Clearly this is one of the best REITs out there. RBC's upside scenario target is also raised to $20.00. GLTA
August 11, 2015
Milestone Apartments REIT
Providing good mileage: In-line Q2/15 results on
solid operating metrics
Our view: Milestone Apartment REIT ("MST") put up yet another quarter
of solid performance, with Q2/15 FFO/unit meeting forecast. Even after
issuing equity below NAV in May, upward revisions to our NOI forecasts
have allowed NAV/unit to hold steady. And, US$ strength keeps boosting
the NAV/unit, as converted to $CAD. Hence, we've increased our target +
$1 to $16 and reiterated our Outperform rating on the units.
Key points:
• FFO/share: $0.273, +9% YoY, and in line with our $0.265E
• SP-NOI growth: +5.2% YoY, driven by 5.7% AMR growth (to $794) and
+10bps in occupancy (to 95.1%)
• IFRS NAV: $13.97/unit, +$2.69 (+24%) YoY and +$0.72 (+5%) QoQ
Another Q with solid operating and financial metrics – As summarized
above, operating and financial metrics were sound. Even in Houston, AMR
growth was a solid 6%. Versus Q1/15, $44MM of fair value gains were
booked in the quarter, due to a more robust NOI outlook and stable cap
rates (6.4% average). The upward marks, plus May's equity raise, reduced
D/GBV to 48% from 52% at Q1/15 and 53% one year ago.
Dollar math matters – MST’s units are listed on the TSX and trade in $C. In
contrast, the entire underlying business is in the southern US, and hence
its earnings and intrinsic value are all US$-based. At the Mar-2013 IPO
date, the $C/US$ FX rate was essentially at parity. Today it is $0.76, which
means the $US has appreciated by 31% versus $C over less than two-anda-
half years. This matters, as even prior to the intervening period of NOI
growth and cap rate compression, FX changes alone have driven a 31%
increase in MST’s NAV/unit and AFFO/unit, in $C term. Currency is a major
factor in the REIT’s 2015E AFFO payout ratio of only 54% and the NAV/unit
of $C17.50 (placing the units at 20% below NAV).
Potential catalysts by year-end – Coincident with the March 2013 IPO,
MST placed $C/$US currency hedges for the distributions on 49.7MM
units. These hedges represent 75% of the REIT’s total distribution
obligation today and they expire by the end of this year. As this occurs, we
believe the REIT will: 1) increase its $C-denominated distribution per unit
(a move which is well supported by the low payout ratio); and/or, 2) offer
unitholder the option of receiving their distributions directly in a US$-pay
format. Each of these moves, in our view, could be catalysts that bring the
business to the attention of (a broader set of) investors.
Price target increased to +$1, to $16 – Our 2015E-16E FFO/unit are
unchanged at $1.07/$1.11. Our inaugural 2017E is $1.14. We’ve increased
our target price to $16, which is congruent with recent FX moves and the
impact on our NAV/unit (and one-year forward NAV/unit) estimates. We
reiterate our Outperform rating on MST’s units.