Our view: Q1 FFO was slightly ahead, benefiting partly from timing of tax refund. Lease spreads have normalized to the low single-digit range and April looks to be the same. 2023 guidance was reaffirmed. BSR expects to manage through the new supply in Austin and existing rent gap in its Austin’s portfolio provides a buffer. At an implied 6.1% cap and $175K/suite, we continue to think that slowing fundamentals and asset pricing risks are more than baked in. Maintain OP.
Key points:
Q1 FFO was slightly ahead, benefiting partly from timing of tax refund:
FFO/unit was $0.23, +9.5% y/y, vs. RBC/consensus of $0.21/$0.22. SP NOI growth was +17.8% (SP-Rev +11.1%; SP-Exp +3.8%), helped by about $0.4M of property tax refund. Occupancy held relatively steady from Q4 at 95.9%, +140bps y/y, -10bps q/q. Monthly rent improved modestly sequentially to $1,489, +10.3% y/y, +0.5% q/q.
Lease spreads normalizing to the low single-digit range: Blended lease spreads: +3.6% (US large cap peers +2% to +4%). This compares with +6% in Q4/22, +11.2% in Q3/22 and 12.6% in Q3/22. New lease rate growth was +0.2%, renewal spread was +7.7%. Regionally, new lease spread turned modestly negative in Austin (-0.2%) and Houston (-0.4%). Dallas new lease spread was 2.2%. In April, BSR is seeing similar blended rates in the 3.6% range. Portfolio MTM is +8 to +10%. 2023 guidance reaffirmed: FFO/unit guidance of $0.90-$0.96 implies +6% to +12% y/y growth. Guidance is based on SP NOI growth of +6% to +8%.
BSR expects to manage through Austin’s supply. According to RealPage, there are 42K units under construction and expected 2023 deliveries are 25,618 (vs. 14,949 in 2022) – see Exhibit 6 for a map of potential deliveries in 2023-2025. BSR’s Austin portfolio MTM on renewals should help offset some of the potential headwinds in 2023. 2023 deliveries as % of existing inventory is 6-8% in Austin, 3.6% in DFW and 2.4% in Houston.
Leverage: BSR has done a good job managing its variable rate debt through rolling swap agreements such that current rate is essentially fixed at 3.3% today and climbing marginally in 2024. In May, BSR entered into a new $50M interest rate swap agreement at 2.25% effective July 2024, with lender having call option in June 2025.
At an implied 6.1% cap and $175K/suite, we continue to think that slowing fundamentals and asset pricing risks are more than baked in. We have taken a more conservative view on NAV/cap rates than BSR with our NAV estimate of $18.50 (-$1.50), based on a cap rate of 5.0% (+15bps) vs. reported NAV of $21.36 (-1.8% q/q) based on an economic cap rate of 4.5% (+10bps q/q). Our price target of $18 (-$1) is based on a 5% discount (unchanged) to our one-year forward NAV and still implies a healthy return. Maintain OP.