Minto Apartment Real Estate Investment Trust T.MI.UN

Scotia comments after conference

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Slowly Moving Up the Pecking Order

OUR TAKE: Slight Positive. We maintain our SP rating but we’re more constructive with an intact $18.50 TP. Our 2023E and 2024E FFOPU rise 3%-5% (Exhibits 1 and 2) following the return of solid y/y FFOPU growth for the first time in a year that should continue especially for 3 quarters (Exhibit 3). Our revised 2024E and new 2025E FFOPU both sit ~4% above consensus, in contrast to our below-consensus FFOPU for most of our MI coverage history (see link for 2020 Initiation). On an absolute basis, it has been a while since we’ve been this constructive on Minto, which we identified as a top 3 or 4 pick for a possible rating upgrade in our Primaris Initiation along with BEI, KMP, and PMZ; we’re reviewing our universe heading into 2024. To the extent MI delivers on the ~10% 2024E FFOPU growth it anticipates (we’re at 9%; Exhibit 4), we think investors can win in one of two ways. First, we think the 10% should make its way into the unit price (and then some) given MI is the 2nd cheapest Apartment REIT on P/2024E AFFO (Exhibit 5). To the extent the unit price doesn’t respond, we think probability of privatization moves up (there would be demand, in our view). Bottom-line, we’re good with buying here (i.e., below $15/un).

KEY POINTS

What’s changed? Our cap rate is +14bp to 4.3% (vs. CAR, IIP, and BEI at 4.5%, 4.4% and 5.15%). Our target multiple falls 3.0x to 21.5x, representing a 1.8x discount to the above peers vs. a historical 1x average premium to them since we launched in 2018. We think the slight discount makes sense in light of completed RPTs last year and slightly higher financial leverage (Exhibit 8). That said, coming back to our comment in the “Our Take”, improved FFOPU growth and increased investor confidence on capital allocation should drive some relative multiple expansion (which is not in our current forecast). Our 2024E FFOPU is +$0.04 primarily on carrying forward the lower Q3 interest expense (Exhibit 21). We’re also one quarter closer to a meaningful acceleration in expected FFOPU growth as easier y/y comps on interest expense emerge.

Call highlights. Something that just can’t seem to fade into the sunset for MI: Furnished Suites (only 2% of suites but 6% of Q3 revenue) was down 17% y/y, impacted by the Hollywood Writer and Actor Strikes (ended in October and November, respectively); should provide some torque to 2024 earnings but Q4 should be slow. MI expects to maintain ~10% floating rate debt exposure through mid-2024. Total estimated equity required for purchasing Vancouver assets in the CDL program = ~$30M, which MI could fund via asset sales. Operationally, Montreal has been slower and it may take until Spring 2024 to see real gains.New 2025 estimates reflect some operational moderation and lower CDL interest income. Our new 2025E FFOPU and AFFOPU of $1.00 and $0.86 = 7.4% and 7.1% y/y growth (vs. 8.9% and 9.4% in 2024E). Exhibit 7 compares MI and apartment peer 2025E growth. Relative to peers, MI has a bit less debt maturing through 2025 (29% vs. 32% avg.) at a slightly higher rate (4.5% vs. 3.5%; Exhibit 8). That said, our forecast includes ~$0.04 (~4%) of FFOPU erosion from acquiring 3 CDL loan assets late in 2024 and early 2025 (2 in Vancouver; one in Ottawa) given we expect the NOI yield to lag the current loan interest rate. Note, we do not forecast low-cap rate dispositions nor substantial reduction in floating rate debt through 2024 as a partial offset (which could limit said erosion). Exhibit 9 = our Key Estimate Summary. Our 2025E SPNOI 5.3% lags peer avg. (Exhibit 7) as we expect a bit more occupancy pressure (-50bp y/y) and rent growth deceleration (to ~5%) for MI’s higher-rent (and less rent-controlled) portfolio. Our 2025E rent assumptions include 22% tenant turnover, 10% and 3% new and renewal lease spreads, respectively. Our 2025E SSREV and SSEXP = 4.9% and 4.2%, respectively, driving ~30bp of margin expansion.