Our view: With rent growth in BSR REIT's ("BSR") core Texas markets hitting all-times highs, it should come as little surprise that cap rates are compressing, and outsized NAV growth is following suit. Looking ahead, positive trends are set to continue, if not strengthen, over the next 12 months as leases signed over the summer filter through the rent roll and rent increases on renewals catch up to market. Overall, we continue to see attractive risk-adjusted returns from BSR's units, underpinned by strong NAV growth and the discount to peers narrowing further. Price target +$3 to $17. Reiterate Outperform.
Key points:
In-line Q2 results underpinned by healthy organic growth. As detailed herein, FFOPU of $0.13 was in line with our $0.13E and down from $0.15 in Q2/20 owing to BSR's capital recycling program. Beneath the surface, organic growth of 5% was in line with Sun Belt peers at 5% and ahead of BSR's 3% TTM average. SP-NOI growth was driven by 3.4% AMR growth and a 110 bps increase in occupancy, with generally stable NOI margins.
Leading me down the right path. As jobs, and people, continue to migrate to BSR's Sun Belt markets, leads in Q2 increased 21% sequentially—with a closing rate of 40%, compared with 31% in Q1. Surging demand supported rent growth on new move-ins of 10% in June and 16% in July, in line with all-time highs of 12% and 15% in the Texas Triangle, according to RealPage. This momentum, paired with a further 70 bps increase in SP-Occupancy to 96.4% in July bodes well for accelerating SP-NOI growth in H2/21.
NAV growth is (still) bigger in Texas. In Q2, BSR recorded $83MM of net fair value gains, equating to 7% sequential growth, in line with 6% for garden- style apartments in Texas and 10% for U.S. apartments. Relative to pre- pandemic values (i.e. Q1/20), BSR's fair value marks imply growth of 15% compared with 19% in Texas and 9% nationally. Looking ahead, we see 8% NAVPU growth over the next 12M, vs. our coverage universe at ~5%.
Capital recycling focus turns to acquisitions. With the disposition program effectively complete, BSR now derives 97% of its NOI from Dallas (40%), Houston (28%), Austin (19%), and OKC (10%)—compared with 53% at the 2018 IPO. This includes the July 2021 acquisition of Hangar 19 in Dallas for $83MM ($236K/door) at a 3.7–4.3% cap rate. In aggregate, capital recycling has reduced the average age from 29 to 13 years. In H2/21, BSR expects to complete $167MM of acquisitions at similar economics to Hangar 19.
Price target +$3 to $17; reiterating Outperform. Post Q2, our NAVPU and 1Y forward increase by $1.75/$2.25 to $15.00 and $16.25, with our target premium to NAV increasing to 5%, from parity previously. In our view, BSR's units should trade at a premium to NAV, given a fully internalized platform, strong alignment, and solid post-IPO execution. Our 2021E–22E FFOPU increase by $0.01/$0.03 (+2%/4%). Our inaugural 2023E of $0.79 reflects a 4Y CAGR of 3% between 2019A–23E