Seeing its relative valuation as “reasonable” relative to its U.S. peers, Scotia Capital analyst Himanshu Gupta lowered his recommendation for BSR REIT to “sector perform” from “sector outperform” previously.
“BSR is trading at 12.4 times 2024 estimated AFFO [adjusted funds operations] multiple vs U.S. peers trading at 10-14 times,” he said. “BSR is trading at 6.6-per-cent implied cap rate while U.S. peers are trading at 6.8-6.9 per cent. BSR trading at 32-per-cent discount to NAV (vs CDN REIT sector at 29-per-cent discount). So, attractive valuation on absolute basis but not so on relative basis.”
In a research note released Tuesday, Mr. Gupta pointed to two other factors in justifying his recommendation change for the REIT, which focuses on multifamily garden-style residential properties in the Sunbelt region of the United States. They are:
* Concerns over same-property net operating income.
“The wait is getting longer,” he said. “As per RealPage, new supply is projected to remain elevated in 1H/24 and will only begin to ease off in Q3/24 and onwards. We forecast a fair bit of deceleration in SP NOI growth with 1 per cent year-over-year in 2024 (vs 2.5-per-cent previous estimate) versus 7 per cent in 2023. We project SP NOI growth should return to usual 2 to 3 per cent only in 2025.”
* Slowing growth.
“Transitioning out from the Growth bucket: We forecast a muted negative 1-per-cent year-over-year AFFOPU [adjusted funds from operations per unit] growth in 2024, and a small recovery in 2025,” he said. “Our 2024 FFOPU estimate is 3 per cent below consensus but there could be further downside if we see pressure on renewal lease spreads as well (in response to negative new leasing spreads).”
Mr. Gupta lowered his target by US$4 to US$13. The average is US$15.38.
Elsewhere, BMO’s Michael Markidis dropped his target to US$13.50 from US$16.50, reiterating an “outperform” recommendation.
“HOM has generated strong earnings growth for investors over the past two years; however, year-over-year comparisons will likely be relatively subdued through 2024 as the rebalancing in the REIT’s three core markets (Dallas, Houston, Austin) continues to unfold,” said Mr. Markidis. “On a positive note, the long-term demand drivers are intact, HOM’s financial position is sound, and management continues to proactively defend the value of its portfolio through the NCIB.”