On today’s TSX Breakouts report, there are 39 stocks on the positive breakouts list (stocks with positive price momentum), and 45 stocks are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a REIT that has been a solid performer over the years given its attractive portfolio of assets and strong fundamentals. Consequently, the REIT trades at a premium valuation. The security is just 78 cents, or 1.6 per cent, away from resurfacing on the positive breakouts list. With 11 buy recommendations, the security highlighted below is Allied Properties Real Estate Investment Trust (AP.UN-T).
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 Allied Properties REIT is focused on managing and developing office properties located in major cities across Canada with a concentration in Toronto and Montreal. As at March 31, Allied had a portfolio of 179 properties.
After the market closed on May 1, Allied reported first-quarter financial results that were largely in-line with expectations. Funds from operations (FFO) per unit came in at 55.5 cents, just above the Street’s forecast of 54.8 cents. Allied reported same-property NOI growth (rental portfolio) of 6.4 per cent with occupancy increasing to 96.2 per cent, up from 94.5 per cent reported during the same period last year. The REIT has a healthy balance sheet with a debt-to-gross book value ratio of 27 per cent and net debt-to-EBITDA (earnings before interest, taxes, depreciation and amortization) ratio of 6.2 times at the end of the quarter. On April 9, Moody’s Investor Services upgraded its outlook to positive from stable on its debt securities. The following trading day, the unit price was relatively unchanged, declining 23 cents, or 0.5 per cent, to close at $47.28.
Management’s outlook is positive. On the earnings call, the chief financial officer Cecilia Williams stated, “We continue to expect FFO, AFFO (adjusted funds from operations) and same asset NOI (net operating income) to be in the low-to-mid-single digit range for the year.” Looking beyond 2019, Allied’s growth potential is attractive given its strong development pipeline and active acquisition program.
In June, Allied completed a $345-million equity financing (issue price of $48.15 per unit) with proceeds earmarked to fund two buildings acquired in Montréal earlier this month, along with its completed acquisitions of properties in Toronto, Calgary, Vancouver and Kitchener completed earlier this year. In a news release issued on June 10, management indicated that it, “Expects its acquisitions in the first half of 2019 to be immediately and meaningfully accretive to its FFO and AFFO per unit and to become progressively more accretive with the passage of time. By using a substantial amount of equity to fund these acquisitions, Allied will once again demonstrate unwavering commitment to its balance sheet and key debt-metrics.” The CFO noted on the earnings call, “At quarter-end and today, we have nothing drawn on our unsecured operating line, leaving us with maximum liquidity of $400-million before exercising the accordion option for $100 million. This will allow us to fund all debt maturities and development activity well into Q2 (second quarter) 2020.” She added, “We don’t have to go to either the debt or the equity markets for another year and that we can absolutely fund (the REIT’s development) using our operating line.”
Allied will be reporting its second-quarter financial results after the market closes on Wed. July 31 and will be hosting an earnings call the following day at 10 a.m. (ET). The Street is expecting the company to report FFO per unit of 55.5 cents.
Distribution policy
Management is committed to steadily increasing its distribution. In a news release issued in December, the president and chief executive officer Michael Emory said, “Management and the Trustees support the two-fold objective of raising distributions on an annual basis while simultaneously reducing pay-out ratios.”
In December, management announced a 2 per cent increase to its monthly distribution, raising it to 13.3 cents per unit, up from 13 cents per unit. This equates to a yearly distribution of $1.60 per unit, or an annualized yield of 3.3 per cent.
The AFFO payout ratio was 84 per cent in the first quarter and 87.6 per cent in 2018.
Analysts’ recommendations
This mid-cap REIT, with a market capitalization of $5.7-billion, is well covered by the Street with 13 analysts actively covering the security. The stock has 11 buy recommendations and two ‘hold’ recommendations.
The firms providing recent research coverage on the REIT are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Echelon Wealth Partners, Goldman Sachs, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Scotiabank, TD Securities and Veritas Investment Research.
Revised recommendations
In June, BMO’s Jenny Ma raised her target price by $1 to $51. Scotiabank analyst Mario Saric tweaked his target price higher by 25 cents to $52. National Bank Financial’ Matt Kornack bumped his target price to $53 from $52.
In May, RBC’s Neil Downey bumped his target price up to $52 from $51. Frederic Blondeau, an analyst at Echelon Wealth Partners, increased his target price to $48 from $47. Desjardins’ Michael Markidis raised his target price by $1 to $52. Caitlin Burrows, from Goldman Sachs, hiked her target price to $56 (the high on the Street) from $55.
Financial forecasts
The consensus FFO estimate is $2.24 per unit in 2019, rising nearly 6 per cent to $2.37 per unit in 2020. The consensus AFFO per unit estimates are $1.88 in 2019 and $2.01 in 2020.
Over the past few months, earnings forecasts have been quite stable. For instance, three months ago, the consensus FFO per unit estimates were $2.23 for 2019 and $2.36 for 2020. The consensus AFFO per unit estimates were $1.89 for 2019 and $2.01 for 2020.
Valuation
The REIT trades at a high valuation.
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 20.7 times the 2020 consensus estimate, above its three-year historical average multiple of over 17.6 times and near its peak multiple of over 21 times during this period. On a price-to-AFFO basis, the REIT is trading at a multiple of 24.4 times the 2020 consensus estimate.
According to Bloomberg, the average one year target price is $51.54, which suggests the unit price is nearly full valued with 5 per cent upside potential over the next 12 months.
Individual target prices are as follows in numerical order: $48, $49, two at $50, two at $51, four at $52, $53, $54 and $56.
Insider transaction activities
Year-to-date, trades in the public market reported by insiders occurred back in Feb. and March. The most recent transactions are detailed below.
On March 25 and 26, the president and chief executive officer Michael Emory exercised his options, receiving 174,501 units at a cost per unit of $40.60 and sold 174,501 units at an average price per unit of approximately $49.04, leaving 882,941 units in his portfolio. Net proceeds, excluding commission charges, totaled over $1.4-million.
On March 21, Doug Riches, senior vice-president – urban data centres, exercised his options, receiving 7,576 units at a cost per unit of $31.56, and sold 7,576 units at a price per unit of $48.6291 with 7,684 units remaining in his account. Net proceeds, not including brokerage fees, exceeded $129,000.
Chart watch
The long-term chart is attractive. Since 2009, the REIT has deliver solid gains to investors with the exception of two years - 2013 and 2015.
Year-to-date, the REIT has been a laggard. The unit price has appreciated 10.9 per cent, which is below the 15.2 per cent gain for the S&P/TSX composite index and below the 16.3 per cent return for the S&P/TSX real estate sector index.
The unit price is approaching initial overhead resistance around $50, close to its record closing high of $49.95 reached on May 27, 2019. There is downside support between $45 and $47, near its 200-day moving average (at $46.77).
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