BSR REIT: Another Fairly Valued Sunbelt Landlord

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Dear readers/followers,

In my latest article connected Camden Property Trust (CPT), I explained why I judge that nan Sunbelt spot marketplace is apt to stay balanced, even-though a grounds magnitude of caller apartments will beryllium completed complete nan adjacent 2 years. Although rents cannot reasonably beryllium expected to proceed to turn by double-digits, I deliberation nan Sunbelt remains 1 of nan champion positioned markets for apartments (mainly owed to precocious occupation growth) and each existent property investors should strive to person astatine slightest immoderate vulnerability to nan market.

In today's article I want to supply a elaborate study connected 1 of my favourite plays connected nan US residential marketplace - nan Canadian based BSR REIT (TSX:HOM.U:CA) (OTCPK:BSRTF).

Overview

BSR is simply a Canadian-domiciled REIT pinch properties located exclusively successful nan Sunbelt region. The REIT utilized to own properties successful smaller towns successful Arkansas and Oklahoma, but has changed its strategy a fewer twelvemonth ago, trading nan mostly of its portfolio and focusing connected 3 cities successful Texas - Dallas, Austin and Houston. This was a bold move by guidance and so an costly 1 arsenic nan aged properties sold astatine importantly higher headdress rates compared to nan newer properties successful Texas. This modulation besides reduced nan mean property of nan portfolio from 29 years to 11 years, thereby reducing capex spending. By now, we tin confidently opportunity that it paid disconnected arsenic nan Texas marketplace has been connected occurrence complete nan past fewer years. Currently nan REIT owns 31 garden-style flat communities totaling 8,666 units (85% of which is located successful Texas) pinch an mean occupancy of 94.7%.

BSR Investor Presentation

BSR's properties thin to beryllium B-class and cater to a wide resident guidelines that tends to rent by necessity. This is reiterated by nan median income of residents that signed leases successful Q3 2022 of $84,000. I for illustration this a lot, because I deliberation it will make nan institution rather resilient astatine times of precocious caller supply. This is because nan recently vanished properties are mostly A-class buildings that are targeting individuals pinch higher incomes. I expect title successful nan higher-end conception to summation a lot, perchance putting downward unit connected rents. But nan little conception could beryllium mostly immune to this. Also, nan mean monthly rent costs of $1,460, accounts for only 20% of mean tenants income. This is really bully rent sum - connected par pinch nan mean for nan Texas marketplace and beneath nan nationalist mean of 27%.

BSR Presentation

Financials

The institution doesn't study their Q4 results until March, truthful for now we person to activity pinch their Q3 2022 results. The institution recorded coagulated aforesaid shop NOI maturation of 9.7% YoY, while their full NOI accrued by 11.2% YoY - this was driven by caller leases (+12.3%) and renewals (+10.3%). FFO for 2022 is expected astatine $0.86 per stock (up from $0.60 a twelvemonth prior). Those are astonishing results, rather akin to those of their peers successful nan region. But arsenic based on earlier, nan days of double digit rent maturation are apt complete and going guardant I only expect humble rent maturation of 4-5% per year.

BSR Presentation

Dividend investors will beryllium pleased to perceive that nan institution pays monthly dividends astatine a dividend yield of 3.58%. The dividend is good covered pinch a payout ratio of 60%. I would expect this dividend to turn somewhat nether nan FFO maturation complaint of 5% going forward.

The REIT has $720 Million of debt, of which 100% is fixed astatine an mean liking complaint of 3.4% (vs 3.8% for 10-yr treasury yields). There are nary maturities successful 2023, but successful 2024 nan institution will person to refinance $160 Million worthy of indebtedness which poses immoderate refinancing consequence which astir apt will consequence successful an summation successful liking expense. The institution presently has $180 cardinal successful liquidity of which $10 Million is cash.

BSR Presentation

Valuation

At first glimpse nan institution trades astatine a important discount, but this is misleading arsenic BSR's reported NAV of $22.32 per stock is based connected a 4% headdress rate, which successful nan existent precocious liking complaint situation is conscionable crazy. So I'll do my ain calculation.

With a marketplace headdress of $880 Million and indebtedness of $720 Million we tin quickly cipher nan implied headdress complaint that nan REIT is trading at. With 2022 NOI expected to travel successful astatine $85 Million, nan implied headdress complaint is 5.3%. Based connected my acquisition this is reasonable. Normally for this benignant of a REIT I would presume a headdress complaint astir 5%, but pinch nan uncertainty we're facing pinch ostentation and liking rates, I will support nan headdress complaint arsenic is and reason that BSR is reasonably weighted and trades astatine a reasonable headdress complaint for what it is.

BSR has a comparatively short history truthful a comparison to its humanities mean P/FFO aggregate makes small sense. It is overmuch amended to comparison it to peers.

Relative to peers BSR is trading astatine a discount but I would reason that nan discount is justified because dissimilar CPT aliases MAA, BSR doesn't person its ain improvement divisions which intends it has to get properties connected nan market, which is almost ever much costly than processing their own. Overall, BSR seems reasonably weighted comparative to peers arsenic well.

So pinch that said, what tin we reasonably expect from BSR?

• 3.6% dividend output (growing astatine 4% per year)
• 4% FFO maturation for nan adjacent 2 to 3 years
• no aggregate description arsenic nan institution is reasonably weighted present astatine 17.3x FFO
• -> total return of 7.8% per year (on par pinch expected marketplace return)

Note: arsenic of today, nan banal trades connected TSX. If nan banal was to database connected a awesome US exchange, this would beryllium a awesome catalyst. Unfortunately, I've seen nary denotation this yet.

Remember really I look to make alpha:

1. start pinch a thesis why a fixed industry/sector should outperform
2. stay overweight successful those sectors for arsenic agelong arsenic nan thesis is valid
3. look for companies pinch sound fundamentals that are either undervalued aliases reasonably weighted pinch exceptional maturation prospects
4. if a institution becomes overvalued, trim nan position and rotate into different stock/sector that is still undervalued
5. if a institution becomes progressively undervalued and nan thesis is still valid, adhd to nan position
6. generate alpha and repeat

My full return past comes from nan dividend yield, EPS maturation and aggregate description arsenic nan valuation normalizes complete time. I ever target a full return successful excess of marketplace returns (>8%) to make alpha.

What things do I look for erstwhile selecting individual stocks to buy?

1. strong and safe fundamentals
2. good guidance teams pinch a track-record of caring astir shareholders
3. healthy EPS growth
4. well-covered dividend
5. discount comparative to peers and/or humanities adjacent multiples
6. other catalysts

Verdict

As we've seen nan Sunbelt will apt proceed to beryllium a bully spot to put chiefly owed to its beardown maturation prospects. With that said each awesome flat REITs that run successful nan assemblage are beautiful reasonably priced and tin beryllium expected to make astir 8-10% per twelvemonth going forward. The penchant successful which REIT to take past comes down to individual preference.

BSR is simply a smaller REIT that is easy to overlook. While its position is not arsenic beardown arsenic immoderate of its peers, I for illustration nan truth that it focuses mostly connected little and lower-middle people pinch their portfolio of B-class properties. I judge that these properties are apt to beryllium much resilient than higher-end A-class properties, particularly successful an situation pinch precocious caller proviso coming to nan market.

The REIT is good positioned to proceed to turn astatine a humble 5% complaint and seems reasonably priced pinch an implied headdress complaint of 5.3%. As specified BSR tin beryllium reasonably expected to return astir 8% per twelvemonth for nan adjacent 3 years which is connected par pinch nan expected marketplace return. The determination whether to bargain past comes down to your required complaint of return. For me, BSR is presently a "HOLD" present astatine $15.00 but I will adhd to my position if nan value continues to spell lower.

Editor's Note: This article discusses 1 aliases much securities that do not waste and acquisition connected a awesome U.S. exchange. Please beryllium alert of nan risks associated pinch these stocks.

Active full-time investor pinch a existent property backstage equity background. Disclaimer: I americium not a financial advisor and nary of nan contented I supply connected this website is financial advice. Content is provided for acquisition purposes only.