Minto Apartment REIT
(MI.UN-T) C$19.24
Demand Fundamentals Recovering; Valuation Very Compelling
Event
Forecast update. For our initial thoughts, click here.
Impact: MIXED
While Q1 results were below expectations and result in reduced estimates and a lower target price, we believe there were some positive takeaways, particularly on the demand side. On the leasing front, the REIT reported the highest spread on new leases since Q1/20, at 10.8%. A pick up in market fundamentals drove the MTM spread to 10.7%, the highest since Q2/20. We believe this figure could be conservative and expect it to continue to trend higher. Management noted that April was a strong leasing month and that it expects near-term occupancy to improve to ~97% from the 94.2% recorded in Q1 (pre-pandemic occupancy was ~98%). Rental incentives have gone from broad-based (high point was H1/21) to much more targeted, which we view as a further demonstration of improving market fundamentals.
As expected, the REIT was impacted by operating cost pressures, with same- property costs +9.9% y/y. The largest driver was utilities, owing to higher natural gas prices/colder winter. We expect these costs to moderate as we head into the warmer spring/summer months. Wages also drove some of the increase, and that is one area that will likely impact the REIT through the rest of the year. Despite the cost increase, SPNOI was +2.6%. We also expect the REIT to be impacted by rising interest rates. Minto has $111.5mm of mortgage maturities in 2022, with a WAIR of 2.47%, which compares to the current CMHC five-year rate of ~3.50%.
Forecast. Our AFFO/unit estimates declined ~11%. While the change reflects the Q1 revenue miss and lower operating margins going forward, the majority of the decline is related to higher interest costs - both fixed (on renewals) and variable. We are forecasting average annual AFFO/unit growth of 7%. Our NAV/unit estimate is -1% to $26.40.
TD Investment Conclusion
We believe that Minto's portfolio is well positioned to benefit from a recovery in market fundamentals, and should be able to overcome cost headwinds. At its current valuation, we believe the downside risks are more than priced in. We are maintaining our BUY rating but lowering our target price to $27.00.