Flagship Communities Real Estate Investment Trust's (MHC.U:TSX;MHCUF:OTCMKTS) Q4/22 operations were in line with expectations, and for this year, "our outlook remains positive," reported Echelon Capital Markets analyst David Chrystal in a March 17 research note. This real estate investment trust owns a portfolio of manufactured housing communities, mostly in the U.S. Midwest.
"High single-digit organic revenue growth in 2022 should be repeated (if not exceeded) in 2023 given significant rent increases pushed through in January," Chrystal wrote. "Easing cost pressure should support net operating income margin expansion."
Recommended Buy
Flagship, one of Echelon's Top Picks and Buy rated, currently has a 75% price:net asset value noted Chrystal. The company is trading at a discount to peers, at US$17.27 per share. Echelon's target price on it is US$23 per share, implying about a 36% return on investment.
"Flagship provides investors with access to a highly defensive asset class, consistent and predictable cash flow growth, a resilient balance sheet, and an attractive valuation," Chrystal commented.
Q4 Notable for Growth
Flagship ended 2022 with strong organic growth, noted Chrystal. During that quarter, it generated 8.2% more revenue than it did a year earlier. Further, the company's revenue for the full year 2022 (FY22) exceeded FY21's by 7.5%. Three factors primarily drove the growth: about 5% higher average rent rates across the portfolio, a gain of roughly 160 basis points in same-property occupancy, and greater utility recoveries.
"Management commentary suggests that the significant rent increase did not result in any material occupancy erosion, and the REIT's offering still enjoys a significant affordability advantage relative to traditional homeownership or apartment rental," noted Kushner.
No Near-Term Deals
As for deal flow, two prospective transactions in Q4/22 did not pan out, and opportunities now are few given "the bid-ask spread remains wide and motivated sellers have yet to emerge," wrote Kushner. As such, this environment may hinder Flagship's growth, at least early in the year, but it may turn around in H2/23. If it does, Flagship can act as it "has ample capacity to transact."
Echelon lowered its 2023 revenue estimates for Flagship slightly. The broker-dealer reduced its forecast for funds from operations per unit (FFO/unit) to US$1.22 from US$1.25 and its adjusted funds from operations per unit (AFFO/unit) to US$1.07 from US$1.10.
Echelon also added these 2024 figures to its model: US$1.31 FFO/unit and US$1.16 AFFO/unit.
2023 Expectations Positive
This year, despite the headwinds, Echelon expects Flagship to at least match and maybe beat 2022 revenue. This is possible, Kushner pointed out, largely because the company increased rents by about 7.8% on average earlier this year in January; it is pushing to boost occupancy to 90–95% from the current 83.1%, and cost pressure has eased somewhat.
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Disclosures For Echelon Capital Markets, Flagship Communities REIT, March 17, 2023
Echelon Wealth Partners Inc. is a member of IIROC and CIPF. The documents on this website have been prepared for the viewer only as an example of strategy consistent with our recommendations; it is not an offer to buy or sell or a solicitation of an offer to buy or sell any security or instrument or to participate in any particular investing strategy. Any opinions or recommendations expressed herein do not necessarily reflect those of Echelon Wealth Partners Inc. Echelon Wealth Partners Inc. cannot accept any trading instructions via e-mail as the timely receipt of e-mail messages, or their integrity over the Internet, cannot be guaranteed. Dividend yields change as stock prices change, and companies may change or cancel dividend payments in the future. All securities involve varying amounts of risk, and their values will fluctuate, and the fluctuation of foreign currency exchange rates will also impact your investment returns if measured in Canadian Dollars. Past performance does not guarantee future returns, investments may increase or decrease in value and you may lose money. Data from various sources were used in the preparation of these documents; the information is believed but in no way warranted to be reliable, accurate and appropriate. Echelon Wealth Partners Inc. employees may buy and sell shares of the companies that are recommended for their own accounts and for the accounts of other clients. Echelon Wealth Partners compensates its Research Analysts from a variety of sources. The Research Department is a cost centre and is funded by the business activities of Echelon Wealth Partners including, Institutional Equity Sales and Trading, Retail Sales and Corporate and Investment Banking.
U.S. Disclosures: This research report was prepared by Echelon Wealth Partners Inc., a member of the Investment Industry Regulatory Organization of Canada and the Canadian Investor Protection Fund. This report does not constitute an offer to sell or the solicitation of an offer to buy any of the securities discussed herein. Echelon Wealth Partners Inc. is not registered as a broker-dealer in the United States and is not be subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. Any resulting transactions should be effected through a U.S. broker-dealer. opinions or conclusions contained in it be referred to without in each case the prior express written consent of Echelon Wealth Partners.
ANALYST CERTIFICATION
Company: Flagship Communities Real Estate Investment Trust | MHC.U-TSX
I, David Chrystal, hereby certify that the views expressed in this report accurately reflect my personal views about the subject securities or issuers. I also certify that I have not, am not, and will not receive, directly or indirectly, compensation in exchange for expressing the specific recommendations or views in this report
The Analyst or any member of the Analyst’s household has a financial interest in the securities of the subject issuer. It is a Long position and Trust Units.
