Raymond JamesRaymond James analyst Ken Avalos initiated coverage of Milestone Apartments Real Estate Investment Trust(MST.UN-T) with an "outperform" rating, emphasizing his expectation for strong same property net operating income (SPNOI) and funds from operations (FFO) growth.
"Milestone targets multifamily properties in Sunbelt cities in the Southeast and Southwestern U.S.," he said. "In contrast to many of its public peers in the U.S. and Canada (that invest in the U.S.), Milestone is focused on what we would consider high quality B properties, middle market/workforce oriented housing, and less on newer vintage, Class A properties. The company generally tries to acquire two to four storey, lower density properties, with attractive amenity packages and strong locations near transit corridors or workforce centers. Geographically the focus is on cities/Metropolitan Statistical Areas (MSA) with strong population and employment growth trends. Going-in yields on the property profile Milestone targets generally tend to be modestly higher than A and/or mid-high rise properties, and provide steady rental rate growth. We think the company can acquire between 5.5 per cent and 7 per cent depending on numerous factors, and will look to add 50 to 100 basis points of yield through its management and operational focus."
Touting its "attractive" long-term fundamentals, Mr. Avalos added: "We think Class B apartment fundamentals in the company's focus markets will remain relatively strong. Rental rate growth in the REIT's workforce oriented portfolio should continue to be in low to mid-single digits in the intermediate-term. Admittedly, supply concerns continue to weigh on investors' minds, and rents have slowed nationally, but most of this is Class A/luxury product and is less relevant to Milestone's value-oriented product.
He said Milestone can deliver SPNOI growth of 3-5 per cent through 2017, based largely on mid-single digit rental growth across its portfolio and "manageable" expense growth. Those "solid" results should translate into single-digit core FFO growth, he added.
"With the impact of new acquisitions ($50-million per quarter), we expect Milestone to deliver 6-per-cent FFO growth in 2016 and 8 per cent in 2017," said Mr. Avalos.
"Generally speaking, we don't expect sizable changes in portfolio performance given its mature nature and the steady macro outlook within the company's markets. Given job/population growth expectations in Milestone's top 5 markets, we expect rental rate growth to range between 3-5 per cent across the company's portfolio, with Houston the key exception. Though Dallas should remain solid, we do expect marginal slowing from strong current rental rate growth levels. Nashville, Atlanta, the company's Florida markets and San Antonio should continue to generate 3% plus rental rate growth within the Milestone portfolio. On the operating expense side, we don't expect dramatic changes, to the up or downside. Property taxes continue to be the primary source of pressure on the operating expense line, but the company will continue to mitigate that as best as possible by challenging assessments or any appeal mechanisms."
He set a price target for the REIT of $21 per unit. Consensus is $23.09.
"The senior management team has been involved in the acquisition, operation and disposition of apartment assets for over 20 years," he said. "The company has a track record of generating strong returns for investors. Since going public the REIT has delivered 25-per-cent-plus annualized total return to shareholders (versus the TSX Capped REIT Index's 11-per-cent total return)."