Today have a great show – starting with a REIT – Milestone Apartments REIT (MST.UN:TSX) – we recently recommended to clients which despite currently returning us around 24% in 6-months, we are mad as all hell at the company’s takeover offer. Our star of the week is also a recommendation from less than one year ago in our U.S. Growth Stock research, Applied Optoelectronics Inc. (AAOI:NASD). The stock jumped 30% in one day recently after it preannounced strong earnings growth and is up 125% over the past year. Finally, our dog of the week, Alcobra Ltd.  (ADHD:NASD), comes from the much beleaguered Pharma segment.


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Now, let’s dig into the show.


I would like to welcome again, myhost, KeyStone’s Senior Equity analyst, father of 1, and a man by who has been so uninspired by the quality of pitches on this Year’s Dragons’ Den that he is thinking of personally pitching the Dragons on a reality show based on a past Dragon running for Prime Minister (sounds interesting), Mr. Aaron Dunn.


Your pitch sounds all too real.


Headline today – we will be discussing a stock that we just made 24% on in less than six-months for clients, but we are mad as hell about it (tongue somewhat in cheek).


It is a very interesting case– a REIT or Real Estate Investment Trust that we recommended to clients in June of this past year and also recommended in our Special Annual REIT Report as one of the select 3 BUYs in the segment from over 50 REITs in Canada. Suffice it to say, the company was a definite favourite in the sector due to its strong fundamentals relative to peers. The company;


Milestone Apartments REIT (MST.UN:TSX)

Industry: Real Estate Investment Trust – Residential

Recommended: June 2016

Recommendation Price: $17.87

Current Price (January 25, 2017): $21.27

Yield: 3.68%




Milestone Apartments REIT (MST.UN) is the largest REIT listed on the TSX focused solely on the U.S. multi-family sector.  e REIT’s portfolio is made up of over 70 multifamily garden-style residential properties, comprising over 22,000 units that are located in 14 major metropolitan markets throughout the Southeast and Southwest United States. MST.UN’s communities are conveniently located with easy access to schools, employment centers, transportation hubs, entertainment and feature extensive amenities, including pools,  tness centers, tennis courts, business centers, and open green space, all of which attract prospective tenants and retain current residents. MST. UN’s strategy is to target mid-market renters, which represents approximately 60% of the U.S. renter population.


RYAN QUESTION: Start with some background on Milestone – why did you originally like it?



RYAN QUESTION: While you are happy are clients are doing very well with the recommendation, tell us why you oppose the deal?


AARON ANSWER: We are opposed to this transaction due to what we consider to be an egregiously low offer price and market premium. In our opinion, this proposal is highly opportunistic for Starwood Capital at the detriment of the REIT’s current unitholders. We do not understand why management and the Board of Trustees would support this deal and we do not believe that it was negotiated in the best interests of the unitholders.


RYAN QUESTION: So it comes down to a valuation – based on what – cash flow and your peer comparisons?


AARON ANSWER: The proposed acquisition price implies a valuation multiple of 16.1 times 2016 estimated AFFO (adjusted funds from operations). This is a sizeable discounted relative to comparable Canadian-listed REITs. We have identified 4 apartment REITs which we consider comparable to MST.UN including Canadian Apartment (CAR.UN), Killam Property (KMP.UN), Inter Rent (IIP.UN), and Morguard North America (MRG.UN). The average price-to-AFFO multiple across this group is 18.9 times (17% higher than the proposed take-out multiple for MST.UN). MST.UN also has some of the strongest fundamentals in the REIT sector with the highest same-property rent and NOI growth amongst any Canadian REIT and one of the strongest financial positions. The REIT had also just raised its distribution 10% and completed US$791 million in acquisitions in 2016, generating strong momentum and embedded growth going into 2017. By management’s own words, 2016 was a “milestone” year for MST.UN and success on a number of fronts resulted in a 30% increase in the unit price compared to 11% for the S&P/TSX REIT Index. We believe strongly that these fundamentals warrant a valuation in line with other premium REITs which should be at least 18 to 20 times AFFO, resulting in a takeover premium of 20% to 33% (for value updated to reflect minimum price) which is also in line with takeover premiums we have seen in the past for Canadian REITs. An 11.8% premium for a ‘top tier’ REIT is unprecedented in our experience.




We have a treat for you this week in our Star category. We do not often include a company in current coverage but the gains in this stock over the past month were too difficult to ignore. From our U.S. Growth Stock research we present;


Applied Optoelectronics, Inc. (AAOI:NASD)


Provider of fiber-optic network products for the internet datacenter, cable broadband, fiber-to-the-home and telecom markets. Specifically, the company designs and manufactures a range of optical communications products employing our vertical integration strategy from laser chips, components, subassemblies and modules to complete turn-key equipment.


All three of the company’s end markets are driven by bandwidth demand fueled by the growth of network-connected devices, that included video traffic, cloud computing and online social networking.


January 11th, 2017, AAOI announced certain preliminary unaudited financial results for its fourth quarter ended December 31, 2016, which significantly exceeded both the company’s guidance and analyst estimates.  On Thursday, the company’s shares have surged approximately 30% following the news.


Revenue in the range of $84.5 to $84.8 million, above the prior outlook of $75.0 to $79.0 million.


Non- GAAP earnings per share for the quarter are estimated to be$0.77 to $0.82, this guidance was raised from the prior non-GAAP outlook of $0.46 to $0.51 per share – an approximate 67% increase!!


What is driving the growth –


AAOI is the majority market share supplier to its two largest hyperscale data center customers – Amazon (NASDAQ:AMZN) and Microsoft  (NASDAQ:MSFT), the two largest and rapidly growing cloud computing players. In a recent presentation, the company stated it is in the early stages of doing business with its new data center customer acquired in Q3 2016, which is widely believed to be Facebook (NASDAQ:FB). AAOI has also stated that ramping up to critical mass at the newest data center customer would likely smooth some normal quarterly lumpiness associated with its two largest customers, within a generally strong and likely sustained upward secular trend.


While stock has now doubled since our recommendation last year – mid-term, the growth trajectory appears bright.




Alcobra Ltd.  (ADHD:NASD)


Alcobra Ltd. is an emerging pharmaceutical company primarily focused on the development and commercialization of MDX (Metadoxine Extended Release), a proprietary drug candidate to treat cognitive disorders including ADHD and Fragile X Syndrome.


The stock has dropped 51.43% year-to-date, and has lost 80.04% over the past year.


What has impacted the stock negatively so far in 2017 – aside from being in an industry, pharma, that is in the doghouse at present, on January 17th, the company reported that its main drug candidate, MDX did not meet the primary endpoint of demonstrating a statistically significant difference from the placebo in the change from baseline of the investigator rating of the Conners’ Adult ADHD Rating Scales (CAARS). In other words, it appeared the company’s big drug hope was not very affective. This is not a good sign.


Although the company appears to have a strong cash balance in the range of $54 million which is above the total market cap, there is no revenue stream and the company is burning through cash rather quickly.


•      Total operating expenses in the third quarter 2016 were $7.9 million, compared to $4.3 million in the third quarter 2015.

•      Net operating expenses, excluding non-cash stock based compensation of $0.6 million, in the third quarter 2016 were $7.3 million, compared with $3.7 million in the third quarter 2015.

•      Research and development (R&D) expenses in the third quarter 2016 were $6.4 million, compared with $2.9 million in the third quarter 2015. R&D expenses consisted primarily of costs associated with the conduct of our Phase III Adult ADHD clinical study named MEASURE.

•      General and administrative (G&A) expenses in the third quarter 2016 were $1.2 million, similar to the third quarter 2015.

•     Balance Sheet Looks good withd – Cash, marketable securities, and deposits totaled $54.3 million at September 30, 2016 compared with $61.1 million at June 30, 2016 and $69.7 million at the end of 2015.


The company is based in Israel and we have also noted lower general valuations associated with NASDAQ listed stocks based in this area.


At present, despite the drop and cash balance, we do not see the stock as investable.

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