On today’s TSX Breakouts report, there are 26 stocks on the positive breakouts list (stocks with positive price momentum), and 41 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a newly listed real estate investment trust (REIT) that may appear on the breakouts list in the future. Real estate securities in the apartment segment have been strong performers. For instance, year-to-date, the unit price of CAPREIT (CAR.UN-T) is up 15 per cent, and the unit price of InterRent REIT (IIP.UN-T) has rallied 18 per cent. Apartment REITs have outperformed the S&P/TSX real estate sector, which is up 4.5 per cent, and the S&P/TSX composite index that is only up 1 per cent. While rising interest rates are a potential headwind for REITs, right now, the market is suggesting that there is only a 20 per cent probability that the Bank of Canada will raise interest rates in September. The security highlighted today is Minto Apartment Real Estate Investment Trust (MI.UN-T).
A brief outline is provided below that may serve as a springboard for further fundamental research.
The REIT
Ottawa-based Minto Apartment REIT owns a portfolio of 22 rental properties with a total of 4,279 apartment units that were purchased from real estate developer and manager, Minto Properties Inc. (MPI). The 22 properties are located in large cities with 14 properties, or 3,060 suites, located in Ottawa. There are four properties, or 824 suites, located in Toronto. In Edmonton, the REIT has three properties, or 251 units, and in Calgary, the REIT has one property with 144 suites. The occupancy level of the REIT’s portfolio is high at approximately 98 per cent. The REIT has a strategic alliance with MPI, which owns over 50 per cent of the units outstanding, and this relationship is expected to help the REIT achieve its growth objectives.
In the prospectus, management identified four key potential drivers of growth, which are: “1) embedded cash flow growth driven by below-market in-place rent (approximately $5.1-million as at March 31, 2018, representing a potential increase of approximately 10.5 per cent over forecast NOI [net operating income]) and above guideline increases; 2) targeted value-enhancing initiatives including asset repositioning and intensification opportunities; 3) potential access to up to $1.7-billion of high quality multi-residential properties that Minto manages on behalf of third parties and in which it has a $510-million proportionate interest, subject to Minto’s current partnership and co-ownership arrangements; and 4) third-party acquisitions leveraging Minto’s extensive relationships and strong track record.” For the 12-month period ending on June 30, 2019, management is forecasting NOI growth of 3.8 per cent. The REIT has a healthy balance sheet with a debt-to-GBV (gross book value) ratio of approximately 47 per cent, providing the REIT with the financial flexibility to fund future acquisitions.
On a macro level, industry conditions remain favourable. Demand for apartments is strong, particularly in major cities, as home ownership is out of reach for many Canadians given expensive home prices and tighter mortgage lending conditions arising from the introduction of B-20 (federal guidelines for residential mortgage underwriting). In addition, rising population growth in cities is increasing demand for apartments.
Distribution policy
The REIT pays its unitholders a monthly distribution of 3.4167 cents per unit, or 41 cents per unit on a yearly basis. This equates to an annualized yield of 2.4 per cent. Its peers offer investors slightly higher yields. Canadian Apartment Properties REIT (CAR.UN-T), or CAPREIT, has a yield of 3.1 per cent and InterRent REIT (IIP.UN-T) has a yield of 2.5 per cent.
The payout ratio is approximately 65 per cent of forecasted AFFO (based on adjusted funds from operations for the 12-month period ending June 30, 2019), suggesting there is room for the distribution to increase in the future.
Analysts’ recommendations
This small-cap security is covered by three analysts on the Street, and all three analysts have buy recommendations.
The firms providing research coverage on the REIT are as follows in alphabetical order: BMO Capital Markets, CIBC Capital Markets, and TD Securities.
Financial forecasts
The Street is forecasting FFO (funds from operations) per unit of 80 cents in 2019, with FFO forecast to rise to 85 cents in 2020.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 21.1 times the 2019 consensus estimate. The unit price is now trading at a valuation that is in-line with its larger cap peers.
Looking at its industry peers, CAPREIT (CAR.UN-T) is trading at a price-to-FFO multiple of 21.6 times the 2019 consensus estimate and InterRent REIT (IIP.UN-T) is trading at a forward multiple of 21.3 times. Looking back over the past three years, these valuations are near peak levels.
The average 12-month target price is $18.83, suggesting the unit price has 11 per cent upside potential over the next year. Individual target prices are as follows in numerical order: $18, $18.50 and $20.
Chart watch
The REIT just began trading on the Toronto Stock Exchange on July 3. Given the brief trading history, the usefulness of technical analysis is limited. The unit price has rallied nearly 17 per cent above its initial public offering price of $14.50.
Looking at its apartment REIT peers, unit prices have been trading sideways in recent weeks.
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