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Inside the Market Wednesday’s TSX breakouts: A REIT yielding 6% with a unanimous buy call and cash flow growth expected to accelerate

On today’s TSX Breakouts report, there are 33 stocks on the positive breakouts list (stocks with positive price momentum) and 16 securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that may resurface on the positive breakouts list in the second half of 2019 as management executes on its capital recycling program - Dream Industrial Real Estate Investment Trust (DIR.UN-T). The Trust is covered by eight analysts with a unanimous buy recommendation. The Trust is anticipated to deliver a 13 per cent total return (including the yield) over the next 12 months. The REIT pays its unitholders an attractive distribution that it has maintained since 2013. The current yield is 5.9 per cent. Cash flow growth is anticipated to reaccelerate once the sale of its eastern Canada portfolio is completed in the third-quarter.

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

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The REIT

Toronto-based Dream Industrial REIT owns and operates a portfolio of 246 industrial properties across North America.

After the market closed on May 7, the Trust reported first-quarter financial results that were in-line with expectations. FFO (funds from operations) per unit came in at 21 cents, in-line with the Street’s expectations. In the first-quarter, same-property NOI (net operating income) increased 0.4 per cent year-over-year with strength in Québec and Ontario (same-property growth of 5.4 per cent and 1.6 per cent, respectfully) offset by weakness in western Canada and eastern Canada (same-property NOI declined 1.5 per cent and declined 3.6 per cent, respectively). The overall occupancy rate stood at 96.5 per cent. The net debt-to-assets ratio declined to 42.4 per cent down from 43.5 per cent reported at the end of 2018. Management maintained its guidance, calling for same-property NOI growth in the 2 per cent to 3 per cent range in 2019. The following trading session, the unit price slipped 6 cents, or increased 0.5 per cent, to $11.50 on moderate trading volume.

Management is committed to strengthening its portfolio through its asset recycling program - purchasing strategic acquisitions and completing divestitures.

In the first quarter, the Trust acquired a portfolio of 21 buildings located across five cities in the U.S. for $235-million and completed an equity financing, issuing units at a price per unit of $10.45 to fund this transaction. Subsequent to the quarter, the Trust purchased a property in Ontario for $35.8-million and agreed to buy another three properties for $71-million. On April 25, the Trust completed a $144-million equity financing, issuing 12,477,500 units at a price per unit of $11.55, with proceeds earmarked to fund these four acquisitions.

On June 17, Dream Industrial announced the sale of its eastern Canada portfolio, selling 38 properties for $271-million to KingSett Capital. In the news release, the chief financial officer remarked, “The sale of the Eastern Canada Portfolio provides us with ample financial flexibility to acquire high-quality industrial assets in our target markets that contribute strong cash flow and NAV per unit growth over the long term.” The sale is expected to be completed in the third-quarter. Upon completion, the Trust’s portfolio will have the following geographic exposures based on investment property value: 31 per cent in Ontario, 28 per cent in western Canada, 25 per cent in the U.S. and 16 per cent in Quebec.

On March 18, the REIT was added to the S&P/TSX composite index increasing the Trust’s visibility.

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Distribution policy

Dream Industrial REIT pays its unitholders a monthly distribution of 5.833 cents per unit, or 79 cents per unit yearly. This equates to a current annualized yield of 5.9 per cent. The Trust has maintained its monthly distribution at 5.833 cents per unit since 2013.

The monthly distribution appears sustainable with a FFO payout ratio of 81.7 per cent in 2018. In the first-quarter, the payout ratio was 83.7 per cent.

Analysts’ recommendations

The REIT is covered by eight analysts and has a unanimous buy recommendation.

The eight firms providing research coverage on the Trust are as follows in alphabetical order: Canaccord Genuity, CIBC World Markets, Desjardins Securities, Echelon Wealth Partners, Industrial Alliance Securities, National Bank Financial, Scotiabank, and TD Securities.

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Revised recommendations

In June, Frederic Blondeau, an analyst at Echelon Wealth Partners, increased his target price to $13 from $12. CIBC’s Chris Couprie took his target price up to $12.50 from $12. Sam Damiani, the analyst at TD Securities, raised his target price to $13.50 (the high on the Street) from $13. Matt Kornack, the analyst at National Bank Financial, lifted his target price to $13 from $12.50.

In May, Michael Markidis, the analyst at Desjardins Securities, raised his target price to $12.50 from $12.

Financial forecasts

Steady but modest growth is forecast for the REIT. The consensus FFO per unit estimates are 84 cents in 2019, rising to 88 cents in 2020. The consensus AFFO (adjusted funds from operations) per unit estimates are 73 cents in 2019 and 77 cents in 2020.

Financial forecasts have edged down slightly. To illustrate, three months ago, the consensus FFO per unit estimates were 87 cents for 2019 and 91 cents for 2020. The consensus AFFO per unit forecasts were 74 cents for 2019 and 78 cents for 2020.

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Valuation

The REIT is trading at a price-to-AFFO multiple of 15.4 times the consensus 2020 estimate and at a price-to-FFO multiple of 13.5 times the consensus 2020 estimate. This is just shy of its peak multiple.

The average one-year target price is $12.69, implying the unit price may appreciate 7 per cent over the next 12 months, providing a potential total return of 13 per cent if you include 5.9 per cent yield. Target prices are concentrated ranging from a low of $12.25 (the low on the Street is from Brendon Abrams, an analyst at Canaccord Genuity and Scotiabank’s Mario Saric) to a high of $13.50 (the high on the Street is from Sam Damiani, ananalyst at TD Securities). Individual target prices are as follows in numerical order: two at $12.25, three at $12.50, two at $13, and $13.50.

Insider transaction activity

Year-to-date, there have not been any sizeable transactions reported in the public market by insiders. The largest transaction was less than $15,000.

Chart watch

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The chart is attractive with the unit price consolidating in the $11.50 to $12 range over the past three months. The unit price remains in uptrend that began in early 2016 with the unit price rallying to an all-time closing high of $12.30 on June 14. Year-to-date, the unit price is up 24 per cent.

In terms of key resistance and support levels, the next ceiling of resistance is around $12.30, at its record closing high. After that, there is resistance around $13. Looking at the downside, the unit price has initial technical support around $11.50. Failing that, there is support at $11, which is near its 200-day moving average (at $10.79).

This small-cap REIT with a market capitalization of $1.6-billion has reasonable liquidity. The three-month daily average trading volume is approximately 750,000 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.

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A technical analysis screen does not replace fundamental analysis, but can help identify companies worth having a closer look at.

Positive BreakoutsJuly 2 close
ACI-TAltaGas Canada Inc. $24.15
BAD-TBadger Daylighting Ltd $49.38
BLU-TBELLUS Health Inc. $2.89
BYD-UN-TBoyd Group Income Fund $170.87
BEP-UN-TBrookfield Renewable Energy Partners LP $46.34
DOO-TBRP Inc $48.20
CD-TCantex Mine Development Corp. $4.55
CAS-TCascades Inc $11.28
CIX-TCI Financial Corp $21.89
CLR-TClearwater Seafoods Inc $5.30
CCA-TCogeco Communications Inc $94.99
CNL-TContinental Gold Inc $3.91
DGC-TDetour Gold Corp $16.71
DOL-TDollarama Inc $47.76
ELD-TEldorado Gold Corp $8.19
GMP-TGMP Capital Inc $2.38
HCG-THome Capital Group Inc $20.23
IVN-TIvanhoe Mines Ltd $4.34
KBL-TK-Bro Linen Inc. $40.60
LIF-TLabrador Iron Ore Royalty Corp $35.48
LSPD-TLightspeed POS Inc. $38.29
MAXR-TMaxar Technologies Ltd. $12.22
NPI-TNorthland Power Inc $25.79
ONEX-TOnex Corp $80.73
OSK-TOsisko Mining Inc. $3.45
PIF-TPolaris Infrastructure Inc. $14.98
RCH-TRichelieu Hardware Ltd $22.25
SBB-TSabina Gold & Silver Corp $1.41
SII-TSprott Inc $3.48
TGZ-TTeranga Gold Corp $4.14
TF-TTimbercreek Financial Corp. $9.50
TD-TToronto-Dominion Bank $77.05
ZYME-TZymeworks Inc. $30.72
Negative Breakouts
AAV-TAdvantage Oil & Gas Ltd $1.51
ARX-TARC Resources Ltd $6.24
BIR-TBirchcliff Energy Ltd $2.56
BNP-TBonavista Energy Corp $0.46
CURA-TCuraleaf Holdings Inc. $9.28
ESI-TEnsign Energy Services Inc $4.12
GTE-TGran Tierra Energy Inc $1.97
HNL-THorizon North Logistics Inc $1.84
HSE-THusky Energy Inc $12.29
NOA-TNorth American Construction Group Ltd. $13.46
PONY-TPainted Pony Energy Ltd $0.92
PEY-TPeyto Exploration & Development Corp $3.77
PL-TPinnacle Renewable Holdings Inc. $9.67
TOY-TSpin Master Corp. $37.78
TGL-TTransGlobe Energy Corp $1.79
WED-TWestaim Corp. $2.61

Source: Bloomberg

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