November 15, 2020
BSR REIT
Smooth sailing in the Sunbelt
Our view: BSR REIT’s (“BSR”) portfolio continues to deliver steady growth as jobs, and people, migrate towards suburban Sunbelt markets. This favourable operating backdrop, together with a ~100 bps YTD pullback in 10Y Treasury yields, has provided meaningful valuation support, with Sunbelt apartments trading at, or above, pre-pandemic levels. At the same time, BSR continues to execute its capital recycling strategy, with a rotation into higher-quality assets in major markets. We raise our price target by $0.50 to $12.50 and reiterate our Outperform rating on BSR’s units.
Key points:
BSR’s core portfolio continues to deliver steady organic growth. Q3 results were in line with our expectations (details on p. 3), with 5% SP- NOI growth matching the 5% TTM average. This compares to Sunbelt apartment peers at 1% and 3%, respectively. In the near term, we expect FFO/unit may be choppy as BSR recycles $250–300MM of assets in Q4/20 and Q1/20. More importantly, management expects same-property NOI growth to remain firm to slightly positive on a sequential basis.
Sunbelt apartments are trading at, or above, pre-pandemic levels. Supported by a pullback in long bond yields, cap rates for Sunbelt apartments have fallen 30 bps YoY to 5.3%, according to Real Capital Analytics. Over the same period, apartment values have held firm across the Sunbelt but increased 3% in Texas, which represents ~69% of BSR’s NOI. Rising private market values supported a $24MM ($0.54/unit) fair value gain in Q3, driving a 3% YoY increase in the REIT’s IFRS NAV to $12.65.
Capital-recycling program advancing well. Since the IPO, BSR has disposed of 5,149 suites totaling $389MM ($75K/suite) in small markets and acquired 3,511 suites for $557MM ($159K/suite) in its core markets of Dallas, Houston, Austin, Oklahoma City, and NW Arkansas (home to Walmart). Today, the REIT derives 88% of its NOI from these markets, up from 53% at the IPO. Following planned asset sales in Q4, BSR expects NOI from its target markets to increase by a further 9–10pp to 97–98%.
Discounted unit price provides attractive entry point. BSR’s units are trading at a 14% discount to NAV, in line with the post-IPO average (since May 2018) but well below its Sunbelt apartment peers at a 3% premium. With a fully internalized and aligned platform, above-average organic growth, and prudent capital allocation, we see no reason that BSR’s units shouldn’t close the gap to peers as short-term FFO drag from the capital recycling program subsides and trading liquidity improves over time.
Reiterating Outperform rating; price target +$0.50 to $12.50. Post Q3, our 2020E–22E FFOPU are unchanged at $0.58, $0.69, and $0.75, implying growth of -18%, +19%, and +8%—for a 3Y CAGR of 2%. Our NAVPU and 1Y forward NAVPU estimates increase by $0.75 each to $12.50/$13.00 while our price target remains based on a 5% discount to NAV one-year henc