On today’s TSX Breakouts report, there are 14 stocks on the positive breakouts list (stocks with positive price momentum), and 89 securities are on the negative breakouts list (stocks with negative price momentum).
The negative breakouts list has grown in size given the recent pressure on equity markets.
Meanwhile, dividend stocks are dominating the positive breakouts list. The stocks that are surfacing on the positive breakouts list (those securities with share or unit prices that are going up) are principally securities providing investors with attractive yields of 4 per cent or more with five utility stocks on the positive breakouts list.
Discussed today is a high-yielding security that may appear on the positive breakouts list in the future - RioCan Real Estate Investment Trust (REI.UN-T). The Trust currently yields an attractive 5.8 per cent and the consensus target price implies a potential one-year total return (including the yield) of over 14 per cent.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The REIT
Toronto-based RioCan owns and operates a portfolio of 250 retail and mixed use properties across the country, including 17 properties that are under development.
In terms of geographical revenue breakdown, Ontario is the REIT’s largest exposure, accounting for 65.7 per cent of annualized rental revenue, followed by Alberta at 16.8 per cent, Quebec at 7.9 per cent, B.C. at 7.2 per cent, eastern Canada at 1.7 per cent, and Manitoba at 0.7 per cent.
In terms of its tenant base, Loblaws/Shoppers Drug Mart is its largest tenant, representing 4.8 per cent of its annualized rental revenue, followed by Canadian Tire at 4.5 per cent, Cineplex/Galaxy Cinemas at 4.3 per cent, the TJX Companies (with banners Winners, Marshalls, and HomeSense) at 4.2 per cent, and Walmart at 3.6 per cent. Other major tenants include Metro/Super C/Loeb/Food Basics, Lowe’s, Sobeys/Safeway and Dollarama. Its top 10 tenants accounted for 31.4 per cent of total annualized rental revenue.
Before the market opened on Oct. 31, RioCan reported solid third-quarter financial results. Funds from operations (FFO) per unit came in at 47 cents, beating the Street’s expectations of 44 cents. Same-property net operating income (NOI) continues to steadily expand, rising to 1.6 per cent year-over-year. In-place occupancy climbed to 96.2 per cent, up 0.6 per cent from last quarter. During the quarter, the Trust was active in its buyback program, repurchasing 5.425-million units. During the trading session, the unit price was relatively unchanged, closing at $24, down 11 cents from the previous day.
Management’s goal is to build a portfolio of high-quality assets in major markets and in doing so, management expects to achieve even higher same-property net operating income leading to future distribution increases. Last year, management announced its plan to unlock value by selling approximately 100 properties located in secondary markets over two to three years. Management indicated that half of the proceeds were to be reinvested in the market (with a focus on major markets) and the other half of proceeds were earmarked to repurchase units. Management is achieving its objective with the REIT’s major market presence rising to 84.1 per cent, up from 75.2 per cent reported last year. As of Oct. 30, the company realized $1.3-billion worth of dispositions, representing roughly 63 per cent of management ‘s targeted proceeds.
On the earnings call, chief executive officer Edward Sonshine commented on the depressed unit price, “Our unit value, sadly, does still not reflect what is being created here at RioCan, and while I hope that that will eventually rectify itself, I’ve also learned that hope is not the best strategy. So while there is no doubt in my mind that the strategic initiatives we have underway are correct and starting to bear impressive fruit, I want you to rest assured that we are never satisfied, and we will continue to explore new initiatives.”
Distribution policy
RioCan pays its unitholders a monthly distribution at 12 cents per unit, or $1.44 per unit on a yearly basis. This equates to an annualized yield of 5.8 per cent.
The payout ratio during the first nine months of 2018 is relatively conservative at 78 per cent, just below management’s 80 per cent target.
Analysts’ recommendations
After RioCan reported its third quarter financial results, nine analysts issued research reports, of which seven analysts issued buy recommendations and two analysts issued “sector perform” recommendations.
The nine firms providing recent research coverage on the REIT are as follows in alphabetical order: Accountability Research, Canaccord Genuity, CIBC Capital Markets, Edward Jones, National Bank Financial, Raymond James, RBC Capital Markets, Scotia Capital, and TD Securities.
Revised recommendations
Expectations have remained relatively stable. To illustrate, after the REIT reported its third quarter financial result, analysts maintained their recommendations and target prices. There were no revisions reported by analysts.
Financial forecasts
The Street is forecasting FFO per unit of $1.84 in 2018 and $1.88 in 2019. The consensus adjusted funds from operations (AFFO) per unit estimates for 2018 and 2019 are $1.65 and $1.68, respectfully.
Financial forecasts have been increasing. To illustrate, three months ago, the FFO per unit estimates were $1.80 for 2018 and $1.83 for 2019.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 13.2 times the consensus 2019 estimate, below its three-year historical average multiple is approximately 14.8 times and near its lowest multiple over this time period. If the multiple expanded to a 14.8 times, this would equate to a unit price of approximately $27.75 based on the current 2019 consensus estimate.
The consensus one-year target price is $26.75, implying the unit price may appreciate 8 per cent over the next 12 months, providing investors with a total return (including the yield) of over 14 per cent. Target prices are quite concentrated. Individual target prices provided by eight firms are as follows in numerical order: two at $26, two at $26.50, two at $27, $27.25, and $28.
Insider Transaction Activity
Richard Dansereau, who sits on the board of trustees, initiated a portfolio position this month. On Nov. 6, he purchased 1,375 units at a price per unit of $24.34. On Nov. 2, he bought 745 units at a price per unit of $23.83. His account balance now stands at 2,120 units.
Chart watch
Year-to-date, the unit price has increased 1.8 per cent, which is slightly below the 3.7 per cent return of the S&P/TSX real estate sector.
Looking at key resistance and support levels, there is major initial resistance around $26, and after that, there is a ceiling of resistance around $27. Looking at the downside, there is technical support around $24, close to its 200-day moving average (at $24.17). Failing that, there is strong technical support around $23.
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