Our view: The outlook for Minto Apartment REIT’s (“MI”) portfolio continues to improve as life gradually returns to its urban markets. While not the hockey stick reopening that some were expecting, progress is tracking slightly ahead of our forecast. Looking ahead, we expect occupancy gains over the winter months to remain gradual. That said, we have full confidence that the recovery remains well under way. Importantly, robust private market demand continues to underpin further NAVPU growth for MI’s high quality portfolio. We reiterate our Outperform rating on MI’s units and increase our price target by $1 to $29.
Key points:
In-line Q3; 4% distribution hike signals confidence in the recovery. As discussed herein, FFOPU of $0.21 declined 6% YoY and was in line with our $0.21E. Thematically, new leasing spreads of 4% showed gradual improvement from the low-single-digit range June/July to the mid-single- digit range by September. Looking ahead, we continue to see a 4% decline in SP-NOI for unfurnished suites in 2021 (vs. -5% YTD), with a high-single- digit rebound in 2022 followed by mid-single-digit growth in 2023.
Recovery progressing slightly ahead of our expectations. While average occupancy 92.9% and $1,651 in Q3 were in line with our 93.1% and $1,650 forecast, we’re encouraged by MI’s ending occupancy of 94.8%—reflecting a late-quarter leasing push. This figure was ahead of our 93.3% estimate and on par with our Q1/22E. While we expect recent leasing momentum to be better reflected in Q4 SP-NOI growth, we also remain cognizant of seasonal trends and temper our expectations for further near-term progress.
MI is focused on four key areas: 1) driving organic growth through its 7% mark-to-market opportunity, which is expected to increase as demand strengthens further; 2) creating value through suite repositionings, particularly as turnover remains elevated; 3) exploring attractive acquisition opportunities, such as Le Hill-Park (profiled herein); and, 4) capitalizing on MI’s relationship with the Minto Group, with potential vend- in acquisition and development opportunities in 2022.
Tweaking our FFOPU forecast. Our 2021–23E FFOPU decline by $0.01–0.02 (1–2%) to $0.79, $0.94, and $1.03 on deleveraging related to MI’s Oct-2021 offering. This reflects YoY growth of -7%, +19% (driven by furnished suites), and +10%, for a 2019A–23E CAGR of 5% vs. our coverage at 2%.
Robust private market demand underpins rising NAVPU. Post Q3, our NAVPU increases by $0.50 to $24.50, with our 1Y forward NAVPU reflecting 8% growth to $26.50 (previously $25.75). Upward revisions were driven by a ~10 bps decline in our cap rate to 3.6%, mirroring compression in MI’s markets. Our price target remains based on a 10% forward NAV premium, in line with the 2019 average of 9%. In the near term, however, we think MI’s 8% discount to NAV may persist, pending better visibility on a full economic reopening—likely in the spring/summer of 2022.