Everything Is Bigger In Texas (except the property taxes)
Our Conclusion
BSR reported an in-line Q2/23, continuing to show above-average growth in
its core markets, recording a very respectable +11.7% SPNOI growth and a
+6.3% weighted average rental rate increase. Occupancy remains at an
effectively full 95.3% and BSR remains an active participant in its NCIB
program. Management maintained its guidance of $0.90-$0.96 FFO per unit,
total revenue growth of 5%-7%, a 4%-6% increase in operating costs, and
NOI growth of 6%-8% – targets we are confident the REIT should have no
issue attaining (or indeed exceeding). HOM units continue to represent an
attractive investment, in our view, for those seeking above-average (albeit
moderating) growth in Sunbelt multi-family real estate, where strong market
fundamentals suggest a long and promising runway of growth and stability.
Trading at a ~14x 2023E P/FFO multiple and a steep ~32% discount to
consensus NAV, we remain Outperformer-rated, and maintain our NAV and
price target of $20.00, implying NAV parity off our 5.25% utilized cap rate (up
from 5.00%).
Key Points
Q2/23 Results: HOM reported diluted FFO per unit of $0.23, in line with both
our and consensus estimates, representing an increase of 9.5% Y/Y. SPNOI
increased ~12% Y/Y, and occupancy was 95.3%, an increase of 30 bps Y/Y.
We note that during the quarter, the REIT recorded a fair value loss of
~$72MM, primarily driven by cap rate expansion, partially offset by additions
to investment properties in use and under development of ~$8MM.
Balance Sheet: D/GBV increased 210 bps since year-end 2022 to 39.4%
(37.3% excluding convertible debentures). With lenders placing increased
scrutiny on leverage in their decisions to extend credit (as well as the
uncertainty regarding additional rate hikes), we view HOM’s relatively low
leverage ratio to be a competitive strength, allowing additional flexibility in
decision-making that many private investors may not be afforded. The REIT
reported an IFRS NAV per unit of $20.48, reflective of a 4.7% utilized
capitalization rate (+30 bps compared to year-end 2022), which represents a
Y/Y decline of 8.4% and more closely aligns with our $20.00 NAV estimate.
Debt And Liquidity: HOM continues to operate a well-balanced debt
maturity ladder, with no principal debt obligations maturing until 2024. With
100% of its mortgage debt fixed or economically hedged (excluding the
Credit Facility and the construction loan), we view the REIT to have
significant financial flexibility, and not subject to the near-term refinancing
headwinds many of its peers face in the coming quarters. At quarter-end, the
REIT had ~$190MM in liquidity, as measured by undrawn credit facilities and
available cash.
NCIB Activity: During the quarter the REIT purchased and cancelled
390,477 units under its normal course issuer bid and automatic securities
purchase plan at an average price of $12.43 per unit.