BSR Real Estate Investment 5 00 convertible unsecured subordinated debentures T.HOM.DB.U

Scotia comments

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It Was Hot in April; Don't Expect A Winter in Texas Anytime Soon

OUR TAKE: Positive. Q1/22 results were strong (see our Glance note). RealPage has recently published April 2022 rent growth data which continues to look good – we estimate +16.9% y/y rent growth in Apr ’22 for BSR portfolio (in line with 17.5% in Q1/22). Based on RealPage estimates, we are expecting 16.4% y/y effective rent growth for BSR in 2022 and 9.1% in 2023 (deceleration from teens but close to ten is still a very strong number) – Exhibit 2 with details. In a way, 2022 will be very hot in Texas (in terms of rent growth) but don’t expect a winter anytime soon. Even the long-range forecasts of 3 to 4% market rent growth in 2024-25 in Texas could look good in a global context.

Current Price equates to 4.9% implied cap rate. Our NAV cap rate is 4.23% vs IFRS cap rate of 39% (-20bp q/q). Management mentioned that there has been no impact to volume or pricing in their markets in March and April (despite bond yields). We hear that transactions which were very aggressive (say 3 or low-3 cap rate) are now perhaps ~50bp higher...but our cap rate of low-to-mid 4% is well-defended in the private market. BSR is now trading at 22% discount to our NAV (Exhibit 1). We reiterate our SO rating and $23.50 target price.

KEY POINTS

AFFOPU CAGR of +23.7% in 2021A-2023E is the highest within our coverage universe (alongside StorageVault): Our 2022 FFOPU estimate is in line with management guidance and implies 47% y/y growth. While BSR has been quiet on acquisition/disposition front in the year so far, we are assuming $100M of acquisitions in 2022 and $200M in 2023 (funded 50% by debt and 50% equity). We compare BSR with CDN, European, and U.S. multifamily names (see Exhibit 3-5); BSR stacks up very well.

So far, not much operating cost pressure as double-digit rent growth is able to offset everything: See page 8 for details on Q1/22 results & 2022 guidance. 2022 is shaping to be a very strong year. We understand multi-family is a gross lease business and therefore increase in utility costs, labour costs, taxes and insurance are largely borne by the landlord. Our model assumes a conservative NOI margin of 53% in 2022 and 2023, and we think there could be upside to this number. We note management guidance implies 5.50% y/y growth in operating expenses offset by 9.00% total revenue growth equating to 12.0% SP NOI growth in 2022. We estimate 8.3% SP NOI growth in 2023 based on our rent growth assumptions (Exhibit 2). Management noted that rent as a % of median resident income in BSR’s portfolio is still 19%-21%, which is similar to last three years despite rent growth. Management also mentioned that ~20% of new leases in the last couple of quarters were out-of-state (40+ States represented) and this has led to strong leasing trends.

Q1/22 Earnings Recap

After blockbuster Q4/21 results, BSR followed up with another strong quarter in Q1/22: (1) Another Beat: Q1 FFOPU came in 7% higher than Scotia estimate. Beat was due to slightly lower interest expenses. SS NOI grew +16.3% y/y in Q1. (2) IFRS NAVPU jumped to $21.98/unit, up 11.0% q/q, as BSR recorded FV gains of $2.28/unit (or ~13.2% of unit price). (3) 2022 guidance reiterated – this implies 12% SS NOI growth and FFOPU growth of 48% y/y. Despite $115M equity issued in end of Apr, guidance was unchanged. FFOPU guidance (at mid-point) at $0.88 vs Scotia estimate of $0.85 and consensus estimate of $0.86.

BSR is now trading at ~22% discount to IFRS NAVPU. The results are too strong and do not reconcile with the current valuation.

FFO beat in Q1: Q1 FFOPU came in at $0.212 vs Scotia estimate of $0.198 and consensus estimate of $0.20. Reported AFFOPU was up 81% y/y in Q1. NOI was in line while interest expense came slightly lower than us which led to outperformance.

Strong 2022 guidance reiterated despite equity issuance: FFOPU (at mid-point) guidance of $0.88 implies +48% y/y growth, versus Scotia estimate of $0.85 and consensus estimate of $0.86.

IFRS NAVPU came in at $21.98 vs $19.81 last quarter (up 11% q/q) as stabilized NOI assumptions were revised upward while cap rate was slightly reduced to 3.9% from 4.1% last quarter: As we have noted earlier, all three core markets (Dallas, Houston and Austin) are seeing meaningful rental rate growth and cap rate compression. FV gain of $2.28/unit in Q1/22 similar to $2.19/unit last quarter.

SP NOI up +16.3% y/y in Q1/22 (2022 guidance of 12% growth at mid-point unchanged): SP NOI growth was driven by 9% y/y growth in rental rates (similar to last q) and SP occupancy was largely flat y/y. SP NOI margin grew 240bp y/y. Portfolio occupancy at 94.5% (down 150bp q/q). Focus has been on rental rate growth (over occupancy gains).

Rental rate acceleration continues – tough comps from Q3/22: See Exhibits 5 and 6 – strong numbers. Q1 was similar to Q4/21 and remains to be seen how H2/22 will pan out against tough comps. So far, we are not seeing signs of slowdown and expect double-digit rent growth through Q2/23 (see our last note for details).

Balance sheet and acquisition activity: In late Apr ’22, BSR completed $115M equity offering @$19.55/unit. We assumed the proceeds will be used to pay down debt and expect leverage will reduce to 37.9% (from 43.2% as of Q1/22). For more details, see our recent note titled “2022 and 2023 Market Rent Growth Forecasts Revised Higher”. No new acquisitions announced in 2022 so far. Weighted average cost of debt at 2.8% p.a. (vs 2.7% last q and vs 3.5% last year). This is a function of refinancing done in H2/21. Next major debt maturity in 2024 and 2025 (so limited debt refinancing risk).