TSX:HOM.DB.U - Post by User
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retiredcfon Aug 13, 2023 7:09am
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Post# 35585811
RBC
RBCTheir upside scenario target is US$19.00. GLTA
August 10, 2023
BSR REIT
Looking for ‘great assets at a fair price’
Outperform
TSX: HOM/U; USD 12.99; TSX: HOM-U
Price Target USD 17.50 ↓ 18.00
Our View: Q2 FFO was in line. Lease spread has normalized, modestly higher than Q1/23, and BSR expects lease spreads to remain in the 3% range. 2023 guidance was maintained with Texas property tax relief providing upside. BSR remained active on unit buyback (~$20M YTD) and struck a constructive tone on potential acquisition opportunities. At implied 6.2% cap ($176K/suite), asset pricing risks appear baked in. Given its good acquisition track record (and ~$300M capacity), there is free optionality on BSR landing on a few good deals in an environment where good assets with broken cap structures could surface. Maintain OP.
Key points:
Q2 FFO was in line: FFO/unit was $0.23, +9.5% y/y, vs. RBC/consensus of $0.23/$0.23. SP NOI growth was +11.7% (SP-Rev +8.5%; SP-Exp +4.8%). Occupancy was 95.3%, (-60 bps q/q, +30bps y/y). Monthly rent was $1,495, +0.9% q/q, +6.5% y/y. Lease spread has normalized and was modestly higher than Q1/23: Blended lease spread was +3.7% (+10 bps q/q). This compares with +3.6% in Q1/23 and +12.6% in Q2/22. New lease rate growth was +1.1%, renewal spread was +6.7%. Regionally, new lease spread deteriorated in Austin (-1.9%) while Dallas and Houston were +2.2%/+1.2%. The renewal spreads were fairly consistent across its markets. BSR expects leasing spreads to remain in the 3% range in H2.
2023 guidance maintained; Texas property tax relief to be voted in November provides ~2.5%-3% upside to guidance – they are in our estimates. FFO/unit guidance of $0.90-$0.96 implies +6% to +12% y/y growth. In terms of the property tax relief in Texas which is expected to be passed in November, BSR guided to $1.3-1.5M in lower property taxes, which we have factored in our estimates.
12 months outlook: BSR’s largest market, Dallas fared relatively well in Q2/23 and RealPage expects Dallas market-wide revenue growth of 4.7%. RealPage 12-month revenue forecast averages +2.7% (weighted to BSR’s markets). BSR noted seeing limited impact from new supply given lower rents in its portfolio, and only 3 Austin assets that are most vulnerable.
Capital allocation: BSR expects to see more opportunities as cost of debt is stabilizing. Acquisition capacity is ~$300M (debt/GBV 39.4%) and it prefers lease up deals where spreads look more reasonable than stabilized assets. It is looking to earn 100-125bps spread to cost of debt on stabilized assets and 125-150bps spread on lease up assets. It sure sounds like BSR is sharpening its pencil for what could come.
Valuation: Our NAV estimate is $17.50 (-5.4% q/q), based on a cap rate of 5.3% (+30bps) vs. reported NAV of $20.48 (-4% q/q) based on an economic cap rate of 4.7% (+20bps q/q). Our price target of $17.50 (-$0.50) is based on a 5% discount (unchanged) to our one-year forward NAV and still implies a healthy return. Maintain OP.