Scotia comments Minto Apartment REIT (MI, SP, $19.50) – Michael Waters, CEO
Fundamentals. MI 100% urban portfolio experienced occupancy erosion at the onset of the pandemic due to population migration into suburban nodes, in addition to a sharp contraction in the furnished suites portfolio (one of the risks identified in our Minto Initiation). The trend began reversing in Q3/21 with a return to downtown living (not necessarily downtown office, however). MI pointed to a strong Q3/22A print, with total portfolio occupancy of 97.4% and SS Occupancy +150bp q/q and +350bp y/y to 96.3% (~80bp above our call of 95.5%). As shown in Exhibit 3, MI remains the only Apartment REIT where occupancy has yet to recover fully, although we think that is coming in the next couple of quarters (notwithstanding experienced seasonality in prior Q4s). Improving occupancy has led to higher new lease spreads, with Q3/22A = 14.5% vs. 12.1% q/q and above MI internal forecast of 12.5%. MI is confident of further improvements in both occupancy and rent, particularly with Montreal continuing to stabilize (occupancy was relatively low at ~93%). Similar to other REITs, tenant turnover continues to fall, potentially another 200bp in 2023E. MI continues to see cost pressure, with last week’s strong jumps print unlikely to alleviate the trend anytime soon; potentially higher property taxes were also cited. That said, MI believes SSREV growth will exceed SSEXP, which = upside to our 2023E FFOPU/AFFOPU (key noted catalyst for us given our lower MI forecast FFOPU growth vs. peers).
Internalization of C-Suite a good step, in our view. MI referenced the recent appointment of Jonathan Li to President and CEO (was President and COO) effective April 2023, replacing Michael Waters (who will remain CEO of Minto Group). Our initial impressions on Mr. Li are positive and we believe forming an independent C-Suite should improve investor sentiment over time, simply from a structural perspective as we note externally managed REITs have traded at an ~800bp NAV discount to internally managed peers over the past 15+ years. Similar to other REITs, MI noted a constructive dialogue with the Federal government on improving existing and new policies to allow for new development and supply to come to market.
Capital Allocation. MI remains committed to its CDL program (funding Minto Group developments), which should surface two potential acquisitions this year (one in Ottawa and Vancouver, respectively). We think Ottawa (Fifth and Bank) will be closely monitored given the negative market reaction to its most recent related-party-acquisition. Specifically, we believe it is important that the going-in cap rate exceeds cost of debt financing on any related-party acquisition. MI is looking to potentially recycle capital out of its Edmonton portfolio into higher-NOI margin assets (like the two in Ottawa/Vancouver) although it is in no rush to sell the assets (patiently awaiting the right price, particularly given Edmonton NOI is growing). MI has no interest in issuing equity at current valuation, but also didn’t discuss a significant interest in repurchasing units. In terms of deployment, MI cited the CDL program, maintaining a track record of attractive distribution/unit growth (keeping payout at 60-65%), and expects repositioning capital to decline as occupancy moves higher.