Our view: Q3 was strong, much like the last two. But market cares not. It’s about (today US election) outlook in the face of potentially no population growth in next two years. BEI’s take: demand could be impacted, but there are mitigating factors, low non-permanent residents in AB being one. We’ve further moderated our estimates such that ‘25/’26 FFO are +6%/ +4%. The interesting exercise at points of uncertainty & inflection is market expectation (-6% NOI erosion) vs. reasonableness of expectation (worse during AB recession, infrequent over 20 years). PT to $90 (-8%); OP.
Key points:
Q3 was much like the prior two – Solid growth: Q3 SP NOI growth of +13.5% was driven by SP-Rev +9.5% and SP-Exp +2.6%. Average occupied rent was $1,493, +10% y/y, +2% q/q. Occupancy was 98.6% (+18 bps y/y, -10 bps q/q) and dropped slightly to 98% in November. Market rent was $1,644 (+0.4% q/q, +7.2% y/y). Rent spreads on new lease +10.9% (moderating) and renewal +7.9% (still achieving same into early ’25E). 2024 FFO guide inched up +0.5%: FFO guide is now $4.15 to $4.23 (Mid $4.19) based on SP NOI growth of 12.5%-14.5%.
Notwithstanding a good quarter, market is more concerned about outlook in the face of potentially no population growth over the next two years. Boardwalk’s take on the call: Demand could be impacted. Mitigating factors include 1) Relative affordability of its markets, 2) Interprovincial migration being a meaningful driver, 3) fewer non permanent residents in its markets. See Exhibits 4 & 5 for the last two points. Indeed, Alberta and SK have among the lowest NPR as % of population at 5.2%/3.5%, vs. Government’s target of 5%.
We are further moderating our assumptions, admittedly without strong conviction in either direction: Our 2025 estimate assumes +100 bps in vacancy, +5.5% rent, +4% expense yielding +6.5% NOI growth. Our 2026 estimate assumes further +50 bps in vacancy, +5% rent, 3% expense yielding +5% NOI growth. As a result, our 2025E/2026E FFO growth decelerates to 6%/4% vs. 15%-16% in ‘23-‘24E, and 6-7% in ‘20-‘22.
Inflecting fundamentals tends to bring about opportunities and it usually comes down to an exercise of market expectation vs. reasonableness of the expectation. Historically, BEI has traded on average largely in line with private market (Exhibit 11). Assuming 5.15% private market cap, current price is implying NOI erosion of -6% from 2024E levels (-11% from F12M NOI). While this is not outside the realm of possibility (see Exhibit 1), that level of erosion has happened infrequently over last 20 years. 2016 Alberta recession saw worse though rent differential between old & new product is materially different today. Valuation: Our NAV/unit estimate of $83 (+1%) is based on a 5.15% cap rate (+5 bps), vs. IFRS reported NAV of $94.64 (+2% q/q) based on 5.1% (unchanged) cap rate on ‘stabilized’ NOI. Our target of $90 (-8%) is based on parity (vs. +5%) to our 1Y forward NAV. Maintain OP.