BSR Real Estate Investment 5 00 convertible unsecured subordinated debentures BSRTF

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Investor Day Takeaways: No Winter in U.S. Sun Belt

OUR TAKE: Positive. BSR REIT (BSR) hosted Investor Day in Dallas this week (Dec 12 & Dec 13) which included property tour, presentations from BSR management, and U.S. multi-family market update from CBRE. Bigger picture: BSR had two back-to-back years with outsized growth i.e. SS NOI growth of 13% y/y in 2022E and 9.9% in 2021. BSR is likely to provide 2023 guidance in Feb (was not provided during Investor Day). Our model implies 4.7% SS NOI growth in 2023, and coming back from the trip, we think there is upside to our estimate.

On valuation, BSR trading at 5.8% implied cap rate while CBRE brokers are still seeing transactions in low-to-mid 4% cap rate range (BSR comparable product). We heard private capital buyers are still there while institutional buyers have pulled back. On $ per door metrics, BSR trading at $177k per door vs CBRE transaction market estimate of $225k per door vs replacement cost estimate of $250k per door. We think public equity markets have over-corrected with BSR trading at 23% discount to Scotia NAV and 40% discount to IFRS NAV.

KEY POINTS

The Investor Day and Property Tour was well-attended. The event was hosted jointly with Slate Grocery REIT (SGR.U). Some of our observations from the tour:

1. BSR management: Good operators + Good capital allocators (a good combo): BSR successfully recycled capital out of secondary markets to core primary markets over the last few years. While market was very hot this year, BSR remained disciplined and made zero acquisitions (stabilized properties) in 2022. We get a sense that management could co-invest (with institutional capital) in new development projects where yields are 200bp higher than stabilized cap rates (i.e. 6%+ development yield). From operational perspective, BSR owns Class A, mostly new garden-style, multi-residential properties in core Texas markets. These are resort-style properties with affordability still in 20% range (rent-to-income ratio).
2. Ingredients of growth is still there in the U.S. Sun Belt especially in BSR core markets. We get a sense that renewals in 2023 can still deliver 10% y/y rent growth while rent growth on new leases are likely to be flat y/y. So, a 5% effective net rent growth is very much possible (assuming turnover of 45%) with flat occupancy. Management focus is to push occupancy higher next year (despite more new supply coming). Overall, Dallas, Austin and Houston are expected to see continued population and job growth (above U.S. national averages).CBRE market update: Danny Baker (Vice Chairman of CBRE Multifamily) based in Dallas provided an update on the Dallas multi-family market. We heard there is a bit of pause in the transaction market with institutional capital on the sidelines but private capital investors are still active. We have seen cap rate expansion of 25bp to 50bp so far, but more repricing expected in Q1/23 as we see more transaction volumes. Due to higher cost of debt financing, we are likely to see delays in development projects – CBRE believes that new starts could be just 50% of what is estimated to be at this point of time.

   CBRE talked about a recent transaction in Dallas market which is expected to clear at 4.15% cap rate – they received 18 bids on this property (mostly private capital). Although transaction volumes have gone down, but we have yet to see significant re-pricing (around 25bp to 50bp in the last six months). We do note that bid-ask spread has widened a lot. We think H1/23 would be a period of transition while H2/23 is likely to see more transactions at new pricing. By then, we will have a better picture of macro and bond yield environment.