RBC Their upside scenario target is $22.00. GLTA
November 6, 2015
Milestone Apartments REIT
Solid Q3/15 results; Profiling a “Landmark”
acquisition
Our view:
Milestone Apartment REIT ("MST") put up (yet another) quarter
of solid performance, with Q3/15 FFO/unit meeting forecast. Strong
organic growth (+8%) continues to propel outsized NAV growth, even after
successive rounds of dilutive treasury offerings. We believe there remain
several drivers behind MST's total return story. We've increased our price
target by $2 to $18 and reiterate our Outperform rating
Key points:
•
Q3/15 statistical highlights –
1)
FFO/unit of $0.263 (+7% YoY and in line
(-1%) with our $0.265E);
2)
8.0% same-property NOI growth (on 6.3%
AMR growth and essentially flat occupancy); and,
3)
$14.81/unit IFRS
NAV, +$2.71 (+22%) YoY and +$0.84 (+6%) QoQ.
•
Shift to US$-pay and boost dist'n –
MST’s Board has approved a change
to a US$-denominated distribution, effective Jan-16.
C$
payments will
be available, via election. The new US$ pay rate of $0.55/unit annualized
is a sizable 11% lift over the current
C$
0.65. The shift to US-pay
simplifies MST’s payout policy and completely aligns distributions with
the business’ underlying functional currency. The new rate equates to a
low 55% of our 2016E AFFO, thus providing for strong (>$30MM) annual
AFFO retention and good “headroom” for future increases.
•
Agrees to acquire $502MM Landmark portfolio and forms potentially
valuable relationship –
On Oct-22 MST announced that it had formed
a JV with Starwood Capital Group (“Starwood”) to acquire Landmark
Apartment Trust (“LAT”) a non-traded US REIT. The $1.9B deal will
see MST and Starwood break-up LAT, with MST taking 15 properties
(4,172 units) for $502MM. Overall, we believe the acquisition to be
consistent with MST’s goal of continuously high-grading its portfolio in
order to optimize cash flow performance and build long term unitholder
value. The deal also establishes a potentially valuable relationship
with Starwood, a significant and opportunistic investor within the U.S.
multifamily sector.
Herein, we provide an extensive backgrounder and
review of this pending transaction
.
•
Closing in on a $900MM float value; A strong candidate for 2016 Index
inclusion –
MST has funded a sizable part of the equity component
for the LAT deal through the issuance of 9.6MM subscription receipts.
When converted to units in Q1/16, MST’s float will rise to 58MM units.
At current pricing, MST’s $0.9B float value will be nudging towards the~
$1B threshold for S&P/TSX Composite inclusion.
•
Target increased to $18; Outperform rating reiterated –
A true-up in
our
C$
/US$ exchange rate model (the US$ gained ~7% versus
C$
in Q3
alone), upward revaluations in the property portfolio (primarily driven
by strong organic NOI growth), offset partially by dilution stemming
from October’s sub-receipt offering are behind a $2 increase in our price
target (to $18). Our price target equates to a ~10% discount to our
NAVPU estimate one-year hence (unchanged) and implies ~13-14x our
2017E AFFO/unit