May 10, 2016
Milestone Apartments REIT
Operating trends remain strong; price target increased $1 to $20
Our view: Once again with the Q1/16 results, Milestone Apartments REIT ("MST") has delivered strong operating performance. While the year-to- date run in $CAD has been a headwind to the intrinsic value of the units in $CAD, underlying operations, earnings and potential value growth in US$- terms still warrant a modest (+$1) increase in our target price, to $20. We reiterate our Outperform rating on MST's units.
Key points:
• FFO/unit: $0.254, -4% YoY, and 6% shy of our $0.270E. Results were clipped by >$0.02/unit of "noise" (more below)
• SP-NOI growth: +7.9% YoY, driven by 6.4% AMR growth (to $883) and -20bps in occupancy (to 95.8%). The same-property pool was ~74% of Q1/16 NOI
• IFRS NAV: $15.32/unit, -$0.18 (-1%) QoQ and +$2.07 (+16%) YoY
Strong Q1 operating results – MST posted a strong operational start to 2016. The Q1/16 NOI margin of 57.1% was +215 bps over Q1/15's 54.9%, due to the strong same-property metrics noted. The NOI margin on acquired properties was almost identical to the overall portfolio and thus had no impact. Seasonally, Q1 results incur low suite turns (and hence, low R&M) and due to the portfolio’s southern geography, seasonally low utilities costs. We expect both R&M and utilities expenses to rise in subsequent quarters, thus trimming the NOI margin relative to Q1. Regionally, DFW and Houston (MST’s largest markets) performed well with SP-AMR growth of +4.7% (to $831) and +7.5% (to $939), respectively. SP-occupancy was firm despite strong AMR growth, with DFW at 96.7% (+10bps YoY) and Houston at 94.6% (-50bps YoY).
"Landmark" transaction and other items clip $1.8MM ($0.024/unit) from Q1/16 FFO – Depressing the Q1/16 results were three items related to the Landmark portfolio transaction and unusually high mark-to-market compensation expense related to strong unit price appreciation (+10% in Q1/16; but, +17% in US$-terms). As such, we pencil-up Q1/16 normalized FFO at $0.278/unit, +5% YoY (reconciliation in Exhibit 2).
$502MM Landmark portfolio and other acquisition/non-core dispositions – MST closed upon its $502MM Landmark portfolio acquisition (4,172 units) on Jan-27. Management notes the assets are by-and-large performing as expected and we refer readers to our Nov-6 report entitled “Solid Q3/15 results; Profiling a “Landmark” acquisition” for extensive commentary on the deal. As expected, through Jan & Feb, MST sold four properties in Atlanta, Houston and DFW (1,534 units) for $111MM (Exhibit 5) It has also contracted to acquire a 295-suite property in DFW for $34MM (Exhibit 4) for which we expect a Jul-31 closing.
Target increased $1, to $20; Outperform rating reiterated