August 14, 2016
Milestone Apartments REIT
In-line Q2/16 results with strong organic growth; internalization re-rating
Our view: Milestone Apartments REIT ("MST") delivered "in-line" Q2/16 on strong operational results. The proposed asset manager internalization should be effected in the next 45 days. While it dilutes our NAV/unit estimate, we also believe the outcome will be an upward valuation re- rating of the units. We've increased our Price Target by $2, to $22, and reiterated our Outperform rating on MST's units.
Key points:
• FFO/unit: $0.278, +3% YoY vs. $0.272 and RBCCM/consensus at $0.29 • Strong SP NOI growth: Q2/16 organic growth was a strong 11.1%, including SP NOI margin expansion of +260 bps, to 58.3%. Drivers included: 1) 6.5% SP AMR growth (+$55, to $900); 2) a 0.4% decline in
SP operating expenses; and, 3) steady occupancy (-10bps, to 95.2%)
• Significant G&A expense growth: G&A and trust expenses charged to FFO increased by 49% to $5.5MM. ~$0.9MM ($0.01/unit) of the increase related to higher deferred units expense (both amortized and m-t-m) and which may have been much of the difference between
Q2/16A FFO and consensus
• IFRS BVPU: $15.65; +2% QoQ ($15.32) and +12% YoY ($13.97).
Additional Q2 highlights – With 55% of total suites in the Lone Star State, TX is always a focus. Regionally, DFW and Houston performed well with SP-AMR growth of +8.3% (to $851) and +3.1% (to $944), respectively. SP-occupancy remained high and generally stable with DFW at 95.7% (-10bps YoY) and Houston at 94.6% (no change YoY). In light of robust multi-res construction and weaker economic conditions in Houston, we expect AMR and SPNOI growth to slow materially into 2017, but we are not penciling-in negative "comps". Discovery of a ground water issue through due diligence caused MST to drop plans to acquire Advenir at Mission Ranch, a $34MM deal (295 suites) in DFW.
AMA internalization – As initially proposed in July (see our note entitled “$106.5MM asset manager internalization proposal”), the proposed Asset Management Agreement (“AMA”) internalization should occur at the end of Q3. We expect the REIT to mail its information circular this coming week and to provide a unitholder meeting date for mid- to late Sept. A key drawback of the current “external” model has been rapidly escalating corporate overhead. The internalization offers ~$0.05 (~5%) annualized AFFO/unit accretion and it should allow for better flow-through of SPNOI growth and acquisition accretion, but only if future growth of ~$3MM of additional salaries and overhead (post internalization) remains contained.
Estimates tweaked – Our 2016E-17E FFO/unit have been tweaked -$0.01/ +$0.01, to $1.10/$1.18. Our inaugural 2018E is $1.23 (4% growth).
Target increased $2, to $22; Outperform rating reiterated.