On today’s TSX Breakouts report, there are 44 stocks on the positive breakouts list (stocks with positive price momentum), and 19 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a security that is just pennies shy of appearing on the positive breakouts list: True North Commercial Real Estate Investment Trust (TNT.un-T). It is a security that is best suited for consideration by investors seeking income, offering investors an attractive yield of just under 9 per cent. Given the REIT’s valuation, further unit price appreciation may be limited in the near-term.
A brief outline is provided below that may serve as a springboard for further fundamental research.
The REIT
Toronto-based True North Commercial REIT owns and operates a portfolio of 42 commercial properties with 27 properties located in Ontario, eight in New Brunswick, three in Alberta, two in British Columbia, and two in Nova Scotia. Management has shifted its focus to major markets such as the Greater Toronto Area from its previous focus on secondary markets such as Hamilton, London and Sarnia. In the second quarter, office properties represented 98 per cent of net operating income (NOI) with industrial properties accounting for 2 per cent. The properties owned are occupied by high-quality, stable tenants with the government (federal and provincial) representing 40 per cent of revenue in the second quarter.
Management is focused on acquiring properties and has completed two financings year-to-date in order to fund this acquisition growth. Most recently, in July, True North raised $57.5-million issuing over 9 million units at a price per unit of $6.38. Prior to that in March, the REIT raised $40-million issuing units at a price per unit of $6.37. Year-to-date, the REIT has acquired three properties and in 2017, it purchased 10 properties.
After the market closed on Aug. 8, the REIT reported its second quarter financial results. Funds from operations (FFO) per unit was 15 cents, down from 16 cents reported during the same period last year. Adjusted funds from operations (AFFO) per unit came in at 15 cents, unchanged year-over-year. Same-property NOI decreased 1.7 per cent year-over-year driven lower by higher vacancies at two properties located in New Brunswick and a lower renewal rate from a property in Calgary. True North’s portfolio had an overall occupancy rate of 95 per cent. At the end of the second quarter, the REIT’s debt-to-gross book value ratio stood at 57 per cent. The unit price inched higher by six cents to close at $6.69 the following trading day.
Management provided a positive outlook stating in the recent “Management’s Discussion and Analysis,” stating: “Management maintains its view that overall real estate fundamentals will remain stable throughout 2018 as Canada remains a strong and stable economy, and a safe-haven for global capital, which continues to arrive in Canada looking for opportunity. For borrowers, this supply helps to keep borrowing rates remain at near-historic lows, and lenders accommodating in their underwriting. Management remains focused on improving revenue and NOI through active portfolio management, maintaining strong tenant relationships and utilizing leasing optimization tactics. Management is also focused on further diversifying the geographic concentration of the portfolio through accretive acquisitions. Management believes the geographic diversification of the property portfolio will serve to add stability to the REIT’s cash flow as it reduces the REIT’s vulnerability to economic fluctuations affecting any particular region in Canada.”
Distribution policy
True North pays its unitholders a monthly distribution of 4.95 cents per unit, or 59.4 cents per unit on a yearly basis. This equates to an annualized yield of 8.7 per cent. The REIT has maintained the monthly distribution at this level since early 2013.
In 2017, the adjusted funds from operations (AFFO) payout ratio was 100 per cent.
Analysts’ recommendations
There are two analysts who actively cover this small-cap REIT with a market capitalization of $383-million.
The two firms that provide research coverage on the REIT are Raymond James, whose analyst has an ‘outperform’ recommendation, and CIBC Capital Markets, whose analyst has a ‘neutral’ recommendation.
Revised recommendations
Most recently, in May, Chris Couprie, the analyst from CIBC Capital Markets, increased his target price to $6.75 from $6.50.
Financial forecasts
The consensus FFO per unit estimate is 62 cents in 2018, up from 61 cents per unit reported in 2017, and is forecast to rise to 64 cents in 2019. The AFFO per unit estimate is 58 cents for 2018, down from 59 cents reported in 2017, and anticipated to climb to 61 cents in 2019.
Over the past several months, the consensus estimates have changed moderately, edging lower for 2018 but inching higher for 2019. To illustrate, three months ago the Street was forecasting FFO per unit of 66 cents for 2018 and 63 cents for 2019. The consensus AFFO per unit estimates were 62 cents for 2018 and 59 cents for 2019.
Valuation
The units are trading at a price-to-AFFO multiple of 11 times the 2019 consensus estimate. On a price-to-FFO basis, the REIT is trading at a multiple of 10.6 times the 2019 consensus estimate. According to Bloomberg, the REIT is trading near peak levels. Over the past three years, the REIT has traded at a peak multiple of just over 11 times on a forward price-to-FFO multiple basis.
The average one-year target price is $6.88, implying the units are fairly valued. Raymond James’ analyst has a target price of $7, and the analyst from CIBC Capital Markets has a target price of $6.75.
Insider transaction activity
Year-to-date, there has not been any trading activity in the public market reported by insiders.
Chart watch
Year-to-date, the unit price is relatively unchanged, up 1 per cent.
For the past two years, the unit price has traded principally between $6 and $7.
Looking at key resistance and support levels, the unit price is approaching major overhead resistance around $7. Looking at the downside, the REIT has technical support around $6.50, near its 50-day moving average (at $6.61) and its 200-day moving average (at $6.61). Failing that, there is technical support around $6.
The three-month historical daily average trading volume is approximately 210,000 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.
Jennifer Dowty