CIBC commentsMINTO APARTMENT REAL ESTATE INVESTMENT TRUST To Every Season Churn, Churn, Churn
Our Conclusion MI printed a small miss for Q1/22, citing softened occupancy due to the seasonality of the leasing cycle, increased utility, insurance and gas costs and the trailing amortization of promotions offered throughout the pandemic.
Currently, MI units trade at an ~18% discount to our NAV estimate, which compares to the “Ontario-centric” residential peers trading at a ~23% discount. Supported by increasing gain-to-lease potential in excess of 10%, we believe the REIT’s growth outlook through our forecast largely mirrors that of the peer group. That said, MI does own a portfolio of generally newer assets that may appear to a broader range of potential tenants.
We are, perhaps conservatively, taking up our forward cap rate assumption 25 bps to 4% given the rising cost of borrowing and the general rate environment.
We are also rolling our NOI to 2023E, adjusting our forecast to account for near term margin pressure, partially offset by the growing mark-to-market opportunity.
Accordingly, we are lowering our price target to $24.50 (from $26.50), which is based on an unchanged premium to our $23.00 NAV (previously $25.00). Our applied premium is roughly commensurate with the REITs realized mark-to-market gains.
Key Points
Earnings Results: Q1/22 FFO was $0.19/unit, below our estimate and similar consensus of $0.21. MI recorded a 1.4% increase to the REIT’s IFRS NAV as compared to December 31, 2021, primarily driven by an increase in forecasted NOI for the REIT’s Toronto and Ottawa properties.
Leasing Update: Minto entered into 401 new leases during the quarter (a 10% decrease from last quarter and a 15% decrease compared to Q1/21), while continuing to reduce its use of promotions and discounts, suggesting that a continued uptick in occupancy is likely through 2022 as rental markets continue to recover from the pandemic and rising interest rates force wouldbe buyers into the rental market. Further illustrating a sustained recovery in the Canadian economy from the COVID-19 pandemic, the REIT realized an average gain to lease of 10.8%, the highest achieved by the REIT in the past two years, which compares to 7.6% in Q1/21 and 7.2% in Q4/21.
Cap Rates, Where Are They Going?
The rising cost of debt remains a theme on many earnings calls this quarter. In Q1/21 the CMHC five-year estimated interest rate was 1.8%, compared to our estimated cap rate at the time of 4%. As of Q1/22 the same CMHC money rate is now 3.5%: a 170 bps increase in the cost of borrowing, resulting in a 50 bps spread on our current cap rate. Although the increased cost of borrowing has not (yet) trickled down to the transaction level, we believe it would be remiss of us not to at least consider whether the current spread is enough to maintain historically low levels on both an absolute and spread basis.
Price Target
(Base Case): C$24.50 Our 12- to 18-month price target is $24.50/unit, which is based on a modest premium to our $23.00/unit NAV.
Upside Scenario: C$30.00 We assume that NOI is 2.5% above our base case expectations, cap rates are 25 bps lower, and units trade at a 15% premium to NAV.
Downside Scenario: C$15.00 We assume that NOI is 2.5% below our base case expectations, cap rates are 25 bps higher, and units trade at a 25% discount to NAV