Wednesday’s breakouts: A REIT with stable income- yielding 3.9% with a payout ratio of 88%

On today’s Breakouts report, there are 85 stocks on the positive breakouts list (stocks with positive price momentum) and 31 stocks on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that is may be of interest to investors seeking stable income – European Residential Real Estate Investment Trust (ERE-UN-T).

The REIT has not appeared on the positive breakouts list since June as its unit price has been trading sideways, bouncing just above the $4 level for the past few months. This REIT has provided investors with stability (low price volatility) and steady income with an attractive current annualized yield of 3.9 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

Toronto-based ERES owns a portfolio of 137 multi-residential properties located in the Netherlands, one office property in Germany, and one office property located in Belgium.

In terms of its portfolio composition, approximately 56 per cent of its residential properties are liberalized (no restrictions on initial rents that can be charged and rent increases) and roughly 44 per cent are regulated units (rent controlled with limits on rental rates and rent increases). Approximately 25 per cent of its units are located in Amsterdam, Utrecht, Rotterdam, and The Hague (high growth urban cities). Approximately 57 per cent of its units have three bedrooms or more, 30 per cent are two bedroom units, and 13 per cent are bachelor or one bedroom units. The weighted average age of its units is 38 years.

On July 7, the REIT graduated to the Toronto Stock Exchange from the TSX Venture Exchange.

Investment thesis highlights

• Strong partnership. Canada’s largest residential landlord CAPREIT (Canadian Apartment Properties Real Estate Investment Trust, CAR-UN-T) has an ownership interest of roughly 66 per cent. Scott Cryer serves as the chief financial officer for both CAPREIT and ERES.
• Strong market fundamentals. With a population of over 17-million, the Netherlands is a densely populated country where there is high demand for rental properties, supportive of rent increases and high occupancy (stable cash flows).
• Strong company fundamentals. The REIT has maintained its financial strength and growth during the coronavirus pandemic.
• Acquisition growth focused in the Netherlands. On Oct. 1, the REIT completed a €26-million purchase of a 113 unit multi-residential property. On Sept. 1, the REIT completed a €20-million acquisition of a 120 unit multi-residential property. The REIT has €90-million of liquidity (cash and available credit) providing ERES with the financial flexibility to continue to make small, tuck-in acquisitions – one of management’s key objectives.
• Income. ERES offers investors an attractive yield, just below 4 per cent. Furthermore, with a payout ratio below 90 per cent this provides a level of assurance to investors that the distribution can be maintained under current conditions.

Quarterly earnings

After the market closed on Nov. 4, the REIT reported solid third-quarter financial results. The unit price advanced 1 per cent the following trading day on high volume with over 690,000 units traded, well above the three-month historical daily average trading volume of approximately 175,000 units.

Funds from operations (FFO) per unit came in at €0.034, unchanged from the previous year. Adjusted funds from operations (AFFO) per unit came in at €0.03, increasing 3 per cent from €0.029 reported during the same period last year. The occupancy rate was 98.4 per cent for residential properties (up from 97.1 per cent reported last year) and 100 per cent at its two office properties. Net average monthly rent on the stabilized residential portfolio increased 5.2 per cent year-over-year. At quarter-end, total debt-to-gross book value stood at a healthy 46 per cent, down from 47 per cent reported last year (management targets a range of between 45 per cent and 50 per cent).

Distribution policy

ERES pays its unitholders a monthly distribution of €0.00875 per unit or €0.105 per unit yearly. This equates to a current annualized yield of approximately 3.9 per cent.

The distribution is converted to Canadian dollars based on the exchange rate on the payment date.

ERES targets an AFFO payout ratio of between 80 per cent and 90 per cent. The AFFO payout ratio was 88 per cent for the first nine months of 2020.

Analysts' recommendations

This small-cap REIT with a market capitalization of $960-million is covered by nine analysts, of which eight analysts have buy recommendations and one analyst (Mark Rothschild at Canaccord Genuity) has a “hold” recommendation.

The firms providing research on the REIT are: Canaccord Genuity, CIBC World Markets, Desjardins Securities, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Scotia Capital and TD Securities.

Revised recommendations

Earlier this month, CIBC World Markets' analyst Dean Wilkinson increased his target price to $5.30 from $5.25.

Financial forecasts

The forecasts below are converted to the Canadian dollar from the Euro.

The consensus FFO per unit estimates are 16 cents in 2020, 18 cents in 2021 and 19 cents in 2022. The consensus AFFO per unit estimates are 15 cents in 2020, 16 cents in 2021, and 17 cents in 2022.

Earnings estimates have declined materially due to COVID-19. For instance, three months ago, the Street was forecasting FFO per unit of 20 cents in 2020 and 22 cents in 2021. The consensus AFFO per unit forecasts were 17 cents in 2020 and 20 cents in 2021.

Valuation

The stock is trading at a price-to-AFFO multiple of 25.5 times the 2021 consensus estimate.

According to Bloomberg, the average one-year target price is $5.06, suggesting there is nearly 22 per cent upside potential over the next 12 months. Individual target prices are as follows in numerical order: $4.50, five at $5, $5.20, $5.30, and $5.50.

Insider transactions

Year-to-date, there has not been any trading activity in the public market reported by insiders.

Chart watch

In March, the unit price tumbled from $5 (on March 4) to $3.01 (on March 23). By May, the unit price recovered to the $4 level. Since then, the unit price has been trading sideways, largely between $4 and $4.30.

Year-to-date, the unit price is down 10.5 per cent.

In terms of key resistance and support levels, the unit price has an initial ceiling of resistance around $4.50. After that, there is major resistance around $5. Looking at the downside, there is strong technical support around $4.

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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