Morgan Stanley On Monogram Residential Trust: Waiting For More Catalysts

Morgan Stanley has downgraded Monogram Residential Trust Inc MORE to Equal-Weight from Overweight as it don't see a near-term catalyst to drive the next leg of outperformance.

Analyst Gregory Van Winkle, who remains constructive long-term, said, "Recent performance has already closed some of the valuation gap versus peers, and scale and leverage overhangs justify the remainder of the discount."

MORE has outperformed Apartment REIT peers by 10.9 percent since Madison Realty's 13D filing on February 19 on shareholder activism, and the market is pricing in an expectation for improved same-store growth in 2016.

Gaps, Leverage And Scale

"However, an 18 percent valuation gap versus peers remains (on an NAV discount basis), and we think this gap is justified by two overhangs for which we see no near-term solution: scale and leverage," Winkle wrote in a note.

The analyst said he does "not see a near-term path" toward building portfolio scale and deleveraging, barring a potential sale of the portfolio.

Related Link: Ladenburg Downgrades Armour Residential REIT To Neutral

Meanwhile, an activist investor recently urged Monogram's board to explore strategic alternatives, but Winkle see obstacles to "full bids" from potential private buyers.

"We think Monogram's assets would be attractive to potential private buyers, but there are frictional costs that a buyer would likely face today, which lower the likelihood of a strategic event in 2016, in our view," Winkle elaborated.

In addition, the analyst see risk to incremental "execution upside" as supply pressure on A-quality assets in urban cores could hurt MORE's same store-revenue growth and development yields.

Cutting Forecasts

The analyst cut his forecast for SS-rev/NOI growth of 4/5 percent for Monogram in 2016 from 4.4/5.7 percent. Winkle also trimmed his 2016 FFO estimate to $0.38 per share from $0.41 per share.

In addition, Winkle cut the price target to $11 from $12.

"Our $11 PT is based on a 15 percent discount to year-end 2016e NAV of $13.44. We think a 15 percent discount is appropriate given: 1) MORE's G&A load, which, on a capitalized basis represents ~20 percent of NAV for MORE versus ~5 percent for peers; 2) outsized leverage and encumbered asset pool; and 3) Lack of a public track record for management," Winkle highlighted.

Shares of Monogram closed Tuesday's trading at $10.37.