Our view: Given most of its markets are non-rent-controlled, the strong apartment fundamentals are most visible in BEI’s results with sector leading SP NOI growth at 13%-14% in 2023. 99% occupancy implies markets can absorb higher rents, and as such, we think there is more revenue growth ahead, especially with rent to income ratio in AB still below national average. We are modeling +9% FFO growth in 2024; growth should slow in 2025 from higher interest expense. Despite the stock outperformance YTD, we see BEI continuing to perform well given the positive demand/supply dynamic. Maintain OP.
Key points:
Growth everywhere: Q3 SP NOI growth of +12% was driven by SP-Rev +9% and SP-Exp +4%. Average occupied rent was $1,357, +2.3% q/q, +8.4% y/y. Occupancy was 98.5% (+20 bps q/q, +122 bps y/y) and improved further to 98.9% in early November – a record high. Market rent was $1,534 (+2.6% q/q, +10% y/y). Regionally, its AB and SK markets (74% of NOI) remain the strongest with SP NOI growth of +16% & 12%, followed by ON at 5%, QC +4%, BC 3%.
2023 guidance raised for third time: 2023 FFO guidance was raised again (+3% last quarter) to $3.52 to $3.60 (vs. $3.42 to $3.54) based on SP NOI growth of +12.5% to +14% (vs. +11.5% to +14%). October new lease spreads were +12% (+12% in AB) and renewals were +7% (+8% in AB). Given the demand/supply imbalance (T12M AB population growth of ~180K vs. completions of ~30K), affordable rent levels (BEI’s AB rent to income ratios of ~16%-20% on in-place, ~19-23% on market), and MTM opportunity of +13%, a high single digit revenue growth looks sustainable in the near term.
Estimates increased by 2%; Interest expense more of a headwind by 2025: Our FFO estimates are increased by ~2%, with ’23 FFO implying +13% y/y, ’24 FFO +9% and ’25 FFO +5%. Higher interest expense will serve as partial headwinds in 2024 with 12% of mortgages maturing at 2.93% and become more of a factor in 2025 with 17% maturing in 2025 at 2.44%.
BEI trades at a 21x 2024 AFFO vs. 19x average for CDN multi-res peers.
We think this premium to average appropriately reflects the record high net migration to AB, the better conversion rate from market rent growth to NOI growth given 74% of NOI is in non-rent controlled markets and the resulting sector-high SP NOI growth. Our NAV/unit estimate of $70 (+1.5%) is based on a 5% cap rate (+15bps), vs. IFRS reported NAV of $82.07 (+1.3% q/q) based on 5.05% (+15bps) cap rate on ‘stabilized’ NOI. Our target of $79 (+3%) is based on parity to our 1Y forward NAV. Despite the stock outperformance YTD, we see BEI continuing to perform well given the positive demand/supply dynamic which we think continues in the near term. Maintain OP.