CIBCEQUITY RESEARCH
November 10, 2021 Earnings Update
BSR REAL ESTATE INVESTMENT TRUST
A Touchdown With A Two-point Conversion
Our Conclusion
BSR reported a blockbuster quarter featuring ~13% Y/Y organic growth and a ~20% Q/Q increase in the REIT’s IFRS NAV (on significant IFRS cap rate compression – the touchdown – and NOI growth – the two point conversion); note that this is on the back of a material ~12% Q/Q increase in IFRS NAV into Q2/21. The strong operating results are indicative of an extremely tight rental market; consider that rent increases achieved on turned suites reached a staggering ~17% during the quarter, with this figure growing to
~23% in October. Needless to say, we see a runway for well above-average (perhaps a continuation of double-digit) organic growth into 2022. While the REIT’s recent operating results are undeniably among the most promising within the residential sector, units continue to trade at a relatively punitive discount to NAV. Given the REIT’s compelling mark-to-market opportunity (which appears to be 20%+), we would suggest that a valuation premium is warranted at this time. Indeed, we apply a ~5% premium (which we note is quite conservative) to our revised NAV estimate of US$19 in deriving our price target, which
increases to US$20.00 from US$17.50 (our revised NAV estimate increases from US$16 previously, reflecting a 25 bp decrease in our applied cap rate to 4.25%).
Key Points
Earnings Results: Q3/21 FFO was $0.16/unit, in line with our estimate of $0.16/unit and $0.16/unit in the comparable quarter last year. We note a material 20% Q/Q increase in the IFRS NAV to $17.77, primarily reflecting a $162MM fair value adjustment to investment properties on increased NOI assumptions and compression in IFRS cap rates (to 4.1% from 4.5%).
Capital Recycling Activity: During the quarter, BSR purchased a 351-unit apartment property in Dallas for $82.8MM and a 356-unit property in Austin for $93.8MM. The focus of the REIT’s capital recycling program continues to be on capital deployment, with management expecting to acquire ~$70MM in assets by year-end, which should add ~$1.7MM, or $0.03/unit, in annualized AFFO.
Debt Position: Debt/GBV at quarter-end was 43.5%, as compared to 41.5% at Q2/21. Liquidity, as of Q3/21, was $79.9MM (consisting of $5.7MM in cash and the remainder on credit facilities/lines of credit). We note that on Sept 30, the REIT amended its credit facility, thus increasing the maximum credit availability to $300MM (from $285MM). The full acquisition capacity of the REIT, as of quarter-end, was ~$250MM.
Valuation: At current prices, BSR trades at a 13% discount to our US$19 NAV estimate, and at ~22x 2022E FFO.