Minto Apartment REIT
(MI.UN-T) C$15.24
Q2 Results in Line; SPNOI +9.9% As Urban Fundamentals Rebound
Event
Q2/22 results and forecast update. Conference call at 9:00 a.m. ET (1-888-390-0546).
Impact: NEUTRAL
FFO/unit (f.d.) of $0.210 was +4% versus Q2/21, and largely in line with our estimate/ consensus of $0.22. AFFO/unit (our calculation) of $0.181, compared with our $0.19 estimate. The variance was largely on interest expense, owing to floating-rate debt assumed on its Q2/22 acquisitions (Exhibit 1).
Q2/22 demonstrated an acceleration of the trends observed in Q1/22, including 9.9% SPNOI (adjusted for $0.6mm tax refund in Q2/21), and a modest uptick in same-property occupancy to 94.8% (+60bps q/q). The mark-to-market edged higher to 10.9%, from 10.7% in Q1/22 (management's estimate of market rents +2.3% q/q). On the leasing front, new leases (667) were completed at +12.1%, the largest gain achieved since Q1/20. While we remain cautious around the impact of a potential economic slowdown, we believe that improving demand, coupled with limited new supply creates a favourable backdrop.
Capital Recycling. The REIT has listed its three-building Edmonton portfolio, which aggregates 254 suites. The average age is ~57 years. Proforma the REIT's Alberta portfolio would consist of just its Calgary assets and represent ~10% of suites at MI's interest, down from 14% previously. We expect Minto to recycle any proceeds into developments, convertible development loans, the acquisition of Fifth+Bank, suite repositionings and its NCIB program.
Forecast. Our 2022/23 AFFO/unit forecast declined ~6% to reflect more modest revenue growth assumptions, as well as higher interest expense and the potential Edmonton portfolio disposition. We are also introducing our 2024 forecast. We expect AFFO/unit growth to be flat in 2022, before accelerating to +8%/7% in 2023/24. Our $24.80 NAV/unit estimate declined 1%.
TD Investment Conclusion
We believe that Minto's portfolio is well-positioned to benefit from a recovery in market fundamentals, particularly given its urban focus. Currently the REIT trades at a 39% discount to NAV, one of the widest discounts in its operating history (average: 12% discount). On P/FTM AFFO Minto is trading at 20.6x, also near historic lows (average: 25.6x). We view the current valuation as excessively cheap. We are maintaining our BUY rating and $22.00 target price.