TSX:HOM.DB.U - Post Discussion
Post by
retiredcf on Aug 15, 2022 7:45am
RBC Raise Target
All targets are USD and their upside scenario target is now USD 27.00. GLTA
August 12, 2022
BSR REIT
Solid Q2; A de-risked balance sheet
Our view: BSR REIT (“BSR”) reported a solid quarter. We maintain a constructive view on the name given continued NOI growth outpacing inflation and a de-risked balance sheet with no variable rate exposure. Simply put, NOI is growing at ~12% while recent interest rate swap agreements resulted in average interest rate increasing by only 10bps to 3.4%. Target raised to $23.50 from $21.00. Maintain OP.
Key points:
Operating performance – continued double digit organic growth: SP NOI growth +17% (SP-Rev +12%; SP-Exp +6%). SP NOI margin improved 250 bps y/y to 55%. Austin continues to be an outperformer with SP NOI +25%. Blended lease spreads: +12.6%; New lease +16.3%; renewal +8.8%.
Outlook: No signs of weakness so far: 2022 SP NOI growth guidance increased to 12-14% (vs. 11-13%); FFO/unit guidance maintained at $0.86- $0.90 with de-leveraging offsetting the higher NOI. Guidance does imply a deceleration in H2 given tougher comp in H2/21, but robust demand conditions in Austin, Dallas and Houston (still topping the charts in terms of fastest growing MSAs) appear to be continuing – out-of-state move-ins are still accelerating (20% in Q2 vs. 18% in Q1), implying higher income renters. Supply does not appear to be an issue at least in the next 12 months.
Capital allocation – Looking for value-added and lease-up risk, no stabilized assets: BSR will develop a new Austin property (in a JV with 97.5% ownership) for $60M ($250K/suite) and expects to earn a development yield of +300 bps in excess of its age cost of capital. Cap rates on stabilized assets remain low (indeed, price per suite higher than replacement cost) as investors are willing to pay up for mark-to-market rent opportunities. Instead, BSR will focus taking on value-added and lease-up risks on new developments in order to be able to earn a reasonable spread over cost.
A de-risked balance sheet: D/GBV of 36% is down materially given the Q2 equity offering. Importantly, post quarter, BSR entered into several interest rate swaps such that 100% of BSR’s debt will effectively be fixed at an average rate of 3.4% (vs. 3.3% a year ago). The swap rates were impressively low in the 2.1-2.2% range with term to maturity until 2029, although the counterparty has staggered one-time call rights in 2024/2025/2026. A materially de-risked balance sheet with net debt / EBITDA in the 9.5x would be the lowest among the Canadian-listed multi-res sector.
Estimates and rating. 2022E/2023E FFO are $0.86 & $0.94 (+$0.04, + $0.05). We are introducing 2024E FFO at $1.02. NAV estimate is increased to $21 from $18.75, on higher NOI (cap rate unchanged at 4.5%, vs. IFRS 3.9%). Target is increased to $23.50 (+$2.50), and is based on 5% premium to one year hence NAV. Maintain OP rating.
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