Growth driving these three REITs

Investor’s Digest of Canada recently surveyed market analysts who follow 40 real estate investment trusts (REITs). The analysts surveyed found three that were being driven by acquisition growth in both Canada and the U.S.A.

Chartwell Retirement Residences: A well-positioned income trust that has strong signs of growth.

Scotia Capital analysts Pammi Bir and Ganan Thurairajah say that Chartwell Retirement Residences (TSX─CSH.UN) is a well-positioned income trust that has compelling growth ahead of it.

In a report focusing on Chartwell’s fourth quarter of 2015 financial results, the analysts say that funds from operations (FFO) per unit came in at $0.21, which is very much in line with their $0.21 estimate and north of the Street’s $0.20 estimate.

They add, however, that potential risks include, among other things, substantial weakening of housing markets.

Messrs. Bir and Thurairajah stick with their “sector performance” recommendation for Chartwell and keep their 12-month price target at $14 per unit as well.

According to the analysts, housing for seniors remains in the nascent phase of demand acceleration, and Chartwell is ideally positioned with its streamlined, high-quality portfolio, solid balance sheet and attractive growth.

Acknowledging that the income trust’s units remain their “preferred” investment opportunity in the sector, the analysts add that Chartwell deserves its “premium valuation”.

The income trust’s organic expansion outlook is still solid, say the analysts.

Its net operating income (NOI) ended on a high at 3.2 per cent year-over-year.

The analysts add that Chartwell, with its makeover complete, will likely slow down on the acquisitions front by seeking deals worth $125 million annually.

The income trust’s growing development pipeline, although somewhat dilutive from a short-term perspective, “creates a visible stream of value upside,” add the analysts.

As for Chartwell’s balance sheet, Messrs. Bir and Thurairajah say that it has enough liquidity and is therefore sound. That said, large deals would probably necessitate an equity raise, they add.

All in all, the analysts note that Chartwell is providing a confident signal via its 2 per cent distribution raise.

They explain that the yearly distribution was raised to $0.562 per unit from $0.468 per unit “effective with the March distribution payable in April.”

Milestone Apartments REIT: Capital partnership leads to acquisitions.

Milestone Apartments REIT (TSX─MST.UN) joined Starwood Capital Group to form a partnership in October of 2015. Together, they acquired Landmark Apartment Trust for US$1.9 billion. The deal closed on Jan. 27, 2016, said Frederic Blondeau of Dundee Capital Markets.

The new portfolio is a combination of 63 properties, and 19,615 apartments, which are located in eight of the Sunbelt states.

The focus for the apartment rentals is on millennials and baby boomers looking to downsize.

Currently, people aged 18 to 34 rent for an average of six years before buying their own home. In the 1970s, the same age group rented for an average of only 2.6 years.

There is a demand for more apartments, and with 70,000 new apartments built every year, it is still not enough due to 7 million more renters than there were a decade ago, said the analyst.

With this most recent transaction, MST became the manager for Starwood’s portfolio. MST acquired 4,172 units in 15 properties for US$502 million.

Prior to this purchase, the analyst expected the real estate investment trust to acquire a total of US$200 million for 2016, but now the expectation to acquire has changed to US$700 million for 2016.

The fourth quarter results have shown operating and revenue expenses to be 5 per cent and 2 per cent lower than previously estimated.

MST management is expecting rent growth to increase on an average of approximately 3.5 per cent, per year, for the next several years. This is very positive, as the U.S. average rent growth is at 2 per cent per year.

Milestone has excellent operating results compared to its peers, trading at 11.7 times the analyst’s estimate adjusted funds from operation estimate (AFFO) for 2016.

As a result of the strong portfolio performance, and the most recent partnership and acquisition with Starwood Capital, Mr. Blondeau is increasing his target price to $19 from $18.50 and is maintaining a “buy” recommendation for MST.

Morguard N.A. Residential REIT: Growth achieved through acquisitions and rising housing rates.

Dundee Capital analyst Frederic Blondeau has increased his target price to $13.50 from $12 and has upgraded his recommendation from “neutral” to “buy” for Morguard N. A. Residential REIT (TSX─MRG.UN), as a result of their recent acquisitions in both the U.S. and Canada.

In September of 2015, MRG acquired 51 per cent interest of a property that is located in Cooper City, Fla. for $73.9 million. At the start of 2016, MRG was in a good growth position sitting with approximately $35 million of cash and a buying capacity of $100 million of property.

Mr. Blondeau is expecting further growth of this real estate investment trust in Canada, but feels that the pricing could be unattainable for some time. However, in early February of this year, MRG announced the purchase of an Ottawa apartment building for $67 million, which implied a rate of return on this real estate purchase to be in the low 4 per cent range.

For MRG, rent rates have increased, primarily in the U.S, which has been the trend for some time now and occupancy in rental units has also increased, especially in the southeastern U.S.

In the fourth quarter of 2015, MRG’s results were in line with previous estimates. In fact, the REIT’s net operating income was four per cent above estimates, says Mr. Blondeau. As well, MRG reported lower costs and a higher margin than originally estimated.
From a financial point of view, Mr. Blondeau makes note that the net operating income margins for MRG have been improving and stabilizing in Canada.

Over 2015, net operating income from its Canadian portfolio benefitted from stable operating expenses while receiving revenue from a balcony restoration project in Toronto.

The analyst believes that MRG is in a good position to take advantage of the growth in the southern U.S. markets. The new apartment building purchases could affect the U.S. portion of the portfolio’s performance, and the lack of product buying potential in Ontario will provide a stable cash flow.


Investor’s Digest of Canada, MPL Communications Inc.
133 Richmond St. W., Toronto, On, M5H 3M8, 1-800-804-8846

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