Our view: While real estate track-records often take 5–10 years to build, we think BSR REIT (“BSR”) is well on its way to becoming a preeminent small cap REIT. In the 3.5 years BSR has been public, we believe its record clearly demonstrates an ability to: 1) deliver outsized SP-NOI and NAVPU growth; 2) recycle significant amounts of capital into faster moving streams; and, 3) build an aligned corporate culture that delivers. While the story isn't finished, the outlook today is brighter than ever. We reiterate our high- conviction Outperform rating and increase our price target by $4 to $21.
Key points:
Building on BSR's post-IPO track-record. Over the past 3.5Y, BSR has: 1) delivered average SP-NOI growth of 7% vs. its Sun Belt peers at 4%; 2)delivered annualized NAVPU growth of 17% vs. our coverage universe at 4%; 3) sold 7,400 suites in small markets for $613MM ($83,000/suite) —representing 75% of its IPO portfolio—at a 6% premium to IFRS fair value; 4) acquired 5,900 suites in major markets for $1.1B ($179,000/suite); and, 5) been named a Best Place to Work for five consecutive years.
At the end of the day, it's all about the people. Today, BSR's 30 property, 8,400 suite portfolio carries an average age of 13Y, with 97% of NOI from Dallas (39%), Houston (25%), Austin (24%), and Oklahoma City (9%). This bears little resemblance to the 48 property IPO portfolio (9,900 suites), which had an average age of 28Y and generated 48% of NOI from core markets. In our view, this demonstrates that the people, as much as the assets, are responsible for generating BSR's 25% annualized total return— which compares to the Canadian and U.S. REIT Indices at 11% and 15%.
Setting the right priorities, in our view. Looking ahead, we believe the REIT is well-positioned with a scalable platform located in some of the Sun Belt's strongest growth markets. In 2022, BSR's top priorities are: 1) capitalizing on its significant organic growth opportunity; 2) maintaining its cost of capital and being very disciplined in its allocation; and, 3) focusing on its culture and people, by remaining a Best Place to Work.
The outlook is brighter than ever. Supported by a 16% mark-to-market opportunity, 44% annualized turnover, and 6–10% growth on renewals, we think BSR is positioned to deliver 9–12% top-line growth in 2022 vs. 9% for the REIT's sub-markets and 9% for the top 50 metros, per RealPage. Importantly, BSR's 19% rent-to-income ratio remains deeply affordable vs. the 27% U.S. average and unchanged from 19% at its IPO.
Still on our Canadian Small Cap Conviction List (see Oct-5-2021 note).
With units trading at a 2% discount to NAV, a 4.4% implied cap rate, and $201,000/suite, we continue to see good value vs. Sun Belt peers at a 9% premium. We raise our price target on the back of a higher one-year forward NAVPU estimate, underpinned by stronger NOI and cap rate compression. Herein, we recap BSR's robust Q3 print, summarize key operating and financial metrics, and detail upward NAVPU and FFOPU estimate revisions.