Monday’s analyst upgrades and downgrades

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Inside the Market's roundup of some of today's key analyst actions

Chartwell Retirement Residences' (CSH.UN-T) "strong" results and "healthy" outlook are already priced into the stock, according to Canaccord Genuity analyst Jenny Ma.

Despite reporting stronger-than-expected fourth-quarter financial results on Feb. 23, she downgraded her rating for the Mississauga-based company to "hold" from "buy" based on valuation and a reduced forecasted return.

"Chartwell has posted a year-to-date total return of 9 per cent, compared to 4 per cent for the S&P/ TSX Capped REIT Index," said Ms. Ma. "Notwithstanding our positive view of the REIT, we believe that Chartwell's units are fairly valued, trading at a 10.2-per-cent premium to net asset value and 17.2 times 2018 estimated adjusted funds from operations. Currently, our target price, combined with the increased annual distribution of 58 cents per unit (3.6-per-cent current yield), implies a 12-month forecast total return of 4.8 per cent."

Chartwell reported funds from operations per diluted unit of 23 cents for the quarter, a 2-cent increase (7 per cent) year over year and matching the projections of both Ms. Ma and the Street.

"The healthy year-over-year growth was underpinned by accretive acquisitions and development completed over the past year, internal growth of 2.2 per cent, interest expense savings from refinancing debt at lower rates, and higher management fees as additional incentive fees for 2016 were earned," she said. "Partly offsetting these items were higher G&A [general and administrative] expense due to higher unit-based compensation expense and staffing costs."

Same property net operating income (NOI) increased 2.2 per cent, which Ms. Ma said was driven partially by a 2.4-per-cent rise in same-property revenue and off-set by a 2.5-per-cent jump in same-property operating expenses. Overall, same-property NOI rose 6.6 per cent in 2016, which the analyst called "impressive."

"While the magnitude of internal growth in Q4/16 was lower than the 7-9-per-cent range posted in the first three quarters of 2016, this was entirely expected," the analyst said. "Leasing momentum was extremely strong in the Ontario retirement residences portfolio during the latter half of 2015, which was instrumental in driving the strong internal growth posted in 2016. Reflecting the tougher comp [comparable] period, 2016 leasing activity in the Ontario portfolio has moderated, and while we continue to expect Chartwell to post healthy internal growth going forward, the magnitude of growth is likely to be lower than in 2016. Further, there is quite a bit of new development activity in a number of markets in Ontario and Quebec. Notwithstanding that the long-term demand fundamentals are very healthy, we would not be surprised to see some pressure on occupancy over the near term.

"Of note, management has guided to internal growth in the 3-4-per-cent range for 2017, which we believe is achievable, though there is downside risk given the aforementioned additional supply under construction in Ontario and Quebec. We expect rent growth, combined with steady occupancy, to support continued growth in same-property NOI. Management has provided 2017 retirement residence rent growth guidance of 3.0 per cent for Ontario, 2.5 per cent for Quebec, and 3.0 per cent for Western Canada."

Ms. Ma maintained a price target of $16 per unit. The analyst consensus price target is $12.56, according to Thomson Reuters.

"Chartwell is the only Canadian publicly traded REIT focused on independent/assisted living within the seniors housing asset class," she said. "We are confident in Chartwell's ability to continue achieving same-property NOI growth as seniors housing fundamentals are quite healthy, and demand for independent/assisted living is less correlated to the business cycle and is therefore more defensive than other real estate asset classes. In addition to healthy fundamentals, we favour Chartwell for its low leverage, healthy cash flow growth profile, and low payout ratio. We believe Chartwell remains well positioned to grow its per unit cash flow at an above-average pace, which should support continued distribution growth. In our view, Chartwell should trade at a premium to NAV to account for its scale and focus in the Canadian seniors housing sector, healthy operating performance, and solid financial position."

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After a "slightly underwhelming" year," Raymond James analyst Johann Rodrigues downgraded his rating for Plaza Retail REIT (PLZ.UN-T) to "market perform" from "outperform."

On Feb. 23, the Fredericton-based real estate investment trust reported fourth-quarter funds from operations of 9 cents, up 5 per cent year over year and in line with expectations.

However, same-asset net operating income (SANOI) fell by 0.8 per cent both for the quarter and the year, which Mr. Rodrigues attributed to vacancy at two properties as well as roof repairs of approximately $100,000.

"Nova Scotia (down 10.7 per cent) was chiefly responsible, with PEI (down 2.9 per cent) and Alberta/Ontario (both down 0.9 per cent) also contributing," he said. "New Brunswick (up 6.0 per cent) and Newfoundland (up 4.4 per cent) partially offset this. Management expects SANOI to revert to its historical average of 1-per-cent growth in 2017. Same-asset occupancy fell 50 basis points year over year to 95.8 per cent."

He did note "solid lifts" for leasing, saying: "For the year, Plaza renewed 466,000 square feet, realizing rental rate lifts of 4.0 per cent (with the weighted average rent at $13.47 psf.) The REIT also completed 161,000 sf. of new leasing, at an average rate of $12.78. Furthermore, pre-leased space in properties under development was a healthy 77 per cent. Plaza has 266,000 s.f. expiring in 2017."

Mr. Rodrigues maintained a target price of $5.25 per unit. Consensus is $4.

"Plaza had a slightly underwhelming year, with SANOI falling 0.8 per cent, FFO [funds from operations] growing 3 per cent and NAV [net asset value] growing 4 per cent," he said. "And while it continued its phenomenal history of annual distribution increases, 2016's increase was only 3.8 per cent, one of the lowest increases since inception. This all played out in its stock performance, returning only 12 per cent and underperforming the TSX Capped REIT Index by 540 basis points in 2016. However, since we initiated with an Outperform rating, the stock has delivered a 27-per-cent total return (versus 13 per cent for the Index). Given this and its sizable NAV premium (up 7 per cent) and 6.7-per-cent implied cap rate (versus a 7.0-per-cent IFRS cap rate), combined with a likely slower growth first nine months in 2017, we are downgrading Plaza."

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The base business of MacDonald Dettwiler and Associated Ltd. is currently "attractively" valued, said CIBC World Markets analyst Stephanie Price.

Believing investors are now receiving DigitalGlobe Inc. "as a free option," Ms. Price raised her rating for the stock to "outperformer" from "neutral."

On Feb. 24, the Richmond, B.C.-based communications and information company announced the acquisition of the satellite imagery provider for $3.1-billion (U.S.). Under the deal, MDA said shareholders of DigitalGlobe will get $17.50 in cash and 0.3132 of its shares for each share held.

"We believe that the takeout valuation (8.4 times) appears reasonable and that the DigitalGlobe asset will add scale in U.S. government, strengthen recurring revenues and improve MDA's free cash flow profile," said Ms. Price. "We expect the addition of DigitalGlobe to be high single-digit accretive in 2018, more so in 2019 as additional cost and revenue synergies are realized. We see key synergies as the ability to cross-sell a combined optical and radar imagery offering and capex related synergies on the construction of DigitalGlobe ground stations, analytics offerings and satellites.

"MDA's stock is down over 10 per cent since news reports of a possible DigitalGlobe acquisition."

Ms. Price expects the acquisition to be accretive in 2018, noting MDA management sees $35-million to $50-million in synergies.

"If we assume that $35-million of those synergies are recognized in 2018, we estimate that the transaction would be high single-digit accretive in 2018," the analyst said.

"We expect the synergy rate to ramp from 2018, with a synergy run-rate of $75-million to $150-million expected by end of 2019. We see both cost and revenue synergies."

On Feb. 23, the company reported in-line fourth-quarter financial results. Adjusted earnings per share of $1.42 met projections, while revenue of $503-million was slightly below consensus estimates ($514-million).

Ms. Price lowered her target price to $83 from $86 to account for near-term commercial satellite headwinds. The analyst average is $81.89, according to Bloomberg.

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Expressing doubt over Tesla Inc.'s (TSLA-Q) ability to deliver its much-hyped Model 3 on time, Goldman Sachs analyst David Tamberrino downgraded the stock to "sell" from "neutral."

"Ultimately we see a delayed launch," said Mr. Tamberrino, who also expects notable free cash flow burn.

He predicted Tesla will be forced to issue $1.7-billion (U.S.) in shares in the third quarter to fund its capital spending.

"While we believe Tesla currently has a lead relative to OEM (original-equipment market) peers with respect to vehicle technology adoption, electric vehicle architecture, and (potentially) battery scale, our concerns are more near-term oriented with respect to operational execution on the Model 3 launch, an unproven solar business, and cash needs," he said.

He lowered his six-month price target to $185 (U.S.) from $190. The analyst average is $252.07.

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Riding the success of the hottest toy of 2016, Spin Master Corp. (TOY-T) is "poised to hatch another good year," said BMO Nesbitt Burns analyst Gerrick Johnson.

After attending the Toronto-based company's investor presentation and product display at the New York Toy Fair on Feb. 21, Mr. Johnson said he expects Spin Master to be able to double its sales of its ultra-popular Hatchimals brand in 2017, which he estimated at $60-million in 2016. He predicted "strong" sales momentum to continue, with "smart collectibles extensions driving incremental growth."

"We think the non-hatching issues and negative press associated with faulty Hatchimals last year was blown out of proportion," said Mr. Johnson. "We don't expect any lingering issues to affect sales. Spin Master also has a smart extension of the Hatchimals brand with CollEGGtibles, a $2.99 collectible that "hatches" from a miniature egg. We think this item will do well as it takes advantage of the collectibles trend. Management also alluded to further extension commenting that, "new ways to hatch are coming."

Led by Hatchimals, Mr. Johnson said he was impressed by the company's 2017 product lineup, adding: "While Paw Patrol may be plateauing, early reads on Rusty rivets are good, and we like the STEM-based toy line with its modular construction and mix n' match parts. Meanwhile, the rest of the line is solid, which should more than offset potential declines in Zoomer."

"We have confidence in the company's ability to achieve its long-term goals owing to a track record of creativity and innovation supported by solid execution and deep relationships with inventors, suppliers, licensors, and distribution partners."

With a "market perform" rating, he raised his target price for Spin Master stock to $38 from $34. The analyst consensus price target is $30.39.

"Given uncertainty around U.S. tax and tariff policy, risks inherent with managing hyper growth, and a glaring lack of stock liquidity, we are unwilling to award shares a multiple beyond the 18 times we are currently using for valuation," the analyst said. "Thus, with our target representing just 7-per-cent upside, risk/reward does not favour acquiring shares at this point."

He added: "We are confident in TOY's ability to achieve top-line growth and gain market share through its consistent creativity, use of entertainment licensors, and solid execution. Furthermore, TOY has the potential to expand margins from scale and efficiency gains and development of international presence. However, we believe the shares are currently fairly valued."

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BMO Nesbitt Burns analyst Troy MacLean expects 2016 leasing activity to lead to 2017 and 2018 organic growth for Slate Retail REIT (SRT.UN-T).

On Feb. 23, Slate, a Toronto-based real estate investment trust, reported funds from operations for the fourth quarter, excluding one-time mortgage defeasance costs of 8 per unit, of 32 cents. The result met the expectations of both Mr. MacLean and the Street.

Same-property net operating income (SPNOI) rose 2.5 per cent year over year, which Mr. MacLean said was "driven by higher rental rates on new and renewal leasing (except for one renewal at Buckeye Plaza done at slightly lower rents), which more than offset modestly lower occupancy (Uptown Station vacancy)."

He added: "SPNOI growth improved in the [second half of 2016] as the REIT benefited from positive leasing spreads … We expect recent leasing activity will provide further organic growth in 2017 and 2018."

With an "outperform" rating, Mr. MacLean lowered his target price to $12.75 from $13. Consensus is $11.99.

"We continue to like the REIT's discounted valuation (14-per-cent discount to net asset value, 2017 estimated AFFO [adjusted funds from operations] of 11.1 times), its fully covered 7.4-per-cent yield, as well as the potential for solid organic growth based on rising occupancy and positive leasing spreads on lease renewals," he said. "Grocery-anchored retail properties are defensive assets that generate consistent foot traffic and should be relatively insulated from the headwinds facing the retail sector (e.g., growing online sales, department store closures, etc)."

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In other analyst actions:

Asanko Gold Inc. (AKG-T) was raised to "buy" from "hold" at Canaccord Genuity by analyst Rahul Paul, who lowered his target to $5 from $5.50. The analyst average price target is $5.75, according to Bloomberg.

JC Penney Co Inc. (JCP-N) was downgraded to "neutral" from "buy" at B. Riley by analyst Jeffrey Van Sinderen with a target of $7.50 (U.S.), down from $12. The average is $8.67.

Magna International Inc. (MGA-N, MG-T) was raised to "outperform" from "neutral" at Macquarie by analyst Michael Glen with a target of $50 (U.S.), up from $43.50. The average is $50.57.