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Inside the Market Monday’s TSX breakouts: A Canadian REIT yielding 5.4% with stable distributions paid in U.S. dollars

On today’s TSX Breakouts report, there are 50 stocks on the positive breakouts list (stocks with positive price momentum), and just two securities are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a security that appeared on the positive breakouts list last week. This Canadian-listed REIT is uniquely positioned, providing investors with exposure to the U.S. industrial market.

Among its top tenants are well-known companies including General Mills Inc., Amazon.com Inc., Unilever, and Zulily. The REIT pays its unitholders a stable monthly dividend denominated in U.S. dollars, which it has maintained at the current rate of 6.33 cents per unit since 2015. The REIT has interesting growth opportunities with its newly formed U.S. industrial venture with the Canada Pension Plan Investment Board and Alberta Investment Management Corporation. The security I am referring to is WPT Industrial Real Estate Investment Trust (WIR.U-T).

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

The REIT

Headquartered in Toronto, WPT Industrial REIT has a portfolio of 57 properties located across 15 U.S. states, 56 industrial properties and one office property. As at Sept. 30, its top 10 tenants accounted for 36.7 per cent of total annualized base rent, and included well-known companies such as General Mills, Amazon, Unilever, Honeywell International and Zulily.

In July 2018, management announced the internalization of management, the purchase of WPT Capital Advisors, LLC., as well as the creation of a new private capital venture with Canada Pension Plan Investment Board (CPPIB) and Alberta Investment Management Corporation (AIMCo). The newly formed private capital joint venture targets investing up to US$1-billion in U.S. properties.

After the market closed on Nov. 6, the REIT reported third-quarter financial results that were in-line with expectations. FFO [funds from operations] came in at 23 US cents per unit, matching the consensus estimate. Same-property NOI [net operating income] increased 2.9 per cent year-over-year. At the end of the quarter, occupancy was high at 98.1 per cent. The debt-to-gross book value ratio was 45.4 per cent. The unit price was relatively unchanged the following trading day, declining 2 cents to close at US$12.67.

On the earnings call, chairman and chief executive officer Scott Frederiksen commented on the REIT’s growth opportunities stating, “The U.S. industrial property sector continues to see strong demand in most U.S. markets. Despite the competitive acquisition environment, we remain focused on disciplined capital allocation and leveraging the strength of our platform and relationships to find compelling opportunities for the REIT. In summary, with a fully internalized management platform and premier institutional partners, we believe that REIT has never been better positioned to grow and diversify our portfolio and revenues to build long term value for our unitholders.”

The REIT will be reporting its fourth-quarter financial results on Wed. March 6 and hosting an earnings call the following morning. The consensus FFO per unit estimate is 22 US cents.

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Distribution policy

The REIT pays its unitholders a monthly distribution denominated in U.S. dollars of 6.33 cents per unit, or 75.96 cents per unit yearly, equating to an annualized dividend yield of 5.4 per cent. The REIT has maintained its monthly distribution at 6.33 cents per unit since mid-2015.

During the first nine months of 2018, the ACFO [adjusted cash flows from operations] payout ratio stood at 89.9 per cent.

There are tax implications for Canadian investors to consider. As indicated on the company’s website, “Distributions paid by the REIT to a Canadian unitholder that are made out of the REIT's "current or accumulated earnings and profits" (as determined for U.S. federal income tax purposes) generally will be subject to U.S. withholding tax at a rate of 15% (generally reduced to 0% for RRSPs). To the extent a Canadian unitholder is subject to U.S. withholding tax in respect of distributions paid by the REIT out of the REIT's current or accumulated earnings and profits, the amount of such tax generally will be eligible for foreign tax credit or deduction treatment in Canada. Distributions in excess of the REIT's current and accumulated earnings and profits generally will not be subject to U.S. withholding tax, provided that the recipient has not owned (or been deemed to own) more than 5% of the outstanding Units. Unitholders should consult their own tax advisors with respect to the income tax consequences of an investment in Units in their particular circumstances.”

Analysts’ recommendations

This small-cap REIT with a market capitalization of US$675-million is covered by nine analysts, and all nine analysts have buy recommendations.

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The firms providing research coverage on the REIT are as follows in alphabetical order: BMO Capital Markets, Canaccord Genuity, CIBC Capital Markets, Desjardins Securities, GMP Securities, Industrial Alliance Securities, National Bank Securities, RBC Capital Markets, and Scotia Capital.

Revised recommendations

Last month, two analysts revised their recommendations. At the beginning of January, when the unit price was below US$13, Neil Downey, the analyst from RBC Capital Markets, upgraded his recommendation to an “outperform” from a “sector perform” recommendation but maintained his target price at US$14.50. Mark Rothschild, the analyst from Canaccord Genuity, tweaked his target price higher to US$15 from US$14.85.

Financial forecasts

The Street is forecasting stable earnings. The consensus FFO per unit estimates are 88 US cents in 2018, 90 US cents in 2019 and 90 US cents in 2020.

Earnings forecasts have moderated. For instance, three months ago, the consensus FFO per unit estimates were 89 US cents for 2018 and 94 US cents for 2019.

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Valuation

On a price-to-FFO basis, the REIT is trading at a multiple of 15.6 times the 2019 consensus estimate. Since early 2017, the REIT has traded at a forward price-to-FFO multiple, for the most part, ranging from 13 times to just over 15 times.

The consensus one-year target price is US$15.03, suggesting there is 7-per-cent upside potential in the unit price over the next 12 months. Individual target prices are as follows in numerical order: US$14.50 (the low on the Street is from Neil Downey, the analyst from RBC Capital Markets), two at US$14.75, three at US$15, two at US$15.25, and US$15.50 (the high on the Street is from Himanshu Gupta, the analyst from GMP Securities).

Insider transaction activities

Looking back to the beginning of 2018, there has not been any trading activity in the public market reported by insiders in over a year.

Chart watch

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Year-to-date, the unit price is up 9 per cent. Given the swift move higher, the REIT is currently in overbought territory with a relative strength index (RSI) reading of 71. Generally, a reading at or above 70 indicates an overbought condition. Consequently, in the near-term, the unit price may retreat and fall back below US$14, back into its historical trading range. Over the past two years, the unit price has traded largely between US$12 and US$14.

On a pullback, there is strong technical support around US$13, close to its 200-day moving average (at US$13.35) as well as near its 50-day moving average (at US$12.97). Should the unit price climb higher, there is initial overhead resistance around US$14.35, at its all-time closing high reached back in July 2018. After that, there is a ceiling of resistance around US$15.

This small-cap security has low liquidity, which can increase the price volatility. The three-month historical daily average trading volume is approximately 105,000 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 Breakouts Feb. 1 close
AW-UN-T A&W Revenue Royalties Income Fund $36.40
ADN-T Acadian Timber Corp $17.64
AC-T Air Canada $30.22
AD-T Alaris Royalty Corp $18.91
ALC-T Algoma Central Corp $14.00
AX-UN-T Artis Real Estate Investment Trust $10.32
ACB-T Aurora Cannabis Inc. $9.70
APR-UN-T Automotive Properties REIT $10.30
BYD-UN-T Boyd Group Income Fund $122.20
CHP-UN-T Choice Properties REIT $12.85
CCA-T Cogeco Communications Inc $74.93
CGO-T Cogeco Inc $68.23
CRON-T Cronos Group Inc. $27.31
DSG-T Descartes Systems Group Inc $41.52
DRT-T DIRTT Environmental Solutions $6.99
ECN-T ECN Capital Corp. $3.86
ELD-T Eldorado Gold Corp $5.22
FAH-U-T Fairfax Africa Holdings Corp. $9.79
FC-T Firm Capital Mortgage Investment Corp $13.57
FSV-T FirstService Corp $107.18
GMP-T GMP Capital Inc $2.40
GCM-T Gran Colombia Gold Corp. $3.71
INE-T Innergex Renewable Energy Inc $14.56
IFP-T Interfor Corp $17.97
ITX-T Intertain Group Ltd $12.06
KXS-T Kinaxis Inc $78.31
LUG-T Lundin Gold Inc $5.54
MRC-T Morguard Corp. $184.99
NA-T National Bank of Canada $61.85
NUAG-T New Pacific Metals Corp. $2.03
OSB-T Norbord Inc $39.47
PDL-T North American Palladium Ltd $13.57
NDM-T Northern Dynasty Minerals Ltd. $1.05
NPI-T Northland Power Inc $24.14
OTEX-T Open Text Corp $48.68
OGI-T Organigram Holdings Inc. $7.87
PPL-T Pembina Pipeline Corp $46.89
QBR-B-T Quebecor Inc $31.19
REAL-T Real Matters $4.42
RY-T Royal Bank of Canada $100.11
SIL-T SilverCrest Metals Inc. $4.90
SSRM-T SSR Mining Inc. $18.05
FIRE-T Supreme Cannabis Co Inc. $2.26
TXG-T Torex Gold Resources Inc $14.42
TA-T TransAlta Corp $7.33
VFF-T Village Farms International $7.58
WCN-T Waste Connections Inc. $110.31
WDO-T Wesdome Gold Mines Ltd. $5.10
WFT-T West Fraser Timber Co Ltd $79.21
ZCL-T ZCL Composites Inc. $9.93
Negative Breakouts
CLS-T Celestica Inc $10.58
PL-T Pinnacle Renewable Holdings Inc. $10.80

Source: Bloomberg

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