On today’s TSX Breakouts report, there are 37 stocks on the positive breakouts list (stocks with positive price momentum), and 31 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a stock that is on the positive breakouts list. This is a security that investors may wish to put on their radar screens and wait for a pullback and not chase the stock as it is nearing overbought levels. The stock can be thinly traded, which can create volatility in the share price. The small-cap stock has five buy recommendations. The current dividend yield is very attractive at 10.3 per cent with a payout ratio of 94 per cent during the first six months of 2019.
The company highlighted below is Invesque Inc. (IVQ-U-T).
A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The company
Headquartered in Toronto, Invesque is a health care real estate company with operations across North America. The company’s portfolio includes independent and assisted living senior housing properties, skilled nursing facilities and medical office buildings.
As of Aug. 14, the company held a portfolio of 118 properties, 103 properties are located in the U.S. (key markets include 22 properties in Virginia, 16 in Pennsylvania, 14 in Illinois and 13 in Texas), and 15 properties are located in Canada (12 in Ontario and three in Alberta). In terms of the U.S. portfolio mix, 69 properties are assisted living and memory care facilities, 17 are skilled nursing facilities, 13 are transition care centers, and four properties are medical office buildings. The Canadian portfolio includes 11 medical office buildings and four senior housing facilities.
After the market closed on Aug. 14, the company reported second-quarter financial results that fell short of expectations. FFO (funds from operations) per share came in at 17 US cents, below the consensus estimate of 22 US cents per share. AFFO (adjusted funds from operations) was 16 US cents, in-line with the Street’s expectations. The company announced it will be acquiring three memory care properties from Ellipsis Real Estate Partners at a purchase price of US$30.7-million. The share price declined 10 per cent the following trading day, declining to US$6.20 from US$6.92, on high volume with over 169,000 shares traded.
On May 22, the company announced a large acquisition with its plans to acquire Commonwealth Senior living for approximately US$340-million. This purchase will expand the company’s U.S. exposure, adding 20 private pay senior living facilities. The Commonwealth acquisition is expected to result in roughly 55 per cent of pro forma NOI (net operating income) coming from senior housing by year-end, transitioning the company to a largely private pay health care provider. Management anticipates this acquisition to be accretive in 2020, adding between 10 US cents and 12 US cents per share to 2020 FFO and between 6 US cents and 8 US cents per share to 2020 AFFO. Commonwealth will become the company’s largest source of NOI, representing roughly 26 per cent of pro forma NOI at the end of the year.
Given the company’s active pace of acquisitions, the company’s leverage, debt-to-gross book value ratio, increased to approximately 60 per cent, above management’s long-term target of between 50 per cent and 55 per cent.
On the earnings call, chief financial officer Scott Higgs said: “The assets that we’re buying are high-quality private pay assets, which will enhance the quality of our cash flow and portfolio. Although our leverage is increasing with this transaction, we’re comfortable at this level for the interim period. We’re focused on balancing growth and diversification with the appropriate leverage, and we have a bias to reduce leverage over time. We have significantly lowered the risk profile of the company, which will allow us to delever organically.”
Chairman and chief executive officer Scott White remarked on industry challenges, indicating that conditions were improving, “Supply continues to be a hot topic in the seniors housing industry. As we noted last quarter, we have observed a recent drop-off in new construction starts. The recently published second quarter NIC (National Investment Center for Seniors Housing & Care) MAP data supports our observation, with total construction as a percent of existing inventory dropping 100 basis points from its peak at the end of 2017. Additionally, we are encouraged by the decline in development starts. The developers broke ground on just 2.6 per cent of product on an annualized basis in the first half of 2019, down from as high as 5 per cent between 2014 and 2018.” He added, “By focusing our efforts on midsized markets, we continue to source sizable, scalable and high-quality opportunities at a discount to replacement cost, just like we did with the Commonwealth transaction. Our regional focus has allowed us to avoid exposure to elevated supply and capitalize on the arbitrage of buying existing stabilized assets for cheaper than it will cost to build them. We’ll still invest in development, like you’ve seen us do with Ellipsis, but we’ll be very selective in the opportunities we choose. While we do not believe supply concerns are a thing of the past, we continue to believe the outlook is improving and should improve in 2021 and onwards. Demand should continue to trend higher due to increased penetration from demographic tailwinds. This demand would trend consistently higher through the next decade with the growing faction of the 80-plus population. On the skilled nursing front, we remain cautiously optimistic about our portfolio of post-acute focused skilled nursing facilities.”
Invesque will be releasing its third-quarter financial results after the market closes on Wednesday Nov. 13 and hosting a conference call the following day at 10 a.m. (ET).
The shares trade on the Toronto Stock Exchange under the tickers IVQ-U (denominated in U.S. dollars) and IVQ (in Canadian dollars).
Dividend policy
Invesque pays its shareholders a monthly dividend of 6.139 US cents per share, or 73.668 US cents per share yearly. This equates to a current annualized yield of 10.3 per cent.
The AFFO payout ratio for the first half of 2019 stood at 94 per cent.
Analysts’ recommendations
This small-cap security with a market capitalization of $393-million is covered by six analysts, of which four analysts have buy recommendations, one analyst has a “speculative buy” recommendation (Brad Sturges of Industrial Alliance Securities), and one analyst (Tal Woolley of National Bank Financial) has a “sector perform” recommendation.
The firms providing research coverage on the company are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Echelon Wealth Partners, Industrial Alliance Securities, and National Bank Financial.
Revised recommendations
After Invesque reported its second-quarter results, five analysts revised their target prices - four trimmed their target prices and one analyst raised his expectations.
In September, BMO’s Troy MacLean reduced his target price to $7.75 from $8.
In August, National Bank’s Tal Woolley trimmed his target price to $6.50 from $7. Industrial Alliance’s Brad Sturges downgraded his recommendation to a “speculative buy” from a “strong buy” and lowered his target price by 25 cents to $7.25. CIBC’s Chris Couprie reduced his target price by 50 cent to $7.25. Mark Rothschild at Canaccord Genuity increased his target price to $7.75 from $7.
Financial forecasts
The Street is forecasting FFO per share of 80 US cents in 2019, rising to 85 US cents in 2020. AFFO per share is forecast to come in at 71 US cents in 2019, increasing to 76 US cents in 2020.
Earnings expectations have declined for this year and next year. For instance, three months ago, the Street was forecasting revenue FFO per share of 87 US cents in 2019 and 91 US cents in 2020.
Valuation
According to Bloomberg, the stock is trading at a price-to-AFFO multiple of 9.5 times the 2020 consensus estimate.
The average one-year target price is US$7.63, implying the share price may increase 6 per cent over the next 12 months. Individual price targets are as follows in numerical order: US$6.50, two at US$7.25, two at US$7.75, and US$9.25 (the high on the Street is from Echelon Wealth’s Stephane Boire).
Insider transaction history
Year-to-date, there have been three transactions in the public market reported by insiders.
On Aug. 29, chief financial officer Scott Higgs bought 2,500 shares at a price per share of US$6.30, increasing his portfolio’s position to 31,266 shares.
On Aug. 19, chairman and chief executive officer Scott White acquired 10,000 shares at a price per share of US$6.61, lifting his account’s holdings to 88,869 shares.
On March 14, Elisabeth Wigmore sold 2,220 shares at a price per share of US$6.857, eliminating her account’s position. On March 19, 2018, Ms. Wigmore was appointed to the board of directors. One year later, effective March 11, 2019, Ms. Wigmore resigned from the board.
Chart watch
Over the years, the share price has been in a gradual downtrend. From mid-2016 to late-2018, the share price traded largely between US$7 and US$8. Since then, this trading range has fallen, and the share price has been trading mainly between US$6 and US$7.25.
The share price is currently trading near the top end of this trading band. Consequently, it may be prudent for investors to wait for a better entry point to accumulate shares, when the stock price is closer to the lower end of its trading range.
Furthermore, the stock is nearing an overbought condition. The RSI (relative strength index) is at 68. Generally, an RSI reading at or above 70 reflects an overbought condition.
Trading volume can be low for this small-cap stock, which can increase the price volatility. Over the past five trading days, the share price has rallied over 12 per cent to US$7.18 on Oct. 22 from US$6.38 on Oct. 15, on no news. The three-month historical daily average trading volume is approximately 42,000 shares.
Looking at key technical resistance and support levels, the stock’s next major ceiling of resistance is just below US$7.50. After that, there is overhead resistance around US$8. Should the share price retreat, there is technical support around US$6.50, which is close to its 50-day moving average (at US$6.45). Failing that, there is strong technical support around US$6.
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