BSR REIT: Great Q4 Earnings But Fully Valued (OTCMKTS:BSRTF)

I first wrote about BSR REIT (OTCPK:BSRTF) in April of last year and was bullish on the company due to an attractive valuation and expected growth from the end of their capital recycling program. Growth took a little longer than I expected but Q4 results showed that the company strategy has paid off and they are well set up for future growth.

BSR’s stock price has rallied as the market has seen the strategy is working and it now trades at a valuation in line with peers. I still like the company and will continue to hold, but am dropping my rating to a “hold” based on my view that after the run up, it’s trading at close to fair value.

Company Background

BSR REIT is a multi-family REIT that owns properties in the Sunbelt region of the US. The properties are garden-style with attractive amenities such as pools and playgrounds. The REIT currently owns 31 multifamily properties consisting of 8,666 apartment units. They are mainly located in suburban locations of high-growth metropolitan areas, with close to 90% of the NOI coming from Austin, Dallas, and Houston.

Since their IPO in 2018, they’ve underdone an ambitious capital recycling program purchasing 22 properties, mainly in the target markets of Austin, Dallas, and Houston while selling 39 properties in non-core areas. The company has been clear on their strategy and stated:

The current cap rate spreads between larger and smaller markets have been among the narrowest in the past 15 years. As a result, the REIT took advantage of this opportunity to recycle capital from non-core assets into larger markets with high growth potential while at the same time improving the average age of the portfolio.

The capital recycling program had a negative effect on the FFO/share as they sold higher cap rate properties and replaced them with lower cap rate properties. At times there were also lags between selling and purchasing which caused delays in capital being deployed. With the capital recycling primarily complete they are now seeing growth in FFO/share returning.

Q4 Results

Q4 results were nothing short of spectacular. The NAV per share increased from $12.30 in Q4 2020 to $19.81 in Q4 2021 an incredible 61% increase. The NAV increase was due to both higher NOI (from higher rental rates and occupancy) as well as a compression in capitalization rates in Austin, Dallas, and Houston.

The same property revenue increased 10.6% YoY, while the same property NOI increased 19.3%. The percentage increase in NOI was much higher than the revenue increase as almost all of the additional revenue flowed through to NOI meaning their NOI margin increased. This shows BSR has done a great job keeping costs under control given the inflationary environment we are in.

In Q4 2021 we also started to see growth in FFO/share with FFO/share coming in at 0.19 a 26.7% increase over Q4 2020. In my previous article, I was predicting FFO/share growth throughout 2021 but my call was a little early as there were some additional dispositions and a lag in acquisitions. FFO growth now looks like it has finally started and I expect it to continue.

The strong results allowed BSR to raise their dividend 4% from an annualized $0.50/share to $0.52/share.

2022 Forecast

The good news did not stop there. BSR also announced their guidance for 2022 and it did not disappoint.

FFO/share is expected to increase 47% from 2021 results. This is skewed a bit as 2021 included a few quarters where capital recycling was still going on but even if you use annualized Q4 2021 FFO as the starting point you get an impressive 16% increase in FFO/share for 2022.

Valuation

When I covered BSR last year I highlighted that its stock price had lagged behind some of its peers, its valuation on a P/FFO basis was attractive and it traded at a discount to NAV.

Since then BSR has closed the gap. Its stock price has outpaced its peers, helped by the sharp increase after the release of Q4 2021 results.

On a forward P/FFO valuation standpoint BSR no longer trades at a discount to peers. Last year it traded at a 2 to 6 turn discount to peers but you can see it now trades in line with IRT and at only a slight discount to CPT which is much larger and better diversified.

Last year it also traded at a discount to NAV. In April of 2021, it was selling for a ~10% discount to NAV compared to an 8.5% premium at current prices.

Risk

Almost all the REIT’s income comes from just 3 markets in Texas making it highly sensitive to what happens to rental markets in these areas. If there is a slowdown in rental rates or an expansion in cap rates in the area BSR’s results will be negatively affected.

The stock’s main listing is also on the TSX so US investors will need to be cognizant of which account shares are purchased to minimize any tax burden.

Conclusion

Everything went BSR’s way in 2021. Rental rates increased, occupancy improved and cap rates compressed. This led to blowout Q4 2021 results and attractive guidance for 2022. Unfortunately, the stock price has followed suit and it no longer trades at a discount to peers or NAV. Due to the recent run-up in price, I am downgrading my rating to “hold”.

I continue to hold my shares in BSR as management has been able to execute on their strategy and BSR is well-positioned for future growth in Texas. If the stock price were to drop closer to $18 (20x forward FFO, 10% discount to NAV) I would consider adding to my position.