RBCA good looking report; their upside scenario target is $16.00 GLTA
September 26, 2014
Milestone Apartments REIT
Investing where America lives; Initiating coverage
with an Outperform rating
Our view: We are initiating coverage of Milestone Apartments REIT
("MST") with an Outperform rating and a $12.50 target. Benefiting
from favourable market exposure and an integrated platform with a
proven track record, the business has exceeded its Mar-13 IPO earnings
objectives. Against a backdrop of an appreciating US$ and a declining unit
price (listed in $C) the current 20% discount to NAV is too wide, in our view.
Key points:
• The largest TSX-listed REIT focused exclusively on the US multi-res
sector – With an equity market cap of $0.6B and assets exceeding $1.5B,
MST provides a unique means for Canadian investors to gain exposure
to US$-denominated “hard assets” offering a solid ~6% cash yield, and
what we see as inflation-protected growth potential over time.
• High growth markets; favourable trends – MST owns/operates 58
properties (~19,332 suites) across 12 markets, mostly located through
the Sun Belt. The REIT’s markets are expected to post cumulative
population growth of 9% over the next five years, well ahead of the
5% US average. The portfolio targets the mid-market renter (~60% of
the US renter pool), with suite offerings that are aimed at individuals
immigrating to the US and the “echo boomers”, whose lifestyle choices
are showing a greater propensity to rent versus prior cohorts.
• Integrated platform and proven track record; aligned management
– Over the better part of a decade prior to creating MST, senior
management, working together, delivered an annual average gross IRR
in excess of 30% on its multifamily investments. Strong performance
has continued with MST, which exceeded its IPO AFFO/unit forecast
by ~14%. Working collaboratively, the external asset manager and the
wholly owned property management arm offer MST the benefit of
vertical integration, providing expertise across the full spectrum of
real estate investment management disciplines. The advisor receives a
performance-based fee (based on AFFO/unit growth) and it owns ~10%
of MST's equity, thus providing alignment with unitholders.
• Internalized property management – MST’s internalized property
management platform employs 1,000 people overseeing ~35,000 suites
across the U.S. A top-50 US management company, the operations
contribute financially (the third-party business contributes ~3% of
annualized AFFO) and to the scale and intelligence of the business.
• Proprietary pipeline; strong external growth potential – MST has been
granted a ROFO on ~19,000 units which the asset manager owns or
manages through finite-life partnerships. Over the next few years, this
may provide opportunities for MST to acquire additional properties.
MST also expects that its extensive relationships in key US markets and
the sheer size of investment class ($103B in apartments traded in the US
last year) will create acquisition opportunities. Post the March 2013 IPO,
MST has acquired or agreed to acquire ~2,400 suites via six transactions,
valued at $290MM.