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On today’s TSX Breakouts report, there are 28 stocks on the positive breakouts list (stocks with positive price momentum), and 33 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a REIT whose market capitalization falls below the screening criteria, otherwise it may have soon appeared on the negative breakouts list. The unit price has dropped 5 per cent after management announced a recent financing with proceeds earmarked to fund recently announced acquisitions. The REIT is yielding 9 per cent; however, the payout ratio is currently above 100 per cent. Management expects cash flow to expand driven by recent acquisitions. The security I am referred to is PRO Real Estate Investment (PRV.UN-X). Management anticipates the REIT will graduate to the Toronto Stock Exchange from the TSX Venture Exchange in early 2019.

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

The REIT

Headquartered in Montreal, PROREIT is focused on building a portfolio of commercial properties located in primary and secondary (suburban) areas.

As at June 30, the REIT had a portfolio of 73 properties with an occupancy rate of 97.6 per cent and a weighted average lease term of 6.6 years. In terms of geographical exposures, 52 per cent of the REIT’s base rent stemmed from the Maritime provinces, 19 per cent was from Québec, nearly 8 per cent was rom Ontario, and the balance was from western Canada. In terms of asset class, 53.5 per cent of base rent was from retail properties, 26.4 per cent was from industrial properties, 12.6 per cent was identified as mixed use properties, and 7.4 per cent was from office properties.

The REIT’s tenants are perceived by management as low-risk, high-quality tenants. The top ten tenants accounted for 40 per cent of base rent as of June. The top four tenants were Rexall (9 per cent of base rent), Sobeys (8.7 per cent), Shoppers Drug Mart (5.1 per cent), and the Government of Canada (3.1 per cent).

On Sept. 11, management announced plans to acquire six commercial properties (five located in Ottawa and one located in Saint-Hyacinthe, Que.) at a cost of $61.7-million. These properties have a combined occupancy rate of 98.3 per cent and weighted average lease term of 4.9 years. To fund these large proposed acquisitions, management announced a $35-million offering, issuing 15.1-million units at a price per unit of $2.32. This is the second equity financing announced year-to-date. In January, 12,500,500 units were issued at a price per unit of $2.30, raising $28.8-million.

Management is seeking TSX approval to have the REIT listed on the Toronto Stock Exchange (graduating from the TSX Venture Exchange), and anticipates the REIT will begin trading on the Toronto Stock Exchange in early 2019.

Distribution policy

The REIT pays its unitholders a monthly distribution of 1.75 cents per unit, or 21 cents per unit on a yearly basis. This equates to an annualized yield of 9.1 per cent. Management has maintained the distribution at this level since 2014.

The high payout ratio is important for investors to note. During the first six months of 2018, the AFFO (adjusted funds from operations) payout ratio stood at 119.5 per cent. In the recent Management’s Discussion and Analysis, management made the following remarks, “For both the three-month and six-month periods ended June 30, 2018, AFFO per unit and the AFFO payout ratio were impacted temporarily by the high cash position of the REIT as a result of the $28.8-million equity raise in January 2018. As mentioned above, acquisitions totaling $37-million announced during the second quarter closed only at the end of the quarter, and therefore did not contribute significantly to AFFO per basic unit in the quarter. The significant cash flow that will be generated from these acquisitions will start to be realized in the third and future quarters.”

Analysts’ recommendations

There are two firms providing research coverage on this micro-cap REIT with a market capitalization of $157-million, Canaccord Genuity and Haywood Securities.

Brendon Abrams, the analyst at Canaccord Genuity, currently has a “buy” recommendation on the REIT. Colin Healey, the analyst from Haywood Securities, is currently restricted on the stock. However, earlier this month, he also had a “buy” recommendation on PROREIT.

Financial forecasts

The consensus funds from operations (FFO) per unit estimates are 19.5 cents for 2018, rising to 24 cents in 2019. The Street is expecting adjusted funds from operations (AFFO) per unit of 21 cents in 2018 and 23.5 cents the following year.

Revisions have been negative for 2018 but positive for 2019. For instance, three months ago, the consensus FFO per unit estimates were 22.5 cents for 2018 and 23 cents for 2019. The consensus AFFO per unit forecasts were 21.5 cents for 2018 and 23 cents for 2019.

Valuation

The REIT is trading at a price-to-FFO multiple of 9.8 times the 2019 consensus estimate. According to Bloomberg, this is in-line with the REIT’s three-year historical average forward multiple of 9.7 times. Over the past three years, the REIT has traded at a forward P/FFO multiple ranging from a low of 8.5 times to a high of nearly 11 times.

The analyst at Canaccord Genuity has a one-year target price of $2.50. Earlier this month, the analyst from Haywood Securities had a one-year target price of $2.55.

Insider transaction activity

Most recently, on June 7, chief financial pofficer Gordon Lawlor purchased 13,500 units at an average price per unit of approximately $2.27 for an account in which he has indirect ownership (GDRJL Holdings Inc.), lifting the account’s holdings to 226,508 units.

Chart watch

The unit price has been relatively stable over the years, trading principally between $2.15 and $2.35 since April 2017, with temporary spikes above the top end of this range. On Aug. 22, the unit price closed at its highest level since May 2015. Since then, the unit price has fallen 5 per cent on the back of the $35-million financing announced on Sept. 11. Year-to-date, the unit price is currently relatively unchanged, up by 0.4 per cent.

In terms of key technical resistance and support levels, the unit price has major overhead resistance between $2.45 and $2.50. Looking at the downside, there is technical support around $2.30, near its 200-day moving average (at $2.28).

This micro-cap security has reasonable liquidity. The three-month historical daily average trading volume is approximately 182,000 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.

Positive Breakouts Sept. 24 close
AOI-T Africa Oil Corp $1.59
AIM-T Aimia Inc $4.23
AKT.A-T AKITA Drilling Ltd $5.98
AD-T Alaris Royalty Corp $20.71
CLIQ-T Alcanna Inc. $9.93
ALS-T Altius Minerals Corp $13.20
ACB-T Aurora Cannabis Inc. $12.27
BMO-T Bank of Montreal $108.32
CM-T CIBC $124.59
KWH.UN-T Crius Energy Trust $6.72
GSY-T goeasy Ltd $53.91
GSV-T Gold Standard Ventures Corp. $2.39
GTE-T Gran Tierra Energy Inc $4.82
HLS-T HLS Therapeutics Inc. $12.50
HSE-T Husky Energy Inc $22.50
III-T Imperial Metals Corp $1.93
IIP.UN-T InterRent REIT $11.95
JWEL-T Jamieson Wellness Inc. $27.33
LIF-T Labrador Iron Ore Royalty Corp $27.92
MAL-T Magellan Aerospace Corp $18.04
MMX-T Maverix Metals Inc. $2.33
MRC-T Morguard Corp. $178.37
NFI-T New Flyer Industries Inc $52.05
NOA-T North American Construction Group Ltd. $12.21
PKI-T Parkland Fuel Corp $43.27
RTI-T Radient Technologies Inc. $1.22
SES-T Secure Energy Services Inc $8.70
SGY-T Surge Energy Inc $2.68
Negative Breakouts
AGF.B-T AGF Management Ltd $5.83
BOS-T AirBoss of America Corp $11.50
ADW.A-T Andrew Peller Ltd $16.12
BCE-T BCE Inc $51.81
BBI-T Blackbird Energy Inc. $0.32
BLX-T Boralex Inc $18.27
BEP.UN-T Brookfield Renewable Energy Partners LP $39.13
CGY-T Calian Group Ltd. $30.80
CTC.A-T Canadian Tire Corp Ltd $153.25
CCL.B-T CCL Industries Inc $59.07
CLS-T Celestica Inc $14.07
CNL-T Continental Gold Inc $2.76
BCB-T Cott Corp $19.48
ENB-T Enbridge Inc $43.77
GS-T Gluskin Sheff + Associates Inc $14.66
IDG-T Indigo Books & Music Inc $13.93
IFP-T Interfor Corp $19.38
MUX-T McEwen Mining Inc. $2.44
MSI-T Morneau Shepell Inc $26.78
OSB-T Norbord Inc $44.79
PLI-T ProMetic Life Sciences Inc $0.50
REAL-T Real Matters $4.92
ROOT-T Roots Corp. $6.53
SJR.B-T Shaw Communications Inc $25.05
ZZZ-T Sleep Country Canada $29.52
STLC-T Stelco Holdings Inc. $21.92
TH-T Theratechnologies Inc $8.51
RNW-T TransAlta Renewables Inc $11.55
TRZ-T Transat AT Inc $7.87
TCW-T Trican Well Service Ltd $2.22
TRQ-T Turquoise Hill Resources Ltd $2.74
VLN-T Velan Inc $11.66
WFT-T West Fraser Timber Co Ltd $77.12

Source: Bloomberg

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