Milestone Apartments REIT Reports 2016 Third Quarter Results

- Continued operating efficiencies through increased scale and portfolio expansion drive year-over-year Q3 2016 samestore NOI growth of 9.1% and AFFO growth of 26.2% -

TORONTO and DALLAS, Nov. 10, 2016 /CNW/ - Milestone Apartments Real Estate Investment Trust (TSX: MST.UN) ("Milestone" or the "REIT") today announced its financial results for the third quarter ended September 30, 2016 ("Q3 2016") and the nine-month period ended September 30, 2016 ("YTD 2016"). All dollar amounts are in U.S. currency unless otherwise noted. References to "samestore" correspond to properties the REIT has owned for equivalent periods in 2016 and 2015, thus removing the impact of acquisitions and dispositions.

"Our third quarter results demonstrate our continued positive momentum of optimizing the REIT's performance as we continue to strategically grow the portfolio. The recent decision to increase our monthly cash distributions by 10 percent underscores the Trustees' confidence in the REIT's business and future cash flows," said Robert Landin, CEO of Milestone. "During the quarter, we also completed the internalization of the REIT's asset management function, an important landmark in Milestone's evolution. This initiative results in the REIT continuing to benefit from the asset manager's expertise, platform and industry relationships, while operating under a more efficient cost structure."   

Q3 2016 Financial Highlights

  • Total and samestore average monthly in-place rents were $950 and $917, respectively, up 9.1% and 6.0% from the third quarter ended September 30, 2015 ("Q3 2015");
  • Total and samestore occupancy remained strong ending Q3 2016 at 95.0% and 94.9%, respectively;
  • Total and samestore property revenue were $68.3 million and $49.2 million, respectively, up 24.7% and 5.5% from Q3 2015;
  • Total and samestore net operating income ("NOI") were $38.0 million and $27.4 million, respectively, up 29.0% and 9.1% from Q3 2015. Total and samestore NOI margins were 55.7% and 55.8%, respectively, both up 190 basis points from Q3 2015. The REIT's NOI margins are generally lower for the third quarter of any year due to higher unit turnover and utility expenses during summer months;
  • Funds from operations ("FFO") totaled $21.5 million, up 23.8% from Q3 2015. Adjusted funds from operations ("AFFO") increased 26.2% to $19.2 million. Diluted FFO and AFFO per unit were $0.28 and $0.25, respectively, up from $0.26 and $0.23 in Q3 2015. FFO and AFFO for Q3 2016 were adversely affected by a $0.3 million increase in deferred units expense compared to Q3 2015 primarily due to an increase in the REIT's unit price in U.S. dollars during the period;
  • FFO and AFFO payout ratios were 50% and 56%, respectively, compared to 47% and 54% in Q3 2015;
  • Financial leverage ended Q3 2016 at 47.9% compared to financial leverage of 47.8% at the end of Q3 2015; and
  • Investment properties increased 29.3% to $2.5 billion at the end of Q3 2016, compared to investment properties of $1.9 billion at the end of Q3 2015.

Q3 2016 Business Highlights

  • Milestone completed the internalization of the REIT's asset management function (the "Internalization") on September 30, 2016. At a special meeting of unitholders of the REIT ("Unitholders") held on September 13, 2016, Unitholders overwhelmingly voted in favour of the Internalization with the Internalization approved by over 99% of votes cast. As a result of the Internalization, the annual asset management fee and incentive fee have been eliminated, resulting in a net reduction in the REIT's annual general and administrative expenses by approximately $9.5 million, and in an expected increase in the REIT's annual AFFO per unit of approximately 4%. Also as a result of the Internalization, the Milestone senior management team now owns approximately 10.9 million Class B units, or 11.8% of the outstanding REIT units, up from 5.5 million Class B units, or 7.3% of the outstanding REIT units prior to the Internalization, creating even greater alignment of interest between the REIT and its senior management team;
  • The REIT filed and obtained a receipt for the renewal of its base shelf prospectus (the "Shelf Prospectus"), thereby enabling the REIT to continue to more quickly access capital when market opportunities permit. The Shelf Prospectus is valid for a 25 month period, during which time the REIT may offer and issue, from time to time, trust units, debt securities, warrants and subscription receipts, or any combination thereof, having an aggregate offering price of up to C$750 million; and
  • The REIT declared total cash distributions to REIT Unitholders and Class B Unitholders of $10.7 million.

Subsequent Events

  • On October 12, 2016, the REIT completed the previously announced acquisition of Park 9 Apartments, a 275-unit multifamily apartment community located in Woodstock, a suburb northwest of Atlanta, Georgia, for a purchase price of $47.0 million, representing an estimated year one capitalization rate of 5.7%;
  • On October 19, 2016, Milestone announced a definitive agreement to acquire a six-property portfolio, comprising 1,460 apartment units in attractive U.S. Sunbelt markets, for a gross purchase price of approximately $242 million (the "Portfolio Acquisition"). As part of the Portfolio Acquisition, the REIT will further diversify its U.S. Sunbelt property portfolio by increasing scale in four existing markets and entering two new markets, establishing greater critical mass to drive operating efficiencies and growth. The six-property portfolio has a weighted average year built of 2005, which will effectively lower the average age of Milestone's overall portfolio. Two of the properties, Costa Bella in San Antonio, TX and Fairways at Birkdale in Charlotte, NC, closed on November 4, 2016, using proceeds from the previously announced bought deal equity offering (the "Offering"). The remainder of the Portfolio Acquisition will be funded from mortgage assumptions, proceeds from the refinancing of the REIT's existing mortgage debt facility, a proposed property disposition, the REIT's revolving line of credit and proceeds from the Offering, as previously disclosed;
  • Also on October 19, 2016, the REIT announced a 10% increase to its monthly cash distributions to $0.05041 per unit (representing $0.60492 per unit on an annualized basis), up from the current monthly distribution of $0.04583 per unit (representing $0.55000 per unit on annualized basis). The increase is expected to be effective starting with the January 2017 distribution, payable on February 15, 2017, to Unitholders of record on January 31, 2017; and
  • On October 28, 2016, the REIT successfully closed the Offering and exercised in full the over-allotment option for gross proceeds of approximately C$192.6 million. Proceeds from the Offering will be used to partially fund the Portfolio Acquisition.

Q3 2016, Q3 2015, YTD 2016 and YTD 2015 Financial Results Summary

(US$000s, except per unit amounts)

Q3 2016

Q3 2015

Change

YTD 2016

YTD 2015

Change

Rents, Samestore

917

865

6.0%

917

865

6.0%

Rents, Total

950

871

9.1%

950

871

9.1%

Occupancy, Samestore

94.9%

95.4%

-50 bp

94.9%

95.4%

-50 bp

Occupancy, Total

95.0%

95.3%

-30 bp

95.0%

95.3%

-30 bp








Revenue, Samestore

49,170

46,611

5.5%

144,748

137,004

5.7%

Revenue, Non-samestore

19,148

8,174

134.3%

53,870

20,784

159.2%

Revenue, Management Company

2,781

1,373

102.5%

7,850

4,733

65.9%

Revenue, Total

71,099

56,158

26.6%

206,468

162,521

27.0%








Operating Expenses, Samestore

16,360

16,327

0.2%

67,619

68,517

-1.3%

Operating Expenses, Non-samestore

5,414

3,019

79.3%

17,698

8,016

120.8%

Operating Expenses, Management Company

2,447

1,208

102.6%

6,594

4,165

58.3%

Operating Expenses, Total(1)

24,221

20,554

17.8%

91,911

80,698

13.9%








Property Revenue, Samestore

49,170

46,626

5.5%

144,748

137,004

5.7%

Property Revenue, Non-samestore

19,148

8,159

134.7%

53,870

20,784

159.2%

Property Revenue, Total(2)

68,318

54,785

24.7%

198,618

157,788

25.9%








Property Operating Expenses, Samestore

21,732

21,477

1.2%

62,247

61,527

1.2%

Property Operating Expenses, Non-samestore

8,552

3,827

123.5%

23,825

10,099

135.9%

Property Operating Expenses, Total(2,3)

30,284

25,304

19.7%

86,072

71,626

20.2%








NOI, Samestore

27,438

25,149

9.1%

82,501

75,477

9.3%

NOI, Non-samestore

10,596

4,332

144.6%

30,045

10,685

181.2%

NOI, Total(2,3)

38,034

29,481

29.0%

112,546

86,162

30.6%








NOI Margin, Samestore

55.8%

53.9%

190 bp

57.0%

55.1%

190 bp

NOI Margin, Non-samestore

55.3%

53.1%

220 bp

55.8%

51.4%

440 bp

NOI Margin, Total(2,3)

55.7%

53.8%

190 bp

56.7%

54.6%

210 bp








FFO

21,489

17,356

23.8%

62,123

51,026

21.7%

FFO Per Unit, Basic(4)

0.28

0.26

0.02

0.83

0.80

0.03

FFO Per Unit, Diluted(5)

0.28

0.26

0.02

0.81

0.80

0.01

FFO Payout Ratio(6)

50%

47%

3%

53%

49%

4%








AFFO

19,224

15,238

26.2%

56,473

44,377

27.3%

AFFO Per Unit, Basic(4)

0.25

0.23

0.02

0.75

0.70

0.05

AFFO Per Unit, Diluted(5)

0.25

0.23

0.02

0.74

0.69

0.05

AFFO Payout Ratio(6)

56%

54%

2%

58%

56%

2%








Total Distributions Declared(7)

10,669

8,199

30.1%

32,640

24,858

31.3%








Weighted Average Units Outstanding – Basic

75,877,790

65,979,455


74,944,470

63,628,504


Weighted Average Units Outstanding – Diluted

76,533,635

66,321,631


76,431,507

63,932,650









Debt to gross book value

47.9%

47.8%

10 bp

47.9%

47.8%

10 bp

(1) Includes real estate tax adjustments related to IFRIC 21.

(2) Excludes third-party property management revenue and related expenses.

(3) Excludes real estate tax adjustments related to IFRIC 21.

(4) Basic FFO and AFFO per unit are calculated by dividing total FFO and AFFO by the amount of the total weighted average number of outstanding REIT and Class B units for the respective periods.

(5) Diluted FFO and AFFO per unit are calculated by dividing total FFO and AFFO by the amount of the total weighted average number of outstanding REIT units, Class B units, subscription receipts and options using the treasury method for the respective periods.

(6) FFO and AFFO Payout ratios are calculated by dividing the amount of REIT unitholders and Class B unitholders distributions declared, by FFO and AFFO for the respective periods. Distributions on REIT units and Class B units are translated based on an average CAD to USD exchange rate for the respective periods, consistent with IFRS, as applicable. Note that monthly distributions starting with the January 2016 distribution were paid in USD and thus not translated from USD to CAD.

(7) Represents total cash distributions declared to REIT unitholders and Class B unitholders for the respective periods.

 

Q3 2016 Financial Results

Total and samestore property revenue were $68.3 million and $49.2 million, respectively, up 24.7% and 5.5% from Q3 2015. The increase in total and samestore property revenue is attributable to continued strong occupancy, organic rent growth and growth from acquisitions completed during and subsequent to Q3 2015.

Total and samestore property operating expenses were $30.3 million and $21.7 million, respectively, up 19.7% and 1.2%, from Q3 2015. The increase in total and samestore property operating expenses is primarily attributable to expenses related to the operations of properties acquired during and subsequent to Q3 2015 and higher real estate tax estimates.

Total and samestore NOI were $38.0 million and $27.4 million, respectively, up 29.0% and 9.1% from Q3 2015. Total and samestore NOI margins were 55.7% and 55.8%, respectively, both up 190 basis points from Q3 2015. The increase in total and samestore NOI and NOI margins is primarily attributable to growth in property revenue and improved operating efficiencies as the REIT continues to increase scale. The REIT's NOI margins are generally lower for the third quarter of any given year due to higher unit turnover and utility expenses during summer months.

FFO and AFFO of $21.5 million and $19.2 million, respectively, were up 23.8% and 26.2% from Q3 2015. Diluted FFO and AFFO per unit were $0.28 and $0.25, respectively, up from $0.26 and $0.23 in Q3 2015. FFO and AFFO growth were attributable to higher property revenue and NOI during the quarter, as noted above. FFO and AFFO for Q3 2016 were adversely affected by a $0.3 million increase in deferred units expense compared to Q3 2015 primarily due to an increase in the REIT's unit price in U.S. dollars during the period.

Fair Value on Investment Properties
As at September 30, 2016, the REIT's properties were valued using an overall weighted capitalization rate of 6.30% (June 30, 2016 – 6.23%; December 31, 2015 – 6.38%). There were $37.9 million of fair value gains recognized in Q3 2016 resulting from increased NOI forecasts. Fair value adjustments are determined based on the movement of various parameters, including changes in stabilized NOI and capitalization rates.

Cash Distributions
Cash distributions declared to REIT Unitholders and Class B Unitholders of the REIT's operating partnership were $10.7 million in Q3 2016, representing FFO and AFFO payout ratios of 50% and 56%, respectively, compared to declared distributions of $8.2 million in Q3 2015, representing FFO and AFFO payout ratios of 47% and 54%.

Liquidity and Capital Structure
As at September 30, 2016, the REIT had cash and cash equivalents of $10.8 million and a $100.0 million revolving line of credit (with an option to increase the line to $125.0 million). As at November 10, 2016, the REIT had no balance on its line of credit. The REIT expects to utilize its line of credit in the coming weeks to fund a portion of the purchase price for the Portfolio Acquisition, as previously disclosed. The REIT ended the period with mortgage notes obligations carrying value of $1.20 billion with 87.0% issued at fixed rates, a weighted average interest rate of 3.65% and a weighted average maturity of approximately 6.1 years. The REIT's debt to gross book value ended Q3 2016 was 47.9%. Following the Portfolio Acquisition, the REIT's pro-forma mortgage notes obligations carrying value is projected to be approximately $1.34 billion with 88.9% issued at fixed rates, a weighted average interest rate of 3.65% and a weighted average maturity of approximately 6.1 years. Following the Portfolio Acquisition, the REIT's debt to gross book value is expected to be approximately 49.0%.

Units Outstanding
As at November 10, 2016, there were 80,478,063 REIT units and 11,116,687 Class B units outstanding.

Conference Call
Robert Landin, CEO, Steve Lamberti, COO, and Ryan Newberry, CFO, will host a conference call for the investment community tomorrow, Friday, November 11, 2016 at 12:00 p.m. (ET). The call-in numbers for participants are 416-764-8688 or 888-390-0546. A live webcast of the call will be archived on Milestone's website at http://www.milestonereit.com/investor-relations/events-presentations.   

A replay of the call will be available until Friday, November 18, 2016. To access the replay, dial 416-764-8677 or 888-390-0541 (Passcode: 319051).   The webcast will be archived on Milestone's website.

Interim Filings
The REIT's Management's Discussion and Analysis and Consolidated Financial Statements have been filed on SEDAR and can be viewed at www.sedar.com, or on the REIT's website at www.milestonereit.com.

About Milestone
The REIT is an unincorporated, open-ended real estate investment trust that is governed by the laws of Ontario. The REIT's portfolio consists of 75 multifamily garden-style residential properties, comprising 23,345 apartment units that are located in 14 major metropolitan markets throughout the Southeast and Southwest United States. The REIT is the largest real estate investment trust listed on the TSX focused solely on the United States multifamily sector. Milestone's vertically integrated platform employs more than 1,200 employees and manages more than 50,000 apartment units across the United States. For more information, please visit www.milestonereit.com.

Non-IFRS Financial Measures
This press release contains certain non-IFRS financial measures including FFO, AFFO and NOI, and related amounts to measure, compare and explain the operating results and financial performance of the REIT. These measures are commonly used by entities in the real estate industry as useful metrics for measuring performance. However, they do not have any standardized meaning prescribed by IFRS and are not necessarily comparable to similar measures presented by other publicly traded entities. These measures should be considered as supplemental in nature and not as a substitute for related financial information prepared in accordance with IFRS. Please refer to the REIT's Management's Discussion and Analysis for the third quarter ended September 30, 2016 for a reconciliation of NOI, FFO and AFFO to standardized IFRS measures.

Forward-looking Information
This news release may contain forward-looking statements (within the meaning of applicable securities laws) relating to the business of the REIT and the environment in which it operates. Forward-looking statements are identified by words such as "believe", "anticipate", "expect", "intend", "plan", "will", "may" and other similar expressions.  Some of the specific forward-looking statements in this news release include, but are not limited to, statements with respect to the REIT's financial performance, the future performance of the U.S. multifamily sector and the U.S. economy, the financing and completion of the Portfolio Acquisition, the effects of the Portfolio Acquisition and the acquisition of Park 9 on the REIT (including estimated year one capitalization rates and pro forma debt profile), proposed changes to the REIT's distribution policy and the effects of the Internalization on the REIT (including the anticipated reduction in general and administrative expenses and increase in AFFO per Unit). They are not guarantees of future performance and involve risks and uncertainties that are difficult to control or predict. A number of factors could cause actual results to differ materially from the results discussed in the forward-looking statements, including, but not limited to, the factors discussed under the heading "Risk Factors" in the REIT's annual information form available at www.sedar.com. The forward-looking statements in this news release are based on certain assumptions that, while considered reasonable by management as of the date hereof, are inherently subject to significant business, economic and competitive uncertainties and contingencies. These assumptions include, include, but are not limited to, those relating to the REIT's future growth potential, results of operations, future prospects and opportunities, demographic and industry trends, legislative or regulatory matters, future levels of indebtedness, the tax laws as currently in effect, the continual availability of capital, current economic conditions, all conditions to completion of the Portfolio Acquisition will be satisfied or waived, the REIT will complete the Portfolio Acquisition on the terms anticipated, revenue and NOI associated with the acquisition properties will remain consistent, significant additional costs will not have to be incurred by the REIT to manage the acquisition properties, the REIT's assets will generate sufficient cash to allow the REIT to pay the increased distribution and exchange rates don't change. There can be no assurance that forward-looking statements will prove to be accurate as actual outcomes and results may differ materially from those expressed in these forward-looking statements. Readers, therefore, should not place undue reliance on any such forward-looking statements. Further, these forward-looking statements are made as of the date of this news release and, except as expressly required by applicable law, the REIT assumes no obligation to publicly update or revise any forward-looking statement, whether as a result of new information, future events or otherwise.

SOURCE Milestone Apartments REIT

Image with caption: "Milestone Apartments Real Estate Investment Trust (CNW Group/Milestone Apartments REIT) (CNW Group/Milestone Apartments REIT)". Image available at: http://photos.newswire.ca/images/download/20161110_C8522_PHOTO_EN_815696.jpg

For further information: Robert Debs, Investor Relations, Milestone Apartments REIT, Tel: 214.561.1215; Bruce Wigle, Investor Relations, Bay Street Communications, Tel: 647.496.7856

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