Desjardins Securities The probability of a "more attractive" offer emerging to compete with Starwood Capital Group for the acquisition of Milestone Apartment Real Estate Investment Trust (MST.UN-T) is low, said Desjardins Securities analyst Michael Markidis."¨"¨
On Jan. 19, Starwood, a Connecticut-based private investment firm, agreed to purchase Milestone for $16.15 (U.S.) per unit, a premium of 9 per cent on the previous day's close and a 16-per-cent premium to its 30-day volume weighted average price."¨"¨
Despite saying it is "tough not to question the timing/optics" of the deal, Mr. Markidis expects it to be succeed, and, accordingly, he downgraded his rating for Dallas-based Milestone to "hold" from "buy."
"¨"¨"Those who have remained invested since MST's IPO in March 2013 have made a lot of money, as the stock is up by more than 100 per cent from $10 (Canadian)," he said. "Nevertheless, we can't help but question the timing of this deal, especially given that only several months have passed since $106-million was ponied up to internalize asset management. MST's relationship with Starwood extends back to 2015 when the two partnered to acquire Landmark Apartment Trust. Hypothetically speaking, Starwood was not prohibited from making an offer to acquire MST prior to the internalization. The reality is, however, that in doing so Starwood would have had to negotiate directly with The Milestone Group to terminate the contract. Under this scenario, we surmise the bid-ask spread would have been quite large and that Starwood might not have been willing to pay the same amount that MST's board and, ultimately, unitholders agreed to.""¨"¨
Mr. Markidis lowered his target price for Milestone to $21.50 from $23. The analyst consensus price target is $22.65., according to Thomson Reuters.
"¨"¨"We frequently used the tagline 'the best GARP story in our coverage universe' to communicate our MST investment thesis to investors," he said. "While same-property [net operating income] growth will inevitably slow from the scorching 5-12-per-cent range posted during the past seven quarters, apartment fundamentals in most of MST's major markets remain quite healthy, in our view. Moreover, MST's payout ratio (50 per cent of our 2017 funds from operations estimate), conservative balance sheet (net debt/EBITDA of 8.3 times) and capex intensity stack up very well compared with large Canadian multi-family peers. For these reasons, we are strong believers in the REIT's NAV and distribution growth potential. MST closed at $20.43 immediately prior to the July 26 internalization announcement. When viewed in isolation, Starwood's proposed acquisition price, which is only 5 per cent higher, does not evoke much in the way of excitement. However, it does look significantly better when viewed in the context of the broader listed property market, as the S&P/TSX Capped REIT Index has declined by 8 per cent on a price-only basis during this timeframe. "¨
"As the old saying goes, a bird in the hand is worth more than two in the bush. On the flip side, we can't help but wonder if negotiating a friendly transaction in this instance was somewhat premature, particularly since one might argue that several of the benefits of the asset management internalization, such as anticipated earnings accretion and the potential for a broader investor base, may not have fully percolated within the REIT's cost of equity capital."