More AnalysisI like the $100 million reverse break fee so I don't think Starwood is going anywhere. The targets are pretty much assuming that the C$ stays where it is now which might be a bit optimistic unless oil continues to rise or Trump lays to rest this potential border tax. GLTA
Inside the Market's roundup of some of today's key analyst actions
Expecting its $2.85-billion (U.S.) acquisition by private investment firm Starwood Capital Group to close, Raymond James analyst Ken Avalos downgraded his rating for Milestone Apartments Real Estate Investment Trust(MST.UN-T).
On Thursday, the REIT announced Starwood will pay $16.15 (U.S.) in cash per Milestone Apartments unit. That equated equates to about $21.47 (Canadian), which represents a premium of 9.2 percent to the unit's close of $19.66 on Wednesday.
"We think the deal will be approved by unitholders and closes," said Mr. Avalos. "Economically, management feels the deal post-capex reserve is really closer to the mid 5's per cent, in line with Real Capital Analytics estimate of 5.6 per cent on average for U.S. B class apartments."
Accordingly, Mr. Avalos lowered his rating to "market perform" from "strong buy."
"The offer equates to a 5.8-per-cent cap rate (versus a 6.1-per-cent implied cap rate at Wednesday's close and a 6.3-per-cent International Financial Reporting Standard cap rate) and implies an average price per apartment unit of $120,000 U.S. (versus a book value of $110,000 per unit)," said Mr. Avalos. "We would note that of the U.S. multi-family takeouts since mid-2013, this is the third-largest premium paid (on a 30-day volume weighted average price basis - 16 per cent). There is no change of control premium but the 5.3 million in Class B units that management received as part of the September 2016 internalization will all vest."
"There is a $53-million U.S. break fee payable to Starwood should Milestone accept a superior proposal. There is also a $100-million reverse break fee payable to Milestone should Starwood terminate the transaction. The offer has the full support of management, which owns 12 per cent of the REIT. The break fee would require a competing bidder to put at least 60 cents U.S. on top of the current bid just to get even, and more to sweeten the deal, which we think would be very unlikely."
Mr. Avalos had a target price of $21 for Milestone. The analyst consensus price target is $22.96, according to Thomson Reuters.
"At the current market price (which is slightly above the takeout price, we think due to the distributions to be received), Milestone trades at a 14-per-cent premium to our net asset value of $14.30 U.S. ($19 Canadian). With minimal upside from current levels, we are dropping Milestone to a Market Perform."
Elsewhere, several other analysts downgraded the stock in the wake of Thursday's announcement, including:
- CIBC World Markets' Dean Wilkinson to "neutral" from "outperform" with a target of $22 (down from $22.50).
- Industrial Alliance Securities' Brad Sturges to "hold" from "strong buy" with a target of $22 (from $23.75).
- Laurentian Bank Securities' Ewa Kiwa to "hold" from "buy" with a target of $21.50 (from $21).