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."
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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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.