The Wall Street Journal last week reported that, with nearly 2,700 homes selling for more than $100,000 above listing price over the last year, Austin, TX has become the nation’s hottest housing market. Oakland has seen a fivefold increase in the number of $100k-premium transactions, while Seattle’s jumped 10x, but at 57 times last year’s volume, Austin’s home market is approaching mania.
With strong in-migration and job growth, new housing supply isn’t keeping up with surging demand and that’s what’s inflating prices. Higher cost of home ownership accommodates higher rents and that bears out with Apartment List’s estimates that Austin’s overall rents are up 14.9% YOY. In this article we will identify which multifamily REITs have property in Austin and which offers the most concentrated exposure to the market.
This inquiry is all about location, so as a first step, we go to Portfolio Income Solutions’ Property Directory, our guide to REIT owned real estate in the top 50 US Metropolitan Statistical Areas (MSA).
In screening for multifamily properties in the Austin-Round Rock-Georgetown MSA we can see that with more than 21,000 apartment units, a number of companies have already taken positions in this fast growing market.
SOURCE:S&P Capital IQ
If we narrow it further to include just the dividend paying, exchange-traded REITs, we can get a picture of who has exposure and where the concentration is.
Source: Data compiled by 2MCSC
With more than 7,000 units, Mid-America Apartment Communities (MAA) owns the most real estate, but Austin accounts for only 6% of its apartment count. Camden Property Trust (CPT) has almost 3,700 units in Austin, but with more than 62,000 units it accounts for only 5.9% of its holdings. BSR Real Estate Investment Trust (OTCPK:BSRTF, HOM.UN) has only 1,492 Austin units, but with a small $470MM market capitalization those units account for 18.6% of its holdings and provides a more concentrated exposure to the targeted market.
You have to go from Little Rock to Toronto to find this value in Texas residential real estate.
BSR REIT’s origins date back to 1956 Little Rock, Arkansas, but when they looked to take their shares public in 2018, listing on the Toronto Stock Exchange (TSX) was the most compelling option. You can trade the HOM.UN shares in Canadian dollars on the TSX or the BSRTF Foreign Ordinary in US$ on the OTC. All financial reporting and dividend payments are in US$.
We have shown that BSR has the largest exposure to Austin multifamily. We now need to look at the other 80% of the portfolio to see if it matches our targeted objective of buying in markets with strong rent growth.
While BSR has a little exposure to Little Rock and Oklahoma City, the bulk of the portfolio is in Texas with a growing concentration in the Houston and Dallas submarkets. This is not by accident; it is the focus of BSR management’s external growth plan.
Source: BSR REIT
Recycling capital is the axis of their acquisition strategy and BSR has executed.
Since its 2018 IPO, portfolio geography and demographics have been completely transformed.
And that transformation shows that the other 80% of BSR’s portfolio are in markets that present the
rent growth potential of the Austin assets. With population growth….
Spurring demand and rent growth.
It’s a very focused strategy and many observers think it has merit.
Targeting Rent Growth
When you consider their disparate market capitalizations, grouping BSRTF with MAA and CPT doesn’t really look like an apples-to-apples comparison. However, these companies are each in the multifamily property business and have material exposure in our targeted high rent growth market of Austin, TX.
If we look at consensus estimates of FFO/Share through 2023 we see that BSRTF is anticipated to grow nearly 3 times as fast as MAA and CPT.
CPT and MAA are fine companies and 16-17% FFO/Share growth over the next two years is truly impressive, but the point of this exercise was to find a way to attach to high rent growth markets. BSR’s strategy to recycle capital and concentrate in targeted growth markets seems to have convinced the analyst’s community that they will deliver higher returns to shareholders as demonstrated by comparing sentiment analysis.
The Apples-to-Oranges Caveat
When comparing companies for purposes of investment opportunities and potential we can look at their relative strengths, but we must also be aware of their relative shortcomings.
In this case, BSRTF/HOM.UN’s small market capitalization, with very little US institutional ownership, and the thinly traded foreign ordinary shares present potential risks that are not present with investment in MAA or CPT. The absence of geographic diversification in BSRTF makes it potentially more vulnerable to economic downturns in Texas. MAA and CPT holdings are geographically diverse throughout the US.
What Did We Learn?
Reading the news everyday can alert us to investment opportunities (or risks). The WSJ story referred to at the start of this article informed us that keeping a roof overhead in Austin is quickly becoming more expensive. Our location driven exercise helped us identify which players are already in the game. Rents don’t grow to the sky, but this has taken us to a place for further fundamental analysis.