Review of Minto Apartment REIT

Review of Minto Apartment REIT

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From: (your name)

Date:  17^th March 2020

Subject: Minto REIT IPO review

Executive Summary

Minto Group has established Multi-Residential Real Estate Investment Trust (REIT), which is dedicated to investing capital, time and energy to the residential segment of the real estate industry to generate more income. The REIT will ensure sustainability and growth of the company’s portfolio. Minto’s executive believes that the REIT will bring out strong Prudential Financial returns as demonstrated by many REITs. MPI has already shown better customer satisfaction across Canada. Minto believes that the REIT will bring a distinctive value proposition and that investment in the REIT provides an investor with an opportunity to support a successful multi-residential rental company. An experienced board will govern the REIT with the power to administer manage Minto rental company and determine investment strategies. The existence of experienced management ensures that the REIT’s affairs are managed in alignment with the investment objectives of the Minto group. The current dynamics in the real estate sector indicate that multi-residential apartments will remain a suitable sector for investments. Also, the company financials and previous acquisitions depict greater impulses for growth. The recent rise in rental rates in Canada caused by unprecedented demand for rental apartments due to the growing population makes Minto apartments present a viable investment opportunity. Minto Apartments has a high quality portfolio than most Canadian public multi-residential REITs. As of the end of March 2018, all 22 properties, which consist of 4,279 suites, had a 98% occupancy.

Industry dynamics and opportunities for growth

Multifamily segments in Canada have maintained a reputation of generating consistent cash flows with low levels of volatility, making Minto apartment REITs an enticing a good fit for our kinds of investment. The Canadian population is increasing at a higher rate compared to other G8 countries and is expected to increase even further by 2020 due to the increased flow of immigrants. An increase in population will ensure stability. Minto is one of the premier real estate companies in Canada, currently managing over 13000 residential suites and a commercial portfolio of office and retail space.

The multi-residential sector dynamics in Canada have shown a positive upward trend, which ensures stability in the real estate sector. These trends include an increase in demand for residential apartments triggered by favourable demographic trends, limited tents concentration issues due to diverse tenant base, and strong risk-adjusted returns. The sector has a well-structured shorter duration of leases, which puts the company in a better position to avoid inflation risks. Also, the industry experiences low-cost CMHC insured debts and fragmented ownership with opportunities for consolidation. According to experts, the average cost of rent in Canada has increased by approximately 6.4% since 2001. Also, there exist certain barriers to establishing a multi-residential company. The large economies of scale enjoyed by well-established firms in the sector alone are enough to keep off the entrance of new companies.  The real estate sector also experienced high placement costs of about 1.26 billion dollars for initial properties, which makes development companies less attractive. Furthermore, the multi-residential sector is more management intensive compared to other real estate sectors, which new companies.

Corporate Structure

Seemingly, the development of REITs and REOCs is one of the key growth strategies in today’s market. Minto Apartments REIT is well structured to execute development strategies. The multi-residential real estate sector has advanced to the top of the most preferred property portfolio in Canada for various real estate organizations. Due to the unprecedented growth, the smaller privately owned firms that once dominated the sector are becoming less effective. Currently, private equity firms and REITs are turning to be an attractive sponsorship group for the multi-residential sector. Through partnerships, Minto apartments REIT will enjoy more experienced executive and operational professionals. MPI recorded a higher customer satisfaction rate of about 93%. Collectively, the management of the REIT has over 105 years of experience in the acquisition, development, and commercial operations of the real estate. The management trustees with seasoned executives who bring quality experience in capital markets and quality governance to the REIT. The experienced executive will enable the REIT to oversee various competitive actions in the real estate sector. Also, the management is s at a better position to internalize asset and property management into the more experience REIT executives without payment of the once the REITs assets near 2 billion dollars.

Portfolio Quality

Based on the assessment and provided information about the company, Minto REITs initial portfolio has high quality properties with the highest rate of occupancy. All the 4279 suites from the 22 properties across Canada have 98% total occupancy. Minto has been owned about 90% of the initial properties in the REIT ‘s portfolio for over ten years and given their record in property management. I believe that their portfolio quality is commendable. Also, the initial properties show stability in returns and growth in the annual growth rate of 8.4%. The portfolio has a better compound annual growth rate than the industry rate of 8.3%. Seemingly the properties in the portfolio will have strong organic growth thanks to the huge capital investment in the last three years to improve quality. Minto platform enables the REIT to benefit from well-researched market intelligence and leasing efficiency. With the gross multiple on capital expected to increase beyond the 1027’s 1.8, Minto REIT portfolio is likely to be a suitable investment opportunity for the company.

In the last five years, Minto apartment’s management has pumped an additional $98 million investment to boost its capital expenditures. The REIT will enter the rental market with an immediate scale and will most likely acquire more quality multi-residential properties. Minto Properties Inc is also lining up for the off-market acquisition of the high quality properties in Calgary and Ottawa. Due to it’s a good relationship with the REIT, the Minto group may benefit from financing from the REIT to speed up their growth. According to the management’s appraisal, the company has an IPO acquisition capacity of over 200 million dollars without accessing the capital market. Also, the forecasted payout ratio is 65%, and the company is charging below-market in-place rent, which provides opportunities for growth to the industrial standards. Unlikely, the Minto group hold stabilized apartment with that require minimal maintenance costs and near term expenditures. The stabilized assets and newly acquired under-managed one provides ample opportunities for asset repositioning and intensification. Additionally, the executive is filled with more experienced personnel that can review and evaluate that enhance the net value of the REIT’s assets. The net operating income is expected to increase in the real estate sector.

Financial metrics

Funds from operations are a better measure of the REIT’s earnings than the net income. From the balance sheet, the AFFO is expected to constitute about 112% of the revenues in twelve months.  Minto group has a total debt to gross book value of 46.4%, of which 73% is CMHC insured at lower interest. 95% of the initial indebtedness comprised of fixed debt, and 77% of these values consist of lower interest rates. Also, the company may have ample time for growth and expansion, given that less than 27% of its indebtedness is expected to mature before 2022. I used the FFO to compare Minto REIT’s valuation to the average industry statistics. The price to metric is a good measure of sound financial performance. The company’s financials project a P/FFO of about 18x, which commendable given the industry average of 19.1x. The REIT’s interest coverage ratio calculated form the FFO is 2.26x, just slightly below 3.0x, which is termed as safe. I have also used the balance sheet values to estimate how long the company is likely to take to repay its debts. The FFO/ Debt ratio shows that the company will take roughly ten years to repay their debts using only operating income. This analysis gives a not so long repayment duration provide the company has many other options from operating income to repay their debts.

Risk factors

The Minto REIT prospectus outlines various risks like ups and downs in the market, idiosyncratic risk, credit risks, and replacement costs. In my opinion, the risks that are worth consideration like regulation and changes in applicable laws. Being a publicly-traded REIT opens up the Minto to effects of rules and regulations relating to building standards, landlord-tenant relationships, and employment standards.  Future federal or municipal changes in policies like restrictions on discharges in the real estate sector may cause fluctuation in the growth of revenue and, thus, instability of earnings. These changes may be detrimental if they negatively affect earnings to the Minto group. For example, the government may decide to institute rent control and stabilization measures, which will probably affect the projected growth over the next coming years even though the company is operating a below-market in-price.

Secondly, environmental issues are hotly debated across the globe, and very sectors are currently being affected by the ever-changing environmental laws. Therefore, there is a possibility that the government’s new rules on pollution and environmental safety may impact on the earnings. Safety issues caused by hazardous substances like waste products, volatile organic compounds, and underground tanks may increase the cost of operations and thus affecting profits. Laws regulation maintenance and removal of materials containing asbestos or even demolition may affect the way the company carries out business. Also, since the company has a total indebtedness of approximately $520 million, part of which is to be repaid using the income revenues. Since there is no assurance that the revenue flow will be consistent, the REIT faces the financial risk of not being able to pay off its obligations.

An outstanding risk I identified was the possibility that the management is well well-versed with managing publicly traded companies.  A more substantial part of the management constitutes people with limited experience in managing publicly traded companies.  The absence of previous public market experience implies that managers must be ready to deal with issues of fluctuation is the prices at which units of their portfolio is traded in the market. The executive may not be well- endowed with a mechanism to keep the REIT operational when units sell for a discount of the original appraisals.  Ideally, the financial figures and predictions are based on past information, which doesn’t necessarily mean the same can occur in the future. Accordingly, deviation in the performance will lead to various risks, including profitability and growth. I also noted that REIT performance is susceptible to economic and legal dynamics areas like Ontario and Alberta, where the majority of the initial properties are located. These areas are known for various economic and environmental changes that may affect the performance of the REIT.

Currently, the REIT has a leverage degree of 46% to gross book value of the assets. This rate may be a concern in the future if it increases because it is already more than 50% of the Netbook value. The degree of leverage risk may affect the REIT’s ability to attain future funds and thus hindering the growth and maintenance of properties at hand. Finally, all REIT at one time must face the risk of redevelopment and renovation of properties. Minto apartments have been carrying out acquisitions and renovating these properties. However, it is nearly impossible to ascertain if the properties will pay back their costs of redevelopment or renovation. Because most real estate companies spend huge on investment, the timing of revenue receipts is a critical issue to the financial stability of the company. Also, during renovations, many uncertainties like failure to achieve the expected outcome in terms of quality. Another risk associated with renovation is the projected time for completion may be longer than anticipated, which in turn costs additional resources and delays in potential revenue. Ideally, redevelopment entails risks that the investment may not generate the expected returns in time.

Valuation of the Units

One of the best methods of valuing the equity investment in a REIT is through the Net asset value. With about 12.8 billion, Minto is one of the best performing real estate in Canada. I project that the value of the Minto REIT’s units will soar by nearly 50% after IPO. This implies that the offering price will jump to almost $20 a unit. Also, due to the increase in the acquisition, the percentage of occupancy will likely rise to 100%. Also, Net asset value is a useful metric for valuing the units of the company. NAV shows the market value of all the net assets (after deducting liabilities) and the deliberated dividends or distributions. A higher NAV will imply better management and thus leading to an increase in the demand for portfolio units. I project that the cost of the REIT’s units will rise after IPO because the company has plans to make several key acquisitions, which will increase portfolio diversification and thus hedge against certain risks.

Furthermore, Minto REIT’s portfolio units are undervalued by over 32% of the actual market value. The undervaluation gives the REIT a unique opportunity for growth, which is not enjoyed by others in the real estate sector. Minto REIT has a for-ward looking mandate with objectives and mission statements geared towards the future. The analysts are focused more on the future trend in growth and demographics. The investment will allow for changes in the fund’s mandate because of the flexibility of the real estate segment. The investment enables adjusting target income for the trust and changing geographical focus for the Minto group and giving it more focus on investing in stocks related to the real estate sector. The REIT also allows the Minto rental company to outsource portions of its portfolio to third party managers which makes it easier to increase earnings to investors.

Recommendation

In my overall evaluation, Minto apartments REIT can be a suitable investment opportunity for XYZ limited. The company shows many signs of growth, both internally and externally. The company’s portfolio units are undervalued by about 32% compared to the market values. Also, the company has the possibility of cash flow growth due to the below-market in-price rent system. Minto REIT enjoys the benefits of the experienced executive, which will make new acquisitions easier. Also, the executive has a good reputation in customer relations, portfolio management, and financing expertise. I have attached the IPO presentations and the prospectus to sew my analysis of this company. An investment of between 15-30 million dollars will earn good returns as the REIT works towards realizing the fund’s mandate.