BSR Real Estate Investment Trust Units T.HOM.UN

Scotia comments

[incomedreamer11]

Foreign Residential: Getting A Bit More Interesting

OUR TAKE: Slightly Positive. Foreign residential names (see Exhibit 1 for comparison) had a strong 2021 and since then have underperformed in 2022, 2023 and 2024 YTD (Exhibit 10) as interest rates spiked and over-supply issues in U.S. Sunbelt impacted HOM and DRR. We are now searching for a turnaround in these names. Our foreign residential basket (HOM.U, DRR.U, MHC.U and ERE.UN) offers growth similar to CDN REIT sector but trades at almost double the valuation discount (Exhibit 6). Foreign basket at 32% discount to NAV vs REIT sector at 18%. Some catalysts:

BSR REIT (HOM.U): New supply is becoming old news. Operating stats show stabilization in Q2 (Exhibit 2) with potential rebound in Q4. We see this as an SO-rating upgrade candidate (Exhibit 4).

ERE (ERE.UN): Recent asset dispositions of €116M (~6.7% of total assets) at mid-4% cap rate or above IFRS valuation. We see this as an M&A candidate.

Flagship (MHC.U): trades at a wide discount to private markets. CAPREIT (covered by Mario Saric) sold a $740M manufactured Housing portfolio at 5.5% implied cap rate. Previously, we have heard MHC similar portfolios in US trading at mid-4 to mid-5% vs Flagship at 7.6% implied cap. Stock has pulled back (~10%) since recent equity offering.

KEY POINTS

U.S. Sunbelt - stabilization and then rebound. Encouraging operating stats from BSR REIT yesterday. During Q2/24, rental rates for new leases declined 2.6% (vs. -4.9% in Q1), while rates for renewals increased 3.1% (vs. +3.4% in Q1), resulting in a blended increase of 0.3% (vs. -0.7% in Q1) over the prior leases with weighted average occupancy of 95.3% (flat q/q – in line with Scotia estimates). Good to see sequential improvement. Within Texas, Austin continues to struggle (posted -2.3% blended rent growth) while Houston seemed more resilient (printed +1.7% blended rent growth). Also, Axiometrics (RealPage) data is out - we think BSR is outperforming the broader market. Per RealPage, effective rents in Austin decreased by 7.4% y/y in Q2/24 (vs. -6.8% y/y in Q1) while Houston rents slightly decreased by 0.7% (vs. -0.5% y/y in Q1). Dallas performed somewhere in between with -2.5% y/y growth in Q2/24 (vs. -2.1% y/y in Q1). Also, see a detailed US Multi-family report from our colleague Nick Yulico. BSR trades at 22% discount to Scotia NAV at 6.3% implied cap rate vs large U.S. peers at 6-6.2% (Exhibit 11). DRR (Dream Residential) continues to perform well and Q2 is very similar to last couple of quarters (Exhibit 5). DRR, a small cap entity, trades at 9.8% implied cap.

European Residential (ERE.un) - still looking to wind-down entity: Although the strategic review last year was unsuccessful, we get the sense management is still committed to surface value either through an M&A or a piecemeal asset sale. We were pleasantly surprised that €114.9M in combined asset dispositions were done at mid-4% cap rate which is similar to their overall cap rate on the residential portfolio. ERE is trading at 5.7% implied cap rate and 36% discount to IFRS NAV. Needless to say, this is a deeply-discounted name and could see more upside on higher asset dispositions. At 5% cap rate and current f/x, ERE NAVPU will be $3.75.