEG-T MEG Energy Corp $7.22
MRT.UN-T Morguard Real Estate Investment Trust $12.13
NGD-T New Gold Inc $1.04
OBE-T Obsidian Energy Ltd. $1.20
ORL-T Orocobre Ltd. $3.30
PAAS-T Pan American Silver Corp $18.93
PPL-T Pembina Pipeline Corp $43.39
PTG-T Pivot Technology Solutions Inc. $1.41
PLZ.UN-T Plaza Retail REIT $4.15
PTS-T Points International Ltd $18.55
POW-T Power Corp of Canada $28.22
PWF-T Power Financial Corp $29.65
SAP-T Saputo Inc $37.96
STEP-T STEP Energy Services Ltd. $5.85
SRX-T Storm Resources Ltd. $2.54
SLF-T Sun Life Financial Inc $50.78
SU-T Suncor Energy Inc $50.70
TECK.B-T Teck Resources Ltd $28.72
TSGI-T The Stars Group Inc. $31.72
TRP-T TransCanada Corp $55.23
TCL.A-T Transcontinental Inc $26.40
TCW-T Trican Well Service Ltd $2.50
UR-T UrtheCast Corp $0.19
WPM-T Wheaton Precious Metals Corp. $20.29
WCP-T Whitecap Resources Inc $7.76
YRI-T Yamana Gold Inc $3.12

Source: Bloomberg

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