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Tuesday’s TSX breakouts: A security yielding 8.3% and a distribution maintained since inception

On today's TSX Breakouts report, there are 23 stocks on the positive breakouts list (stocks with positive price momentum), and 22 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a REIT that is just 3 per cent shy of appearing on the positive breakout list. The REIT has a forecast total return of over 14 per cent (including its 8 per cent yield). In the near-term, the unit price could retreat and fall below the $10 price level, trading back into its historical trading band. From 2013, until recent months, the unit price has been locked in a trading range, trading largely between $8.70 and $10. This is a REIT to watch. The security discussed today is Inovalis Real Estate Investment Trust (INO.UN-T).

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

The REIT

Toronto-based Inovalis REIT holds a portfolio of office properties located in Europe. The REIT currently has an interest in 12 office properties, of which seven properties are located in France and five properties are located in Germany.

The REIT was listed on the Toronto Stock Exchange a few years ago. Inovalis REIT completed its initial public offering in April 2013, raising $105-million by issuing 10.5 million trust units at a price of $10 per unit.

Before the market opened on Aug. 9, the company reported its second quarter financial results. Funds from operations (FFO) per unit came in at 20 cents per share, a penny below the Street's expectations. Adjusted funds from operations (AFFO) was 23 cents per unit. Same-property net operating income (NOI) increased 6 per cent. Management is calling for NOI to increase by between 7 per cent and 14 per cent fuelled by future acquisitions, and same-property NOI is estimated to increase by 2 per cent.

A core objective held by management is growth. In June, the REIT acquired a 50 per cent interest in an office building located in Germany and completed a $13.7-million private placement to fund its growth. Last year, on July 25, 2016, the REIT completed a $46-million bought deal financing, issuing units at a price of $9.50 per unit.

Inovalis has a diversified tenant composition with 49 tenants from various industries. Its top five tenants occupy approximately 59 per cent of the total weighted areas. Amongst its top five tenants are Orange (formerly France Telecom), Daimler AG, and Mitsubishi Hitachi Power Systems Europe GmbH. Over the next two years, only 4.5 per cent of its leases (as a percentage of total gross leasable area) expire in 2018 and 5.6 per cent are up for renewal in 2019. After that, lease maturities jump to 16.1 per cent in 2020 and 25 per cent in 2021. As at June 30, overall occupancy held steady at 96 per cent. Last quarter, management contracted a new 10-year lease with one of Germany's largest banks for its Hanover property, which comes into effect on Jan. 1, 2019 (once the current lease expires).

The company has an foreign exchange hedging program in order to mitigate foreign currency risk.

Distribution policy

The REIT pays its unitholders a monthly distribution of 6.875 cents per unit, or 82.5 cents on a yearly basis. This equates to an annualized yield of 8.3 per cent. Inovalis REIT has maintained its distribution at this level since 2013.

The AFFO payout ratio was just under 92 per cent in the second quarter. Management targets a payout ratio of between 88 per cent and 94 per cent. However, the consensus AFFO per unit to be 82 cents, implying an AFFO payout ratio just above 100 per cent.

Analysts' recommendations

This small cap REIT, with a market capitalization of $201-million, is covered by six analysts, of which three analysts have buy recommendations and three analysts have hold recommendations.

The six analysts covering the company are from the following firms in alphabetical order: BMO Capital Markets, Desjardins Securities, Eight Capital, GMP, Laurentian Bank Securities, and National Bank Financial.

Financial forecasts

The consensus FFO per unit estimates are 82 cents in 2017, increasing over 14 per cent to 94 cents in 2018. The Street is forecasting AFFO per unit to come in at 82 cents in 2017, and climb to 92 cents the following year.

Forecasts have been relatively stable over recent months. For instance, three months ago, the Street was forecasting FFO per unit of 85 cents in 2017 and 95 cents in 2018. The consensus AFFO per unit estimates were 82 cents in 2017 and 91 cents in 2018.

Valuation

The REIT is trading at a price-to-AFFO multiple of 10.8 times the consensus 2018 estimate. On a price-to-FFO basis, the REIT is trading at a multiple of 10.6 times the 2018 consensus estimate. According to Bloomberg, this is just below the REIT's peak multiple of 11 times.

According to Bloomberg, the one-year consensus target price is $10.62, suggesting there is 6 per cent upside in the share price over the next 12 months, including the dividend yield, this equates to a potential total return of over 14 per cent. Target prices range from a low of $9.50 to a high of $11.35. Individual target prices are as follows in numerical order: $9.50, two at $10.50, $10.75, $11.25 and $11.35.

Revised recommendations

Last month, two analysts revised their target prices – both higher.

Troy MacLean, the analyst from BMO Capital Markets, took his target price up to $11.35 (the high on the Street) from $10.50. In addition, Michael Markidis, the analyst from Desjardins Securities, increased his target price to $10.50 from $10.25.

Insider transactions

On Aug. 14, Michael Lagopoulos, who sits on the board of trustees, purchased 5,000 units for an account in which he has indirect ownership at an average price per unit around the $9.88 price level, initiating a portfolio position.

The following day, he acquired 2,000 units for this account at an average cost per share of $10.08. Mr. Lagopoulos is a newly appointed trustee, joining the board in August. He was the former deputy chairman of RBC Wealth Management.

These transactions were the only trades in the public market reported by insiders so far this year.

Chart watch

The REIT has a limited trading history making technical analyst somewhat constrained. The units began trading on the Toronto Stock Exchange in April 2013. That being said, since the initial public offering, the unit price has been range bound, trading principally between $8.75 and $10, until recent months, when the unit price broke, and held, above the $10 level.

Year-to-date, the REIT is up 9 per cent, and is trading above its historical trading band.

Should the unit price pullback, there is initial support around $10, close to its 50-day moving average (at $10.12). Failing that, there is support around $9.50, near its 200-day moving average (at $9.68). There is solid support between $8.70 and $9.

In terms of overhead resistance levels, there is a ceiling of resistance around the $9.50 level.

Liquidity is rather low for this REIT. The three-month historical daily average trading volume is approximately 37,000 units.

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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 indices 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.

If you want to receive an automatic link to all reports that I write, follow me on Twitter at @jennifer_dowty

Positive BreakoutsSept. 11 close
ARE-TAecon Group Inc $17.64
AIM-TAimia Inc $2.44
AVO-TAvigilon Corp $17.36
BLDP-TBallard Power Systems Inc $4.30
BLX-TBoralex Inc $22.65
CWB-TCanadian Western Bank $30.52
CFP-TCanfor Corp $22.61
WEED-TCanopy Growth Corp. $9.48
CG-TCenterra Gold Inc $9.07
FAH.UN-TFairfax India Holdings Corp. $13.10
INE-TInnergex Renewable Energy Inc $15.56
KMP.U-TKillam Apartment REIT $13.19
LIF-TLabrador Iron Ore Royalty Corp $20.24
LAC-TLithium Americas Corp $1.60
MKP-TMCAN Mortgage Corp $15.54
NMX-TNemaska Lithium Inc. $1.40
OSB-TNorbord Inc $46.13
ORL-TOrocobre Ltd. $4.21
PBL-TPollard Banknote Ltd. $14.75
RUS-TRussel Metals Inc $27.40
SHOP-TShopify Inc. $143.01
TFII-TTransForce Inc $30.75
WPRT-TWestport Innovations Inc $3.51
Negative Breakouts
AOI-TAfrica Oil Corp $1.65
BOS-TAirBoss of America Corp $11.58
ACO.X-TAtco Ltd $45.07
ATP-TAtlantic Power Corp $2.90
AI-TAtrium Mortgage Investment Corp. $11.91
CARA-TCara Operations Ltd $21.53
CPH-TCipher Pharmaceuticals Inc $4.89
ECN-TECN Capital Corp. $3.70
LUC-TLucara Diamond Corp $2.43
MAG-TMAG Silver Corp $15.03
MND-TMandalay Resources Corp $0.33
NAL-TNewalta Corp $0.85
NWC-TNorth West Co Inc $29.46
PONY-TPainted Pony Energy Ltd $2.99
PTM-TPlatinum Group Metals Ltd $0.58
ZZZ-TSleep Country Canada $32.37
SOY-TSunOpta Inc $10.30
TA-TTransAlta Corp $7.59
TGL-TTransGlobe Energy Corp $1.46
TC-TTucows Inc. $60.40
UNS-TUni-Select Inc $26.21
WRG-TWestern Energy Services Corp $1.09

Source: Bloomberg

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