On today’s Breakouts report, there are 66 stocks on the positive breakouts list (stocks with positive price momentum), and 24 securities are on the negative breakouts list (stocks with negative price momentum). Energy and gold stocks continue to charge higher and dominate the positive breakouts list.
Discussed today is a REIT that recently appeared on the positive breakouts list, 10 trading sessions ago to be exact - PRO Real Estate Investment (PRV.UN-T). The REIT offers investors an attractive yield of 6.2 per cent. The monthly distributions appears sustainable with a payout ratio of 90 per cent in 2021. The REIT has six buy recommendations and one ‘sector perform’ recommendation. While the REIT is not cheap, the average 12-month target price suggests the unit price has 10 per cent upside potential for a potential total return (including the yield) of 16 per cent.
A brief outline on PROREIT is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
Headquartered in Montreal, PROREIT is focused on building a portfolio of industrial properties located in mid-sized cities across the country.
As at Dec. 31, the REIT had a portfolio of 120 properties across 10 provinces with an occupancy rate of 98.4 per cent and a weighted average lease term of 4.6 years.
In terms of geographical exposures, in the fourth-quarter 47.2 per cent of the REIT’s base rent stemmed from the Maritime provinces, 27.5 per cent from Ontario, 15.5 per cent from Western Canada and 9.8 per cent from Quebec.
The REIT’s industrial sector exposure continues to significantly increase. In the fourth-quarter, 64 per cent of base rent was from industrial properties (up from 49.1 per cent during the same period last year), 25 per cent was from retail properties (down from 36 per cent last year), and 11 per cent was from office properties (down from 14.9 per cent during the fourth-quarter of 2020).
The REIT’s tenants are perceived by management as low-risk, high-quality tenants. The top ten tenants accounted for 30 per cent of base rent as at Dec. 31. The top six tenants were Rexall (4.5 per cent of base rent), Sobeys (4.3 per cent), Leonardo DRS (4 per cent of base rent), Sysco (3.4 per cent), the Government of Canada (3.3 per cent) and Shoppers Drug Mart (2.5 per cent).
Investment thesis
- Steady growth: management anticipates same-property net operating income (NOI) growth of between 2 per cent and 5 per cent in 2022. In 2021, same-property NOI increased 4.3 per cent year-over-year.
- Asset value growth: management is focused on adding industrial properties to its portfolio. Management targets $2-billion in asset value in the next couple of years, up from the current value of its properties of approximately $1-billion.
- Acquisition growth: In 2021, PROREIT acquired 34 properties (a purchase price of $296.9-million for these industrial assets) and sold five non-strategic properties.
- Rising rents: the average rental increase was over 10 per cent for 97 per cent of the leases that matured in 2021. For leases that expire in 2022, management indicated in the earnings release that almost half of these leases have been renewed at a positive 10 per cent spread compared to maturing rates.
- Cap rate compression: management expects cap rate compression will continue for the REIT’s industrial portfolio. The weighted average cap rate was roughly 5.9 per cent at year-end, down 6.3 per cent sequentially (6.9 per cent for retail, 6.3 per cent for office and 5.9 per cent for industrial).
- Strengthening its balance sheet: continued debt reduction remains a focus by management.
- Valuation: potential multiple expansion, especially as the REIT continues to increase its industrial portfolio.
- Attractive yield: above 6 per cent.
- Potential risks to consider: 1) rising bond yields and 2) the REIT is not cheap.
Quarterly earnings results
On March 23, the REIT released its fourth-quarter financial results. Revenue came in at $22.9-million, up 30 per cent year-over-year. Net operating income rose to $13.4-million, up 33.6 per cent year-over-year. AFFO (adjusted funds from operations) totaled $7.4-million, up 37 per cent year-over-year. Same-property NOI increased 5.5 per cent year-over-year. At year-end, the debt-to-gross book value ratio declined to 53 per cent. Management aims to lower this ratio to below 50 per cent over the medium term. The following day, the unit price was relatively unchanged, declining by a penny to close at $7.06.
On the earnings call, president and chief executive officer Jim Beckerleg provided a positive outlook for 2022, “We continue to optimize our strong and flexible financial position, and I think we maintained a disciplined capital allocation. We intend to pursue our accretive growth in the industrial sector especially, focusing on midsized Canadian cities, where we believe rent growth opportunities remain very strong. We will do so well aiming to achieve the right balance between growth and quality of cash flows. We will also consider on an opportunistic basis with sale of some nonstrategic properties, mainly smaller buildings in the retail and office asset classes, which will result and further focus on our cash flows from the industrial sector. While optimizing the value and performance of our portfolio, this will also contribute to the decreasing of our leverage numbers.”
After the market closes on May 11, the REIT will be releasing its first-quarter financial results. According to Bloomberg, the Street is expecting PROREIT to report FFO (funds from operations) per unit of 13 cents. The following day, management will be hosting a conference call at 10:30 AM (ET).
Distribution policy
The REIT pays its unitholders a monthly distribution of 3.75 cents per unit, or 45 cents per unit on a yearly basis. This equates to a current annualized yield of 6.2 per cent.
In the fourth-quarter, the AFFO payout ratio stood at 93 per cent. In 2021, the AFFO payout ratio was 90 per cent.
Analysts’ recommendations
There are seven firms that provide research coverage on this small-cap REIT with a market capitalization of $427-million. The REIT has six buy recommendations and one “sector perform” recommendation (by Scotiabank analyst Himanshu Gupta).
The firms providing research coverage on PROREIT are as follows in alphabetical order: BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Haywood Securities, Laurentian Bank, Scotiabank, and TD Securities.
Revised recommendations
In March, five analysts revised their target prices – all higher.
- BMO’s Jenny Ma to $7.75 from $7.50.
- Canaccord’s Mark Rothschild to $8 from $7.50.
- CIBC’s Sumayya Syed to $8.25 (the high on the Street) from $7.50.
- Scotiabank’s Himanshu Gupta to $7.75 from $7.25.
- TD’s Lorne Kalmar to $8 from $7.50.
Financial forecasts
The consensus FFO per unit estimates are 54 cents for 2022, rising to 57 cents in 2023. The Street is expecting AFFO per unit of 51 cents in 2022 and 54 cents the following year.
The Street’s expectations have moderated slightly for 2022. For instance, three months ago, the consensus FFO per unit estimates were 57 cents for 2022 and 53 cents for 2023. The consensus AFFO per unit forecasts were 53 cents for 2022 and 53 cents for 2023.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 12.7 times the 2023 consensus estimate, which is above the five-year historical average multiple of 10.4 times and just below its peak multiple of approximately 13.1 times during this time period.
The average 12-month target price is $7.95, implying the unit price has 10 per cent upside potential, including the yield the potential total return is 16 per cent. Individual target prices are: two at $7.75, $7.90, three at $8, and 8.25.
Insider transaction activity
Year-to-date, only one insider has reported trading activity in the public market.
On March 30, chief financial officer Gordon Lawlor invested over $101,000 in units of PROREIT. He purchased a total of 13,700 units at an average price per unit of approximately $7.39 for two accounts, 9,500 shares for an account in which he has direct ownership, increasing this specific account’s position to 52,000 units, and in a separate account in which he has indirect ownership (GDRJL Holdings Inc.), he bought 4,200 shares lifting this particular account’s holdings to 221,088 units.
Chart watch
Year-to-date, the unit price has increased 6.6 per cent, outperforming the S&P/TSX Composite Index, which is up 2.9 per cent, as well as the S&P/TSX Real Estate Sector Index, which is down 7.5 per cent.
In terms of key technical resistance and support levels, the unit price has initial overhead resistance around $7.50. After that, there is a ceiling of resistance around $8. Looking at the downside, there is technical support around $7, near its 50-day moving average (at $6.96) and its 200-day moving average (at $6.86).
This small-cap REIT has reasonable liquidity. The three-month historical daily average trading volume is approximately 155,000 units.
ESG risk rating
At this time, data providers Systainalytics, Bloomberg, ISS, MSCI, and S&P Global each do not have risk ratings on this REIT.
According to the REIT, female representation accounts for 39 per cent of management and 25 per cent of the board of trustees.
Please note that this report is not an investment recommendation.
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.
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