Texas Two-stepping The Debt Roll
Our Conclusion
BSR reported an in-line Q3/23, continuing to show above-average (albeit
moderating) growth in its core markets; however, perhaps more topical is the
unique position in which HOM currently has no principal debt obligations until
2025 (negating any near-term refinancing headwinds). Occupancy remains
at an effectively full 95.2% and BSR remains an active participant in its NCIB
program. Management tightened its guidance; however, the mid-point was
unchanged. In our view, HOM units continue to represent an attractive
investment. While growth may be somewhat moderating, it still remains
positive and the Sunbelt multi-family real estate market fundamentals remain
strong, suggesting a long and promising runway of not only growth, but
stability as new supply continues to be absorbed.
We are reducing our NAV estimate to US$18.00 on 25 bps of cap rate
expansion (to 5.5%); accordingly, we are reducing our price target to
US$16.50, a modest discount to our NAV estimate. We maintain our
Outperformer rating. Concurrent with the quarter, we are releasing our 2025
estimates.
Key Points
Q3/23 Results: HOM reported diluted FFO per unit of $0.23, in line with both
our and consensus estimates, and representing an increase of 8.3% Y/Y.
SPNOI increased ~7% Y/Y and occupancy was 95.2%, an increase of 50
bps Y/Y. We note that during the quarter, the REIT recorded a fair value loss
of ~$111MM on investment properties, primarily driven by cap rate
expansion, partially offset by additions to investment properties.
Balance Sheet: D/GBV increased 400 bps since year-end 2022 to 41.3%
(39.2% 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. The REIT reported an IFRS NAV
per unit of $18.66, reflective of a 4.9% utilized capitalization rate (+50 bps
compared to year-end 2022), which represents a Y/Y decline of 16.4% and
now below consensus of $19.95. At quarter-end, the REIT had ~$200MM in
liquidity, as measured by undrawn credit facilities and available cash.
Debt Rolls: HOM continues to operate a well-balanced debt maturity ladder,
with no principal debt obligations maturing until 2025. With 100% of its
mortgage debt fixed or economically hedged (excluding the credit facility and
the construction loan), we view the REIT as having significant financial
flexibility, and not subject to the near-term refinancing headwinds many of its
peers face in the coming quarters. Beginning in 2025, the REIT has ~$208M
of debt maturing or ~30% of total loans and borrowings. If the market does
indeed play out as most economists expect, then HOM stands to benefit from
a decrease in rates by 2025, minimizing any material refinancing risks.