GREY:MSTUF - Post by User
Post by
retiredcfon Dec 20, 2016 8:05am
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Post# 25623266
RBC
RBCAre also joining the party. GLTA
December 19, 2016
Milestone Apartments REIT Re-aligning the ranks; Rating shifted to Top Pick
Our view: We are shifting our rating on Milestone Apartments REIT's (“MST”) units to Top Pick from Outperform previously. We believe the current unit price offers a very timely entry point into a business with strong fundamentals. The implied upside to our $22 price target (unchanged) plus a mid-4% cash yield offers what we see as highly attractive total return potential.
Key points:
Achieving a number of 2016 milestones – We believe it’s been a really good year for the REIT. Through 2016 the REIT completed the following milestones: 1) integrating the $502MM “Landmark” portfolio, which was acquired in Q1/16 as part of a larger transaction with Starwood Capital Group; 2) arranging other acquisitions totaling $289MM; 3) committing $50MM to Milestone Real Estate Investors IV, LP, a related party-managed real estate PE fund focused on acquiring properties which are suitable for renovation, repositioning and operational turnaround; 4) internalizing the management of the REIT via the $104.5MM acquisition of TMG Partners LP, thus eliminating all future fees to the management-controlled external manager and more directly aligning senior executives will all unitholders; and, 5) posting strong operating and financial results (Q3/16 AFFO/unit +9% with +9% SPNOI; 9M/16 AFFO/unit +6% also with +9% SPNOI growth).
Units have lagged since the internalization announcement – In late July, MST announced its proposal to buy-out its external manager. This was a pricey deal. But one that we believe should prove favourable for unitholders over time. The units initially reacted positively and, when the “internalization” transaction was put to a unitholder vote in September, it was approved by the vast majority of votes cast. What is interesting to us is that the units (-15% in price; -14% in total return) have underperformed the S&P/TSX Capped REIT Index (-10% in price; -8% in total return) since Jul-31, thus pushing the units to an 11% discount to NAV. We think this creates an opportunity for investors.
Organic growth potential and low AFFO payout should drive better than average NAV/unit growth – Since its Q1/13 IPO MST has posted strong organic growth – averaging 8% over 10 quarters of same-property stats. To be clear, we don’t think this can be maintained. Rather, we see 2-3% organic growth as a realistic 2017 outlook in light of a potential drag from Houston (19% of suites). Yet, with the external management contract gone, organic growth should translate more favourably to FFO/unit and AFFO/unit growth, which we pencil-in at 6-7% annualized over the next two years. Moreover, MST’s better than average cash retention (~55% 2017E AFFO payout ratio) also helps drive better than average NAV/unit growth potential and offers "headroom" for future distribution increases.
$22 Price Target maintained; rating moved to Top Pick (Outperform previously) on relative return expectations