BSR REIT: An Unrecognized Metamorphosis Into A Premier Apartment REIT

Summary

• BSR is growing and trades at a cheap valuation relative to multifamily peers.
• The Canadian listing has limited the investor pool, thereby keeping the stock cheap.
• For those able to handle the hassles of the foreign listing, BSR looks opportunistically cheap.
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Sundry Photography/iStock via Getty Images

The Buy Thesis

For years BSR REIT (OTCPK:BSRTF) has been the discounted apartment REIT, consistently trading at a lower multiple than peers. The reasons for the discount were its Canadian listing, smaller town property locations and small size. Today, BSR still trades at a discount, but the reasons for that discount are rapidly evaporating. It has transformed into a premier multifamily REIT with a young property portfolio concentrated in some of the highest growth submarkets. As such, it now warrants trading in-line with peers providing significant upside to the multiple.

The Metamorphosis

Since IPO BSR has been rapidly upgrading the quality of its property portfolio, selling older properties in small submarkets and buying young properties in large growth markets. Listed below are the transactions from the past 12 months.

Source: SNL Financial

In total they have made 37 dispositions with a total of 5907 apartment units and 19 acquisitions totaling 5907 units. The average year built for the acquisitions was 2015 taking the weighted average age of the portfolio to 13 years from its 1989 average year built at IPO.

With selling the small town properties and buying almost exclusively in the Texas Triangle, the portfolio is now highly concentrated in the growth markets of Austin, Dallas and Houston.

Source: SNL Financial

Thus far, dispositions have slightly outpaced acquisitions which has reduced leverage.

Source: SNL Financial

At just under 70% debt to total capital BSR REIT is still a somewhat high leverage company. As you know, leverage is a double-edged sword in that it amplifies both gains and losses. For most sectors I would not want to invest in a company with so much leverage, but given how strong multifamily fundamentals are, I think the amplification will be in a direction that is favorable to investors.

BSR REIT has successfully transformed into a premier multifamily REIT with a young portfolio of strong assets in some of the best submarkets.

2021 is trough FFO recovering into 2023

Just as the caterpillar uses up resources while in the cocoon, BSR’s metamorphosis was a bit expensive but worth it in the long run.

Some investors have been disappointed in BSR due to what appears on the surface to be negative FFO/share growth.

Source: SNL Financial

I see it as more of a timing thing with 2021 being the trough year. As seen in the consensus estimates below, FFO/share is anticipated to dip to $0.58 in 2021 from $0.72 in 2019, but also expected to swiftly recover to $0.77 in 2022 and $0.83 in 2023.

Source: SNL Financial

So what is really going on here?

Well, dispositions hurt FFO because the company loses the NOI associated with the sold properties. Similarly acquisitions help FFO and much of this trough is related to the timing of dispositions largely coming before the acquisitions. Thus, during this phase, BSR was operating with a smaller cash flowing portfolio and excess liquidity.

Overall, the acquired properties will approximately replace the lost NOI of the sold properties, but with higher growth rates going forward.

Subsequent to 3Q21, BSR completed its transformation with a few final dispositions. Running the numbers on these shows how the trough year timing works.

BSR sold 2 properties for a total of $147.9 million.

Data from company filings compiled by author

They used the proceeds along with some financing to buy the Aura Benbrook and a portfolio of properties for a total of $365.7 million.

On the last earnings call when discussing acquisitions, Daniel Oberste referred to a 3.5% to 4.5% cap rate.

“ With those kind of NOI gains, it really makes that 3.50% to 4.50% cap rate go down a lot more smoothly when you know that you're underwriting to incremental revenue gains in successive months after purchase with 2 to 3 years of tailwinds in the horizon.”

Since the acquisition volume is larger than the proceeds from dispositions we need to factor in $219.45 million of financing at BSR’s weighted average cost of debt of 3.67%

That results in overall accretion from the post 3Q acquisitions and dispositions of somewhere between 0 cents and 7 cents per share.

Just as with the overall transformation, the dispositions will hit NOI first because of timing, but beyond that initial timing window it is accretive.

That is how BSR’s FFO dipped from $0.72 in 2019 to $0.58 expected in 2021. Nothing bad happened, it is just timing of the activity. It should swiftly recover to $0.77 next year simply from the other side of the timing window.

The overall activity was accretive to FFO/share in addition to markedly improving property quality.

A good way to see through the distraction of the heavy acquisition and disposition activity is to look at the same store numbers. The properties have been performing well with mid to high single digit same store NOI growth.

Source: SNL Financial

Rents are increasing and occupancy has come up. That said, I think this is only the tip of the iceberg.

Significant growth ahead

In examining the supplemental one may notice a stark contrast between least rates on new leases going up 16.5% and renewals only being bumped up 4.5%.

Source: Supplemental

When asked about this on the earnings call Blake Brazeal responded with the following:

“we have had exceptional rent uplifts in the third quarter in all of our markets, which has resulted in renewals for December and July -- excuse me, January, going on an average of 10% and that equates to an increase in income, which will be collected next year of 10% to 15%. And that does include organic growth that could be in there. This is positive for us, and we've been very strategic in the renewal rates at this point. And at this time, we calculate only 5% of our leases are at/or above market rates. I want to repeat that, only 5% of our leases are at/or above market rates.”

BSR’s rental rates are substantially below market. They were gentle on renewals, charging far less than they could have which means there is still room to up rents by 10% or so just to get to market rates.

With inflation running rampant, apartment rental rates are expected to increase nationally quite a bit in 2022 just as they did in 2021. BSR will have this extra cushion on top of the national rate increases because their leases are below market. Thus in simply marking to market and riding the growth inherent in the strong Texas markets, BSR is well-positioned to get 15% rental rate growth in 2022 and another 5-10% in 2023.

To get a sense for what this does to FFO/share, here is a sensitivity table.

Source: Author calculated

Starting from 3Q21 annualized FFO of $0.63, I think BSR will get to $0.84-$0.99 as a run rate in 2023.

This is a bit above the consensus estimate, with the difference being that I think I am factoring in the below market rental rates a bit more.

Valuation

Using consensus estimates BSR is trading at 20.8X 2023 FFO.

Using my estimate of $0.91, BSR is trading at 19.0X 2023 FFO.

In either case, it is significantly cheaper than the rest of the multifamily sector which has mean and median 2023 multiples of 23.6X and 24.4X, respectively.

Source: SNL Financial

Thus, BSR REIT is discounted to peers by about 4 turns which I believe is mispricing.

A few years back such a discount was warranted because BSR was too small and its properties were somewhat older and located in small cities.

Today, that discount seems a bit out of place as its portfolio now consists of young assets in high growth MSAs. BSR is fundamentally positioned to significantly outgrow the rest of the sector which would normally suggest it should trade at a higher multiple than peers. However, due to a bit higher leverage, I think the appropriate multiple would be around 23X 2023 FFO.

That implies a fair value of $19.09 using consensus FFO numbers and $20.93 using my estimated FFO- roughly 10-20% upside.

The catalyst: Potential U.S. listing

I think one of the major things holding back BSR’s price is its Canadian listing, or rather the lack of a U.S. listing. Sure you buy it with U.S. dollars using the ticker HOM.U, but that still comes with many of the hassles of international investing.

Some custodians will withhold a portion of the dividend and while you can claw this back it is an extra hassle most investors do not wish to do. Some institutional investors may shy away from buying BSR so as to save their clients from such hassles.

Thus, I think BSR is under-owned relative to the pool of buyers who would normally own it for the strength of its fundamentals.

In addition to being under-owned by active capital, it is drastically under-owned by passive capital. Shown below are the top holders of the Canadian listed BSR versus the similarly sized Centerspace (CSR) which is U.S. listed.

Source: SNL financial

U.S. listed REITs enjoy a large portion of their stock being bought up and owned by the passive ETFs like BlackRock (BLK) and Vanguard (VNQ).

In contrast BSR has almost no ETF ownership with the large owners being Insiders like the Bailey family and active capital like Vision.

BSR REIT is now getting to a size where it could pursue dual listing and get a slot on a U.S. exchange. I believe this would cause a swift pop in market price as the passive money starts to flow in and a new investor base is unlocked.

As a case study we can look at Tricon Residential (TCN) which is a Canadian company with U.S. properties that began trading on the NYSE on October 7^th according to the press release.

“The Common Shares are expected to begin trading on the New York Stock Exchange (the "NYSE") under the symbol "TCN" on October 7, 2021 and will continue to trade on the Toronto Stock Exchange (the "TSX") under the symbol "TCN". The Offering and the Private Placement are expected to close on October 12, 2021, subject to customary closing conditions.”

Source: SNL Financial

I think BSR could get a similar price pop if it were to get a 2^nd listing in the U.S.

Summary and Risks to thesis

BSR is well positioned if multifamily fundamentals continue on a strong trajectory. Its combination of location in growth markets, and leverage should help it significantly outperform peers. However, if multifamily fundamentals sour, it may underperform peers as the higher leverage would pull it down.

Important data points to watch are development activity in its 3 main Texas submarkets. Thus far demand growth is outpacing supply growth, but keep watch to make sure developers don’t get a bit too excited.

Additionally, for U.S. investors be sure to know what is involved in holding a security that is technically foreign despite all the revenues coming from the U.S. and the management being from Arkansas. The hoops to jump through can vary by custodian.

Trading

BSR REIT can be bought via the following tickers

• HOM.UN (Toronto stock exchange Canadian dollars)
• HOM.U (Toronto stock exchange U.S. dollars)
• BSRTF (U.S. foreign ordinary in U.S. dollars)

As a U.S. investor I own it through BSRTF. There is no currency risk because the revenues are in USD and the dividends are paid in USD. It has very low liquidity so I would strongly caution against market orders. I have seen people accidentally buy it for far higher than the actual price when they entered market orders. Use limit orders when trading low liquidity securities. That way you know the price at which you are buying/selling.

Analyst’s Disclosure: I/we have a beneficial long position in the shares of BSRTF either through stock ownership, options, or other derivatives. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Important Notes and Disclosure All articles are published and provided as an information source for investors capable of making their own investment decisions. None of the information offered should be construed to be advice or a recommendation that any particular security, portfolio of securities, transaction, or investment strategy is suitable for any specific person. The information offered is impersonal and not tailored to the investment needs of any specific person. Readers should verify all claims and do their own due diligence before investing in any securities, including those mentioned in the article. NEVER make an investment decision based solely on the information provided in our articles. It should not be assumed that any of the securities transactions or holdings discussed were profitable or will prove to be profitable. Past Performance does not guarantee future results. Investing in publicly held securities is speculative and involves risk, including the possible loss of principal. Historical returns should not be used as the primary basis for investment decisions. Commentary may contain forward-looking statements which are by definition uncertain. Actual results may differ materially from our forecasts or estimations, and 2MCSC and its affiliates cannot be held liable for the use of and reliance upon the opinions, estimates, forecasts, and findings in this article. S&P Global Market Intelligence LLC. Contains copyrighted material distributed under license from S&P 2nd Market Capital Services Corporation(2MCSC) provides investment research and consulting services to the financial services industry and the financial media. 2MCSC does not provide investment advice. 2MCSC is a separate entity but related under common ownership to 2nd Market Capital Advisory Corporation (2MCAC), a Wisconsin registered investment advisor. Dane Bowler is an investment advisor representative of 2nd Market Capital Advisory Corporation.

Comments

[Rob G. in Vegas]

I sold some today on the big 7% move up to $19.50, but still hold a core position (some of the shares I bought were below $10 when you first mentioned the stock on SA - so thank you!)

The stock is now above your fair value and approaching 22X 2023 FFO - just not cheap anymore.

I'm expecting the company to announce a large secondary offering of common shares during the first half of 2022.

[jgrever621]

US listing could help stock price; certainly it has helped others. Mostly think they will benefit more from rent increases, and 2022 looks like even more inflation and rental increases.

Certainly the announced FED plans for 2022 won't do much to contain inflation or the money supply, though a few rate increases might mitigate market attitutes more. I plan to watch velocity, which MIGHT show something by midsummer.

[Dane Bowler]

@jgrever621 Fed minutes just came out. Now they have added in the possibility of letting the balance sheet run off, but I agree with you that it is still not enough to prevent inflation.

[Blsh john]

Hello Dane,
You said, “Some custodians will withhold a portion of the dividend and while you can claw this back it is an extra hassle most investors do not wish to do”.
This situation certainly applies to me. I own BSRTF In both a regular account and an IRA account with Ameritrade. They keep absconding with part of my dividend. I’ve explained that …
1. The dividend is return of capital and there would be no tax.
2. We have a tax treaty with Canada so even if there were a tax, there would be no tax in an IRA.
3. Even Canadians don’t pay a tax.

I’ve sent them proof including an email from the company all to no avail. I gather you found a clawback solution. I’m hoping it’s not merely a deduction on my taxes since that would only be a partial solution for my regular account and no solution for my IRA account.

Can you apprise me of the solution you found?

So warning to other investors you might not use Ameritrade for this stock. And does anyone have a broker they recommend that doesn’t run this scam?

Thank you Dane and I enjoyed your article.

John

[Dane Bowler]

@Blsh john The clawback for me was a tax deduction. Unfortunate the way custodians are handling it.

[knownothingguru]

@Blsh john
John...I also hold BSRTF at TDA, but in a non-retirement account...TDA does correctly withhold FWT. I believe it's 15%. So, when you get your YE tax form 1099, you will see a line that shows all FWT that has been withheld. You are therefore given credit for the tax you essentially have paid. KNG

[Blsh john]

@knownothingguru Thank you for your response. I would agree that they should withhold the 15% tax in the regular account provided that the dividend was taxable. BSRTF‘ s dividend is 100% return of capital so there would be no taxes. Therefore, there is no excuse to withhold any taxes.

I contacted investor relations at BSR and they confirmed this to be the case. In fact, I was apprised that they had had this Complaint from other shareholders and that some stock brokers eventually corrected their error. Further, I was only able to take a deduction instead of a credit when I did my taxes. This varies with your situation of course but it means that I only got a partial return.

But even if this were plausible that still eliminates any hope in an IRA account. There is no way, to my knowledge, to get any kind of tax deduction or credit for those pilfered funds.

In fact, I had the same situation with Pure multi-Family REIT.
Eventually, Ameritrade stopped withholding the taxes. However, the previous embezzled funds went unreturned.

So back to square one, any suggestions? I have an account at interactive brokers but they don’t trade many OTC stocks. So I bought the Canadian shares instead. But I would still like a better solution. Thank you KNG.

[Jambr403]

Trading at ~20x 2023 FFO is cheap? I don't know. Look at Artis or H&R if you want cheap.

[MaritimeTrader]

Holding almost since IPO, done well.

Another ‘suppressed’ REIT is ERE.UN.TO, European Residential REIT, holding mainly Dutch apartments, listed in Toronto..

Had stonking gains with Dream Global REIT and was unhappy when Brookfield took it over but when COVID hit 2-3 months later I was happy with the realized cash.

MaritimeTrader

[Russell A]

Why do some US REITs list in Canada to begin with? Lower listing fees; lower REIT distribution requirements?

[Dane Bowler]

@Russell Ashcraft Yeah, I think its cheaper or at least easier to raise money there as a really small company. To be a publicly traded U.S. REIT it is really hard under $500 million market cap. So subscale REITs will sometimes list in Canada instead.