March 4, 2016
Milestone Apartments REIT
Delivering strong results: Price target +$1 to $19; Outperform rating reiterated
Our view: Milestone Apartments REIT ("MST") continues to deliver strong operating performance, which is driving NAV/unit and solidifying the prospects for FFO, AFFO and dist'n per unit growth. We have increased our target by $1 to $19 and reiterated our Outperform rating on MST's units.
Key points:
Temporary dilution hits FFO/unit – Q4/15 FFO/unit of $0.26, was +1% from Q4/14’s $0.25 and in-line with our $0.26E. The 9.6MM sub-receipt offering on Oct-30 clipped Q4/15 by ~$0.025. X-ing out the transitory dilution on idle capital, Q4/15 FFO/unit would have been $0.28, +11% YoY.
Cranking the rents, with no appreciable hit to occupancy – Q4/15 SP AMR growth was a solid +6.3% (to $829 from $780 at Q4/14). This, in part, drove a sizable 270bps improvement in NOI margin to 55.3% and SP NOI growth of 12.2%. Q4/15 SP occupancy of 95.0% remained stable, -30bps YoY.
$502MM Landmark portfolio acquisition & non-core dispositions – As expected, MST closed upon its $502MM Landmark portfolio acquisition (4,172 units) on Jan-27. We refer readers to our Nov-6 report entitled “Solid Q3/15 results; Profiling a “Landmark” acquisition” for extensive commentary on the deal. Also through Jan & Feb, MST sold four properties in Atlanta, Houston and DFW (1,534 units) for $111MM, in line with the $107MM expected value articulated in Oct.
In-fill development project – In Q4/15, MST started a $6.5MM development of 60 new units at its Harbor Creek property in Cherokee County, just north of Atlanta. Harbor Creek was built in two phases in 2003 and 2007. Consisting of 316, predominantly 1- and- 2 bedroom units, MST acquired Harbor Creek in May-14 for $28MM (6.4% cap rate). The project should be completed by Q3/16 and the pro-forma dev't yield is 8.5%.
4.5% yield from an industry-leading (low) payout – MST’s yield is now 100bps below the average of the other five multi-res REITs under our coverage. Notably however, this yield is derived from a ~55% AFFO payout (the peer average is ~76%) which provides material annual AFFO retention (>$30MM) and good “headroom” for future increases.
~$950MM float: A strong candidate for 2016 Index inclusion – The conversion of 9.6MM subscription receipts in Jan has increased MST’s float to 58MM units having a total value of ~$950MM. We continue to see the units as a strong candidate for TSX Index inclusion this year.
Target increased to $19; Outperform rating reiterated – On the back of strong Q4/15 results and modest FX adjustments since our November mark, our $15 NAV/unit estimate is translating to C$20. Our $19 price target (+$1) continues to be derived from a ~10% discount to our NAVPU estimate one-year hence, and implies ~13-14x our 2017E AFFO/unit.