Scotia comments after conference Key Takeaways From Our Scotiabank Residential Conference on January 17, 2023
BSR REIT: SO rating and US$18.50 target price
BSR recently provided Q4 operating metrics. We got an impression that Q4 occupancy of 96.0% came in perhaps 50bp ahead of internal expectations. This was offset by slightly lower growth on new leases. In total, BSR still managed to print 6% effective blended rent growth in Q4 which was driven by 12% y/y growth on renewals and 2% growth on new leases. Houston saw the biggest deceleration with negative new leasing spreads.
Bad debt has remained at historical levels, i.e., 1% to 1.5%. Even during past recessions, bad debt has been ~1.75% of total revenue and not much worse.
On new supply issue, we got an impression that the reported new supply numbers by brokers are mostly on a 2- or 3-year rolling average basis. All that reported new supply is not expected to be delivered in the next 12 months, and rather in the next 1 to 3 years. Higher cost of debt financing for developers have perhaps changed the new supply economics.
BSR REIT mentioned that ~15% of tenants go out and buy homes. This pool is likely to be available for renewals and should further help the renewable rental spreads. We got a sense that loss-to-lease rent opportunity is still 10 to 12% which could be captured through rental increases. New leases are likely to be flattish on q/q basis as they face very tough comps.
BSR has made significant progress on the buy-back program with $14.6M of repurchases during Q4/22.
On portfolio growth front, BSR continues to be disciplined. We think they are still open to take more lease-up risk as long as they get 100 to 150bp spread over the underlying cap rates. BSR still believes cap rates have not expanded much for their product in key Texas markets.