Minto Apartment Real Estate Investment Trust T.MI.UN

Scotia comments on valuation

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Effective Capital Recycling in the Short Term Provides Medium-Term Flexibility

OUR TAKE: Slight Positive. We disagree with MI lagging XRE and peers by ~60bp today. MI is selling two older Ottawa assets (at Q3/23A IFRS FV) for gross/net proceeds of $86M/$69M, respectively. No cap rate provided, but MI Q3/23A Ottawa IFRS cap rate range = 4.0%-4.63% vs. CBRE low-rise Class A and B of 4.2%-4.5% and 4.65%-5.25% (Exhibit 1; 20 acres of land likely matter). Clarity on potential special distribution expected in 2024. Our 2024E and 2025E FFOPU are +1% (Target Price +1.4%) as some of the net proceeds should lower high-cost variable-rate debt (7%+ cost right now). On the surface, we like the news. It raises a good amount of the capital to likely (in our view) buy 2 CDL projects (Londsdale Square and The Hyland) from the Minto Group late in 2024 (we est. ~$0.01 of dilution; already in our #s). We also view an acceleration in Community Housing Corporations/Government bodies acquiring assets to preserve affordability as a positive for the Apartment Industry on the whole (i.e., crystallizing some of the LT rent MTM). Post recent unit price move (Exhibit 2), MI NTM total return of ~20% matches sector, but we still view it as a top 2 potential upgrade pick (particularly in a soft landing scenario) vs. top 3-4 before.

KEY POINTS

Review of our positive thesis. MI is +18% vs. +7% for peers and +10% sector avg. post Q3 results (Exhibit 2), reflecting some of the “upgrade” potential we saw. That said, we still like MI ~20% total return profile. It has solid 2024E FFOPU growth acceleration at 6% (10% y/y growth vs. 4% in 2023E; Exhibit 3), its PEG ratio of 2.1 is below 2.6 peer avg. (Exhibit 4). Having been below consensus FFOPU for much of our MI coverage history, we’re now ~4% above 2024E and 2025E FFOPU consensus. Lastly, we see privatization potential should MI unit price not respond to aforementioned per unit growth. In terms of risks, we think MI could lag other Apartment peers in a “hard-landing” scenario given its higher rent price point and furnished suite business (i.e., more sensitive to occupancy erosion, in our view); something worth doing more work on.

MI disposed of older buildings, but with substantial underlying land and rent MTM. The two assets (Tanglewood and Chesterton/Bowhill) are 50-year-old product developed by the Minto Group (Exhibit 4) comprising 3-4 bedroom townhomes (Exhibit 4) located near Nepean (Exhibit 5); for those of us on the September 2023 property tour, we did not pass either one. Given the older product, we suspect the rent MTM was well above MI disclosed Q3 Ottawa average (19%) albeit at well below-average turnover (can’t really have one without the other!). While no cap rate was provided, we think the gap between “going-in” and “stabilized” (at market rent) could be ~150bp. Importantly, the buildings sit on ~20 acres of land, which could provide for long-term intensification for the Ottawa Housing Corporation (OHC; will manage the assets) to add inventory plus regulating in-place rents. On that front, we note Tanglewood and Chesterton/Bowhill properties have Walk Scores of 77 and 84, respectively. In some ways, the deal is consistent with CAP REIT’s applauded capital recycling in 2023 (sale of older assets to buy new development), although we’re not sure if MI disposition cap rate will be < than a Vancouver acquisition cap rate (lower cap rate market; our model has a forecast 4.25% Vancouver acquisition cap rate).