On today’s Breakouts report, there are 30 stocks on the positive breakouts list (stocks with positive price momentum), and 52 securities are on the negative breakouts list (stocks with negative price momentum).
Discussed today is a real estate investment trust (REIT) whose unit price has declined 5 per cent over the past three weeks causing it to surface on the negative breakouts list - Canadian Apartment Properties REIT.
This is a rare appearance for CAPREIT as the unit price has been in an uptrend for years, excluding the 2020 sell-off arising from COVID-19. Just two months ago, the unit price closed at a record high. Consequently, the falling unit price may soon represent a buying opportunity for long-term investors with the unit price nearing oversold territory.
A brief outline on the CAPREIT is provided below that may serve as a springboard for further fundamental research when conducting your own due diligence.
The REIT
Toronto-based CAPREIT is a residential landlord owning or with interests in over 69,000 units located primarily in and close to major cities across Canada, as well as in Europe.
In term of its geographical breakdown as a percentage of total NOI (net operating income) for the first half of 2021: Ontario represented 44 per cent, Quebec at 15 per cent, B.C. at 11 per cent, Nova Scotia at 5 per cent, Alberta at 3 per cent, PEI and Saskatchewan each at less than 1 per cent, the Netherlands at 14.5 per cent, and the MHC (manufactured home communities) portfolio represented 6.5 per cent of total NOI.
CAPREIT has an ownership interest in European Residential REIT (ERES) as well as an investment in Irish Residential Properties REIT PLC.
In May, the company filed for a base shelf prospectus, which is valid for 25 months. In filing a shelf prospectus, CAPREIT is able to quickly access markets to raise capital.
Investment thesis
Strong management team.
- Industry leader in Canada. A leading publicly traded residential landlord.
- Solid fundamentals. Delivering cash flow growth.
- Diversified portfolio. Management’s primary target markets are suburban regions surrounding the Greater Toronto Area, Greater Montreal Area, and Greater Vancouver Area. Management targets a European exposure of roughly 15 per cent.
- Healthy balance sheet. CAPREIT has a conservative debt to gross book value ratio, an unused credit facility of $250-million, and $120-million of cash and cash equivalents at quarter-end.
- Acquisition growth. In 2020, CAPREIT acquired 3,262 suites and sites. On the earnings call held on Aug. 13, management indicated that they have acquired 2,001 suites and sites so far in 2021. CEO Mark Kenney said, “We are experiencing a strong pipeline of accretive acquisition opportunities and expect to see solid growth in the quarters ahead. Importantly, the current low interest rate environment provides significant opportunities to acquire properties with strong cap rate spreads and the reduce interest costs on our refinancing initiatives.”
- Management adheres to a disciplined growth strategy. On the earnings call, Mr. Kenney said their deal success rate is only around 10 per cent or more, noting “We lose a significant number of the bids that we make because we have these really rigorous hurdles for accretion.” Mr. Kenney believes that management can sustain total purchases of between $500-million and $1-billion annually. In 2020, CAPREIT acquired 3,262 suites and sites at a total cost of $820-million.
- Distribution growth. CAPREIT maintains a conservative payout ratio.
- Tailwinds:
- Rent increases for 2022. Effective Jan. 1, 2022, rent increases of 1.2 per cent are permitted in Ontario, after being frozen in 2021 by the Ontario government.
- Rising occupancy supported by immigration and fewer reported COVID cases.
- Valuation: The REIT is not cheap but as the unit price retreats, the valuation is becoming more attractive.
- Potential risk to consider: 1) if there is a rapid acceleration in interest rates increases.
Quarterly earnings results
After the market closed on Aug. 12, CAPREIT reported solid second-quarter financial results. Normalized funds from operations (NFFO) per unit came in at 58 cents, up 4.3 per cent year-over-year, and in-line with the consensus estimate. Same property net operating income increased 2.7 per cent year-over-year. Overall occupancy was solid at 97 per cent. CAPREIT has a healthy balance sheet. Total debt to gross book value stood at 36.4 per cent at quarter-end. Year-to-date, CAPREIT has collected over 99 per cent of its rents due. The following trading day, the unit price declined $1.30 or 2 per cent.
On the earnings call, Mr. Kenney provided a positive outlook, “Looking ahead, we expect the balance of the year will show rising occupancies, accelerated growth and much improved operating performance as the pandemic eases and we return to more normal markets and operations.”
Distribution policy
Management is firmly committed to returning capital to its unitholders.
In August, CAPREIT announced a 5-per-cent increase to its monthly distribution, raising it to 12.083 cents per unit ($1.45 per unit yearly) from 11.5 cents per unit (or $1.38 per unit yearly). The new distribution equates to a current annualized yield of 2.5 per cent.
Prior to COVID, management announced a distribution increase in every calendar year between 2012 and 2019.
Management targets a long-term annual payout ratio of between 60 per cent and 70 per cent based on normalized funds from operations. Last quarter, the NFFO payout ratio stood at 60 per cent. For the first half of 2021, the NFFO payout ratio was 61 per cent.
Analysts’ recommendations
There are 13 analysts actively covering this REIT. Eleven have buy calls and two have neutral recommendations.
The firms providing recent research coverage on the company are: ARC Independent Research, BMO Nesbitt Burns, Canaccord Genuity, CIBC World Markets, Desjardins Securities, Echelon Wealth Partners, Industrial Alliance Securities, National Bank Financial, Raymond James, RBC Dominion Securities, Scotia Capital, TD Securities and Veritas Investment Research.
Revised recommendations
Last month, two analysts revised their target prices.
· TD’s Jonathan Kelcher raised his target price to $72 from $70.
· Veritas’ Howard Leung upgraded his recommendation to a “buy” from “sell,” and lifted his target price to $69 from $54.
In August, six analysts revised their target price – all higher.
Financial forecasts
The Street is currently forecasting funds from operations (FFO) per unit of $2.34 in 2021, up from $2.27 reported in 2020, rising to $2.48 in 2022. The consensus adjusted funds from operations (AFFO) per unit estimates are $1.95 in 2021 and $2.08 in 2022.
Earnings forecasts have been stable, relatively unchanged over the past few months.
Valuation
According to Bloomberg, the REIT is trading at a price-to-FFO multiple of 23.7 times the 2022 consensus estimate, below its peak of over 25 times, but above its 3-year average of 21.9 times. On a price-to-adjusted FFO basis, the REIT is trading at 28.3 times the 2022 consensus estimate.
The average one-year target price is $67.80, implying the unit price has 15 per cent upside potential over the next 12 months.
Target prices range from a low of $63.50 (from Scotiabank’s Mario Saric) to a high of $72 (from TD’s Jonathan Kelcher).
Individual target prices are: $63.50, two at $65, $66, $67.50, two at $68, two at $68.50, $69, $70, $70.50, and $72.
Insider transaction activity
Quarter-to-date, only one insider has reported trading activity in the public market.
On Sept. 14, chief financial officer Scott Cryer sold 8,819 units at a price per unit of $61.2927 with 905 units remaining in this specific account. Proceeds from the sale exceeded $540,000, not including trading fees.
Chart watch
Year-to-date, the unit price is up nearly 18 per cent. On Aug. 6, the unit price closed at a record high of $62.65.
In recent weeks, however, the unit price has come under pressure, falling five per cent over the past three weeks.
Given the recent slide in the unit price, the REIT is nearing oversold territory. The relative strength index (RSI) is at 36. Generally, an RSI reading at or below 30 reflects an oversold condition. While the selling pressure remains intact, the unit price may soon find technical support.
The unit price has major technical support between $55 and $56, near its 200-day moving average (at $56.12). Failing this, the next support level is around $50. On a recovery, the unit price has a ceiling of resistance between $60 and $62.50.