Responsible Growth Is A Good Thing
Our Conclusion
As we have come to expect, BEI reported another strong quarter, driven by
heightened rental demand in all of its markets coupled with prudent cost-
management initiatives (read: margin expansion). Alberta continued to lead
the pack, with Edmonton taking the title of “Belle of the Ball”, and we expect
the absence of rent controls (other than those self-imposed by the REIT)
should result in that dance card remaining full for some time to come. With
the REIT’s focus on its cost-optimization plan, expenses continue to be
controlled well below inflationary pressures, resulting in another quarter of
SP-NOI margin expansion (+230 bps). Indeed, sustained operating
fundamentals resulted in further upward revisions to guidance, and as
Alberta continues to be one of the most affordable rental markets within the
country with an estimated mark-to-market opportunity without incentives of
~9.8% (12.8% on a portfolio level), we view the REIT as having sufficient
runway to sustain (or perhaps exceed) its near-term growth trajectory (which
appears to show no signs of slowing, as July printed new leasing and
renewal spreads of +12.8% and +8.4%, respectively).
While we recognize the many positive tailwinds afforded to the REIT, a good
deal of the valuation upside may have already been captured in current unit
prices, which have significantly outperformed year to date (up 34% vs. the
XRE, which is down ~1%). As such, we maintain our Neutral rating, but
increase both our NAV estimate and price target to $70.00 (from $68.00), off
an unchanged 5% utilized cap rate.
Key Points
Earning Results: BEI reported diluted FFO per unit of $0.89, ahead of our
estimate of $0.87 as lower vacancy loss and incentives supported positive
NOI growth. We note that the REIT reported a ~$222.9MM fair value gain on
investment properties off a 2 bps decrease in its utilized cap rate.
Debt And Balance Sheet: At quarter-end, D/GBV was 44.3%, a 170 bps
decrease over Q2/22 and a 90 bps decrease Q/Q. IFRS NAV per unit was
$80.98 (vs. $70.03 in Q2/22) as increased market rents continued to drive
NOI. With a DSCR of 1.57x, both the REIT’s DSCR and D/GBV ratio remain
well within the requirements prescribed in its credit facility agreement, which
are <75% and above 1.20x, respectively. The REIT also maintains a prudent
debt maturity ladder, with ~$210.9MM in mortgages maturing in 2023
(~6.2%) and sufficient liquidity of ~$238.7MM to cover any immediate debt or
capex obligations.
Another Bump To Guidance: Given the increased visibility on non-
controllable expenses, continued cost optimization, and revenue trending
towards the upper end of its original forecast, management further provided
upward revisions to its 2023 guidance. SP-NOI is now expected to grow
between 11.5% and 14% (previously 9.5%-13%) while FFO per unit was
increased to $3.42-$3.54 (previously $3.30-$3.46); as such, our estimates
increase to the mid-point of the range.