November 14, 2022
BSR REIT
Start of rent growth normalization
Our view: US rent inflation seems to be witnessing the beginning of a ‘normalization’ following outsized growth in 21/22. BSR still has 10-12% loss-to-lease to work through and as such mid-to-high single digit revenue growth next year does not seem unrealistic. Timely interest rate swaps provide at least a one-year interest expense shelter. Like for other US multi- res REITs, public market has priced in a material move in cap rates for BSR, now trading at an implied 5.7%. Its NCIB activity is a welcomed move.
Key points:
Rent growth decelerating, rent not declining: SP NOI growth: +9.7% (SP- Rev +11%; SP-Exp +12%). The NOI growth lagged its US sun belt peers (12-17%), likely due to adj. to tax accrual in its Austin portfolio. Occupancy: 94.7%, -180 bps y/y, -30 bps q/q; AMR $1,460, +14.5% y/y, +3.4% q/q. BSR noted its strategy of forcing turnover earlier this year to capture rate growth on new tenants, and is now working back to improving occupancy.
Outlook: 2022 SP NOI guidance was unchanged at 12-14%. FFO guidance was reduced by 2% reflecting the interest rate swaps not taking full effect until end of year. We are modeling 2023 revenue growth in the mid-to-high single digits, reflecting loss-to-lease of 10-12% and flat occupancy. Home buyers priced out of the housing market, supply deliveries elevated but slowing due to cost/availability of financing and no evidence of sun belt migration reversing support healthy but not overheated markets. Realpage one-year forecast for market rent growth averages 4% for BSR’s markets.
Capital allocation – Active on NCIB: Post quarter, BSR acquired 200K units at an average price of US$13.99 for a total of $2.8M, and noted that it expects to remain active at current pricing. We expect it to remain quiet on the acquisition front. Bid/ask spread remains wide to the tune of 200 bps.
Management changes: Blake Brazeal, Co-President and COO, will retire. Susan Koehn, current CFO, will assume his role. Brandon Barger, current Chief Accounting Officer, will assume CFO and Corporate Secretary role.
Interest expense not a headwind next year: With the timely interest rate swap agreements entered in Q3, 100% of BSR’s debt will be effectively fixed at an average rate of 3.4%. The full effect of the swaps will be felt in Jan 2023 and they mature in 2029. The counterparties have call rights in 2024/2025/2026 and as such, with no other debt maturing in 2023, there is no refinancing rate exposure next year.
Maintain OP. Our $21 NAV (unchanged) is based on a cap rate of 4.6% (+10bps) vs. reported NAV of $22.32 (IFRS cap rate of 4%, +10bps q/q), and implied cap rate of 5.7%. Our PT of $20.50 (-$3) is based on a 5% discount (+5% prev.) to our one-year forward NAV, reflecting our view that the broader REIT sector will trade at an above average discount given volatility and asset pricing uncertainty.