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On today’s TSX Breakouts report, there are 23 stocks on the positive breakouts list (stocks with positive price momentum), and 24 stocks are on the negative breakouts list (stocks with negative price momentum).

Discussed today is a REIT that has underperformed its sector peers and is almost oversold. However, operationally, the REIT is in turnaround mode with fundamentals anticipated to improve. The REIT trades at a reasonable valuation with room for multiple expansion and offers investors an attractive 6.2-per-cent yield. Furthermore, the REIT has a potential near-term catalyst that could give the unit price a lift.

The REIT discussed below is H&R Real Estate Investment Trust (HR-UN-T).

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A brief outline is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.

The REIT

Toronto-based H&R REIT has a diversified portfolio of North American real estate assets containing office properties, retail properties, industrial properties, and residential properties.

In terms of tenants, the REIT is well diversified with only one tenant, Encana Corp., representing more than 10 per cent of estimated annualized gross revenue (at 11.9 per cent). Bell Canada is the second largest tenant, representing 8.1 per cent of H&R’s rental income. The top 20 tenants account for 382 locations, representing 51 per cent of revenue and have an average lease term to maturity of 12 years.

On Aug. 13, H&R reported second-quarter financial results that fell short of expectations. Funds from operations (FFO) per unit came in at 42 cents, below the consensus estimate of 44 cents. Same-property NOI (net operating income) declined 0.2 per cent. Occupancy was 94.1 per cent at the end of the quarter. Debt-to-gross book value was 46.4 per cent, down from over 47 per cent last quarter.

The REIT continues to reposition its portfolio and has sold $1.7-billion worth of assets over the past 18 months while acquiring $563-million of assets. On June 6, H&R completed the sale of a large Toronto asset, The Atrium, for $640-million.

Looking ahead, a key focus by investors, and potential near-term catalyst, is the speculated partial sale of the REIT’s Calgary office building, - The Bow.

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On the earnings call, the president and chief executive officer Tom Hofstedter said, “We have a strategy in place. We hope to have clarity, I would say, before the year is out, if we can actually execute on our plan.” He added, “The big question mark is The Bow. So again, within the next short while, we’ll have an answer to that and we’ll get clarity, and that will bring down, could bring down, our office segment significantly. And then the question is… where do we allocate the funds to and that will remain to be seen as what is the best opportunity at the time.”

Another potential catalyst is improving operational results.

In the Management’s Discussion and Analysis (MD&A), improvement in the REIT’s retail segment is anticipated, “Management expects positive rental growth from the retail segment as the lease-up of the former Target and Sears space is expected to generate approximately $1.0 million, $4.6 million and $3.8 million of additional annual base rent in 2019, 2020 and 2021, respectively.” On the earnings call, Pat Sullivan, chief operating officer of Primaris Management Inc. (a wholly owned subsidiary of H&R REIT) elaborated, “Moving into Q3 (third-quarter) and through Q2/Q1 (second-quarter/first-quarter) 2020, we will see significant positive rental growth from new large format tenants opening from former vacant premises… these include a 40,000 square foot Marshalls/Home Sense at Garden City Square in Winnipeg and 19,000 square foot Planet Fitness opening at Garden City Square, and Best Buy opened a 35,000 square foot store at Sunridge”.

The REIT is expected to report its third-quarter financial results on Wednesday, November 13. The following day, management will be hosting a conference call at 9:30 a.m. (ET).

The consensus FFO per unit estimate is 43 cents.

Distribution policy

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The REIT pays its unitholders a monthly distribution of 11.5 cents per unit, or $1.38 per unit on a yearly basis. This equates to a current annualized yield of 6.2 per cent.

The monthly distribution has been maintained at this level since late-2016.

The FFO payout ratio was 78 per cent during the first half of 2019. In the second-quarter, the FFO payout ratio stood at 81 per cent.

Based on the 2019 consensus AFFO estimate of $1.45, the AFFO payout ratio is anticipated to be 95 per cent in 2019.

Analysts’ recommendations

There are nine firms providing research coverage on this REIT, of which five analysts have buy recommendations and four analysts have neutral recommendations.

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The firms providing research coverage on H&R are: Accountability Research, BMO Nesbitt Burns, CIBC World Markets, Desjardins Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, and TD Securities.

Revised recommendations

Recommendations and target prices have remained relatively stable.

So far, in the second half of 2019, only one analyst has revised his expectations. In August, Desjardins’ Michael Markidis downgraded his recommendation to a “hold” from a “buy” and trimmed his target price to $24 from $25.

Financial forecasts

The consensus FFO per unit estimate is $1.75 for 2019, rising to $1.83 in 2020. The Street is forecasting AFFO per unit to come in at $1.45 in 2019 and $1.58 in 2020.

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In recent months, forecasts have come down. For instance, three months ago, the Street was forecasting FFO of $1.80 in 2019 and $1.86 in 2020. The consensus AFFO per unit estimates were $1.55 for 2019 and $1.63 for the following year.

Valuation

According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 12.2 times the 2020 consensus estimate, below its peak multiple of approximately 12.6 times. The REIT is trading at a price-to-AFFO multiple of 14.1 times the 2020 consensus estimate. Furthermore, the REIT is trading at a discount to its NAV (net asset value). The NAV per unit stood at $25.81 as at June 30.

The average one-year target price is $25.03, implying the unit price has 12 per cent upside potential over the next 12 months (a potential 18 per cent total return if you include the yield). Individual target prices range from $23 to $28, and are as follows in numerical order: $23 (the low on the Street is from Raymond James’ Johann Rodrigues, the analyst at Raymond James), two at $24, $24.25, two at $25, two at $26, and $28 (the high on the Street is from National Bank’s Matt Kornack).

Insider transaction history

Since the beginning of the second quarter, there have only been two transactions in the public market reported by insiders.

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On June 6, Ronald Rutman, who sits on the board of trustees, sold 6,600 units at a price per unit of $22.8401 for an account in which he has control or direction over (CLYR Charitable Foundation), leaving 43,400 units in this account. Proceeds from the sale, excluding commission charges, totaled over $150,000.

On April 3, chief operating officer Nathan Uhr exercised his options, receiving 50,000 units at a cost per unit of $15.42, and sold 50,000 units at a price per unit of $23.5477, eliminating his account’s position. Net proceeds from the sale, not including trading fees, exceeded $406,000.

Chart watch

Year-to-date, the unit price has underperformed its sector peers, rising just 8 per cent, below the 18 per cent price return of the S&P/TSX real estate sector index. In fact, of the 25 members in the S&P/TSX real estate sector index, only one security has realized a lower price return year-to-date - SmartCentres Real Estate Investment Trust (SRU-UN-T).

H&R’s unit price has fallen 4 per cent over the past 13 trading days. On Oct. 8, the unit price closed at a record high of $23.36. Given this pullback, the unit price is nearing oversold levels. The relative strength index reading is 34. Generally, a reading at or below 30 reflects an oversold condition.

Looking at key technical resistance and support levels, the next major ceiling of resistance is between $23.50 and $24. Should the unit price continue to retreat, there is strong technical support around $22, which is close to its 50-day moving average (at $22.63) and its 200-day moving average (around $22.32).

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.

Positive BreakoutsOct. 28 close
ACI-TAltaGas Canada Inc. $33.35
BMO-TBank of Montreal $98.15
GBT-TBMTC Group Inc $11.77
BRE-TBridgemarq Real Estate Services Inc $15.06
DOO-TBRP Inc $57.96
BTB-UN-TBTB Real Estate Investment Trust $4.84
CFP-TCanfor Corp $15.60
CHW-TChesswood Group Ltd $10.74
CM-TCIBC $112.22
CMG-TComputer Modelling Group Ltd $6.95
EFN-TElement Fleet Management Corp. $11.20
EQB-TEquitable Group Inc $116.26
FC-TFirm Capital Mortgage Investment Corp $14.29
MIC-TGenworth MI Canada Inc $53.30
IAG-TiA Financial Corporation Inc. $62.63
IFP-TInterfor Corp $15.98
IVQ-U-TInvesque Inc. $7.50
MFC-TManulife Financial Corp $24.77
NA-TNational Bank of Canada $67.71
TIH-TToromont Industries Ltd $66.90
TSU-TTrisura Group Ltd. $31.33
WM-TWallbridge Mining Company Limited $0.59
WFT-TWest Fraser Timber Co Ltd $61.34
Negative Breakouts
AIF-TAltus Group Ltd $35.56
ADW-A-TAndrew Peller Ltd $13.09
CFW-TCalfrac Well Services Ltd $1.15
OH-TCannaRoyalty Corp. $4.89
DOL-TDollarama Inc $45.08
EMA-TEmera Inc $54.10
FSV-TFirstService Corp $115.71
GUY-TGuyana Goldfields Inc $0.75
HRX-THeroux-Devtek Inc $16.31
HEXO-THEXO Corp. $3.03
HLF-THigh Liner Foods Inc $9.60
KMP-UN-TKillam Apartment REIT $19.47
MAG-TMAG Silver Corp $12.16
PPL-TPembina Pipeline Corp $46.27
POM-TPolyMet Mining Corp. $0.38
PSK-TPrairieSky Royalty Ltd $14.74
PBH-TPremium Brands Holdings Corp $87.61
QSR-TRestaurant Brands International Inc $86.03
STN-TStantec Inc $27.85
SJ-TStella-Jones Inc $37.03
FIRE-TSupreme Cannabis Co Inc. $0.78
TGOD-TThe Green Organic Dutchman Holdings Ltd. $1.05
TA-TTransAlta Corp $7.70
U-TUranium Participation Corp. $4.00

Source: Bloomberg

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