November 11, 2016
Milestone Apartments REIT
Strong, yet "in-line" Q3/16 results; Currency creates opportunity
Our view: Milestone Apartments REIT ("MST") posted strong, yet "in- line" Q3/16 results. Despite the NAV-dilutive impact of September's AMA "internalization", strong organic growth and a weaker C$/$US have continued to push MST's NAV/unit, in C$-terms, higher over the last number of months. This currency move has, in our view, created an opportunity. We reiterate our Outperform rating on the units and our $22 Price Target.
Key points:
• FFO/unit: $0.28, +7% from Q3/15’s $0.26 and in-line with our $0.28E (consensus was $0.29)
• Strong SP NOI growth: + 9.1%, driven by 6.0% SP AMR growth (+$52, to $917) and only a 1.2% increase in SP operating expenses
• IFRS BVPU: $14.90; -5% QoQ ($15.65) and +1% YoY ($14.81). The sequential decline was principally due to the REIT’s $106MM internalization on Sept-30 (see more inside)
DFW maintains momentum; early but convincing signs of slowing in Houston – Dallas-Fort Worth and Houston are MST’s largest markets (26%/19% of total suites). Maintaining the momentum from the past two years, DFW produced strong Q3/16 organic growth, as evidenced by SP AMR growth of +8.3% (to $872) and only modest occupancy erosion (-30bps YoY, to 95.4%). Houston produced far less buoyant results with Q3/16 SP AMR growth of 1.7% (to $949) and 120bps of occupancy erosion (to 93.8%). We’d been waiting signs of softening in Houston, and this may be the beginning. For context, since Q1/15, Houston YoY occupancy changes were +/-100bps, and AMR growth was routinely +3-7%.
Sunny ways: Acquires/agrees to acquire 1,735 sunbelt suites for $289MM – In Oct MST acquired the 275-suite Park 9 Apartment located in NW Atlanta for $47MM and it tied-up the six-property, 1,460-suite "Fogelman portfolio" for $242MM. We review the properties herein. The purchases are funded, as MST issued 10.4MM units priced at C$18.45, raising $144MM on Oct-28.
Currency creates opportunity – Over the past 3-4 months, the strengthening of US$ relative to C$ (+5%), coupled with our increased US $-denominated NAV/unit estimate have added more than C$1.50 to our NAV/unit. When coupled with a ~15% pullback in MST’s units from their August highs, the 11% discount to NAV is at its most attractive reading since March.
Estimates tweaked – Our 2016E-18E FFO/unit have been tweaked +$0.01- $0.02 each, to $1.11/$1.20/$1.25, offering a 3Y FFO/unit CAGR of 6%
$22 Price Target and Outperform rating reiterated