MORE — Market News — The Closing Table

FULL REPORT

We are initiating coverage of MORE with a Buy rating. Our $11.50 estimate of fair value implies ~9% upside for the stock, which we believe when combined with a 2.8% dividend yield, provides an attractive potential return in the current market environment.

Apartment REIT focused on Class A properties. Based in Plano, Texas, MORE owned a portfolio of 54 apartment properties (including 2 under construction) across 10 Coastal and Sunbelt states totaling 15,211 units as of June 30. Also, MORE’s portfolio was 94.6% leased with a weighted average monthly rent of $1,909.
Reasons to own MORE: One of the newest portfolios, discounted valuation, and growth potential. We see upside to MORE’s stock price given (1) the benefits of one of the newest portfolios in the apartment space, (2) a discounted NAV valuation, and (3) ability to produce outsized growth both internally and externally over the next few years.
NAV valuations are attractive. MORE is trading at a 5.8% nominal implied capitalization rate (5.5% economic) or $204,000 per unit. This compares to the apartment REIT peer group at 5.3% (4.9%) and $334,000 per unit, respectively. Our $11.50 fair value estimate is based on our DCF valuation model.
Complexity issues, higher leverage, cost of capital, and less liquidity our biggest concerns. The MORE story is not without risks, most notably: (1) the majority of its assets are owned within JVs, which causes complexity issues and may have difficulty attracting the generalist investor; (2) despite recent improvements, MORE’s leverage levels are significantly higher than its peers; and (3) MORE has a higher cost of (and less access to) capital and less liquidity than its peers.
We remain Neutral on the US REITs, despite the group having already exceeded our 10% total return expectation for 2016. Heading into 2H16, we believe strong generalist investor interest, solid internal growth, and continued access to inexpensive and plentiful capital are somewhat offset by strong valuations, greater levels of new supply, and the threat of higher interest rates.