Good afternoon. My name is Kelsey, and I will be your conference operator today. At this time, I would like to welcome everybody to the BSR REIT Q3 2021 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you'd like to withdraw your question, please press star followed by the two. Thank you. Mr. Bailey, you may begin your conference.
All right. Well, thank you, Kelsey, and good afternoon, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the third quarter ended September 30th, 2021. I am joined on the call today by Susan Koehn, our Chief Financial Officer. Also with us are Dan Oberste, President and Chief Investment Officer, and Blake Brazeal, Co-President and Chief Operating Officer, who will both be available to answer questions following our prepared remarks. I'll begin the call with an overview of our third quarter performance and other corporate developments. Susan Koehn will then review the financials and conclude by discussing our outlook and strategy. After that, we will hold a Q&A session. Before we begin, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature.
Any such information is subject to risk, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in our news release and MD&A dated November 9th, 2021 for more information. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Also, please note that Dollar amounts were denominated in US currency. BSR REIT had an outstanding third quarter. Let me quickly take you through a few of the highlights. Net asset value per unit increased 41% from the end of Q3 last year to $17.77 this year.
Same property revenue increased 7.7% YoY. Same property NOI rose 12.6%. AFFO increased 20.9%. Weighted average occupancy as of September 30th was 96.4% compared to 93.7% at the end of Q3 last year. Weighted average rent was $1,275 at quarter end, an increase of 26.1% from $1,011 a year earlier. These results highlight the strength of our core Texas markets, Austin, Dallas-Fort Worth, and Houston. We reoriented our portfolio to focus on these three primary markets because of their strong fundamentals, and that decision is clearly paying off. As we noted yesterday in our Q3 news release, same community rental rates for new leases increased 19.8% YoY.
That is an extremely strong figure, and it highlights how robustly these MSAs have rebounded from the economic crisis caused by the pandemic. We continue to deploy our acquisition capacity into our core Texas markets during the third quarter. We acquired two high-quality garden-style properties for a combined purchase price of $176.6 million, or $250,000 per apartment unit. Hangar 19 in Dallas-Fort Worth and Aura 36Hundred in Austin. The acquisitions provided us with a combined 707 apartment units. Both properties were built very recently, and they upgrade our overall portfolio. The average age of the BSR properties is now just 13 years old. That compares to 29 years at the time of our IPO in May 2018.
As of September 30th, our acquisition capacity is approximately $250 million. We are focused on deploying approximately $70 million on acquisitions in our core Texas markets before the end of the year, driving further growth in NOI and AFFO in the near term. We are excited about our growth trajectory. We are also committed to maintaining a flexible balance sheet. We continue to have a conservative debt-to-gross book value ratio. During the third quarter, we refinanced mortgage debt and amended certain credit facilities to provide additional financial flexibility. Susie will speak more about this important initiative shortly. We also continue to effectively navigate the challenges created by the pandemic. We collected 99% of expected revenues during the third quarter, which is in line with our historic norms.
In addition, as of October 31st, we have collected $1.1 million in rental assistance through the federal government's Emergency Rental Assistance program, which assists households that are unable to pay rent and utilities due to COVID-19. The money was collected through eligible residents at our properties. Finally, I wanna note that we were recently named as one of the best places to work in Arkansas by the publication Arkansas Business and the Best Companies Group. This was the fifth consecutive year in which we received this honor. We are proud to have maintained a strong corporate culture amid the major changes to our business and to our overall operating environment over the last five years, and especially in the last two. I'll now invite Susie to review our third quarter financial results in more detail. Susie?
Thanks, John. Same community revenue increased 7.7% in the second quarter to $14.5 million from $13.5 million last year. The improvement reflects an increase in average rental rates for the same community properties from 1,048 per apartment unit last year to 1,116 this year, as well as higher occupancy, higher utility reimbursement revenues and late fees. Total portfolio revenue for Q3 2021 increased 6.2% to $31.7 million, compared to $29.8 million in Q3 last year. This reflected organic same-property rental growth, as well as the contributions from property acquisitions and non-stabilized properties, which added $10.8 million and $0.5 million of revenues respectively. Property dispositions reduced revenue by $10.5 million compared to Q3 2020.
To clarify, non-stabilized refers to properties that were undergoing lease-up or significant renovations, such as taking an entire building down during at least part of the comparative period. NOI for the same community properties was $7.8 million, an increase of 12.6% from $6.9 million last year. The increase was attributable to higher same community revenue, partially offset by a $0.1 million increase in real estate taxes and higher property insurance costs. NOI for the total portfolio increased 8.3% to $16.5 million from $15.2 million in Q3 2020. Property acquisitions and non-stabilized properties increased NOI by $5.6 million and $0.3 million respectively, while dispositions reduced NOI by $5.5 million.
FFO for Q3 2021 was $8.2 million or $0.16 per unit, compared to $7.4 million or $0.16 per unit last year. The 9.9% increase in FFO reflects the higher NOI, partially offset by a $0.3 million increase in G&A expenses and a $0.2 million increase in amortization of deferred financing costs. AFFO increased 20.9% to $7.8 million or $0.15 per unit from $6.5 million or $0.14 per unit in Q3 last year. The increase reflects a higher FFO as well as the $0.7 million escrowed rent guarantee that was realized in Q3 2021 related to the properties that were acquired during the lease-up phase this year. Also, please note that losses on extinguishment of debt are excluded from the calculation of FFO and AFFO.
Net asset value increased 61.4% YoY to $926.5 million from $574.1 million in Q3 last year. NAV per unit rose 41% to $17.77 in Q3 2021, compared to $12.60 last year. The REIT paid quarterly cash distributions of $0.125 per unit in Q3 of both years, representing an AFFO payout ratio of 82.7% in Q3 2021, compared with 87.5% last year. All distributions were classified as a return of capital. Turning to our balance sheet. The REIT's debt to gross book value ratio as of September 30th, 2021, was 43.5% or 40.7% excluding our convertible debentures.
Total liquidity was $79.9 million, including cash and cash equivalents of $5.7 million, $39.2 million available on our credit facility and $35 million available under our line of credit. On September 30th, 2021, we amended the REIT's revolving credit facility. This increased the maximum credit availability to $300 million from $285 million, extended the maturity to September 30th, 2025, and decreased the interest rate to adjusted LIBOR plus 1.45%-1.9%, subject to certain leverage ratios. During the quarter, we also refinanced $134.6 million in mortgage debt on six mortgages with proceeds from the credit facility and the creation of a non-recourse loan with a fixed interest rate of 2.7%.
In connection with the acquisition of Aura 36Hundred, we amended a mortgage-encumbered credit facility with CIBC, reducing the margin by 20 basis points. As of September 30th, we had total mortgage notes payable of $547.6 million, excluding the credit facility and the line of credit, with a weighted average contractual interest rate of 3.1% and a weighted average terms to maturity of 5.7 years. Total loans and borrowings were $694.6 million, excluding the debentures, and 71% of the REIT debt was fixed or economically hedged to fixed rates. We also have $42.5 million of convertible debentures outstanding at a contractual interest rate of 5%, maturing on September 30th, 2025, with a conversion price of $14.03 per unit.
Investment properties were valued at $1.7 billion as of September 30th, 2021. We reported a fair value increase of $162.3 million in the third quarter, and $308.5 million during the nine-month period. Approximately 40% of the increase in fair value during the quarter was driven by increases in NOI, and 60% was due to cap rate compression. Finally, I want to note that since the REIT's base shelf prospectus is expiring in December 2021, we intend to renew it by filing and obtaining a receipt for a short form base shelf prospectus to be valid for a 25-month period. This will enable us to maintain financial flexibility. There is no certainty that any securities will be offered or sold. I will now turn it back over to John for some closing comments. John?
All right. Well, thank you, Susie. We are obviously very pleased with our financial results for the third quarter. This is only the beginning. We are positioned to generate strong performance in coming quarters. Revenue growth in our three primary Texas markets has been higher than expected. This is driven in part by the very strong demand and economic fundamentals in these markets, including high population growth and low unemployment. Accordingly, we expect to continue generating strong organic rent growth. As I noted earlier, we also expect to deploy approximately $70 million in accretive property acquisitions in our core markets before the end of the year. With a healthy pipeline, we are highly confident that this goal will be achievable. We will continue to benefit from the recent accretive acquisitions we completed, including two in the third quarter.
Aggregating the Q3 and anticipated Q4 acquisitions, we expect NOI and AFFO to continue to gain strength throughout 2022. The hard work of transforming our portfolio through the capital recycling program has been largely accomplished. Now, not only are we reaping the benefits of it, but the value of the BSR platform and culture continues to demonstrate its capability and scalability as reflected by our earnings growth. We began to implement the capital recycling strategy back in 2019, when the spread in cap rates between the primary and secondary markets dropped to historically low levels. We viewed this as an opportunity to boost our exposure in the highest growth primary markets in Texas and upgrade our overall portfolio quality. It has taken a lot of time and hard work to transition the portfolio out of our non-core secondary markets.
We have appreciated the patience of our investors as we successfully achieved our objectives. We are now in an ideal position to drive even stronger financial performance. The threat of COVID-19 has not gone away, and it could create more uncertainty for BSR and the broader global economy in the months ahead. Our strong rent collection and strong operating performance throughout the pandemic gives us confidence that we can withstand further turbulence and continue to deliver excellent returns for unitholders. As this is my last earnings call to participate in with the team, before we get to your questions, please allow me to thank all of you for your interest and support of BSR.
Our valued investors for their trust, our board of trustees, and all of our committed, dedicated, and loyal BSR team members who live and work our mission to provide an outstanding living experience to our residents every day. Congratulations to Dan Oberste as our incoming CEO as of January 1st, 2022. We are all excited for his leadership and BSR's exciting future. Well, that concludes our remarks this morning. Susie, Dan, Blake, and I would now be pleased to answer any questions you may have. Operator, please open the lines for questions.
Thank you. Ladies and gentlemen, we'll now begin the question-and-answer session. Should you have a question, please press star followed by the one on your touch-tone phone. You will then hear a three-tone, three-tone prompt acknowledging your request, and your questions will be pooled in the order that they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you are using a speakerphone, please lift the handset before pressing any keys. One moment, please, for your first question. Your first question does come from Sairam Srinivas from Cormark. Please go ahead.
Thank you, operator. Good afternoon, gents and Susie. John, first off, congratulations on leading BSR to the summit where it is, and I'm sure it's gonna grow from here under Dan's leadership. First off, guys, congratulations on a great quarter. My first question was on the $1.1 million on rental assistance that was received. I just want to wrap my head around the magnitude of that number in terms of what percentage of tenants would you say are actually reliant on the assistance program?
Yes, I'll take this one. So that $1.1 million was actually collected for rent that was due from the past. That doesn't feed into our current 99% collectibility. That relates to when we were collecting 98% last summer when COVID lockdown was more intact.
Good. That's perfect. That's exactly what I was trying to determine through you. Thanks for that. Then also, you know, just moving on from, you know, the $1.1 million, just trying to understand the spreads you're seeing in the rental markets. Would you say that the spreads you're getting on new leases is representative of the delta between in-place and market rents in the portfolio right now?
Sorry, we cut out there. Blake's gonna take this one.
I feel like I'm gonna get this question quite a bit, and I think it's good to review the process for our new leases and renewals. We're looking at when you put yourself in the leasing agent's chair. I have to do this all the time. When they're sending out the renewals, it's usually 60 days before maturity. What does that mean? You look at July, August, September, they're using May and June rents. It's really old news by that point, by the time we send those out.
The result is in our portfolio, as you can see, we've had exceptional rent uplifts in the third quarter in all of our markets, which has resulted in renewals for January going at an average of 10%. That equates to an increase in income, which will be collected next year of 10%-15%. That doesn't include organic growth that could be in there. This is positive for us, and we've been very strategic in the renewal rates to this point. At this time, we calculate only 5% of our leases are at or above market rates. I wanna repeat that. Only 5% of our leases are at or above market rates.
This was strategically done through these months, and we think we've done a pretty good job of this because if you look at, for the quarter, why we've been able to raise occupancy to the 96.40%. This time last year, we were at 94.57%. We did this by hand. We outperformed our peers on YoY and quarterly basis on revenue and NOI. I think we're positioned well, and we're positioned to collect the rent that I alluded to earlier next year.
That's fantastic color, Blake, and thanks for that. I mean, clearly the fundamentals are really strong in these markets. In terms of understanding the supply side responses to the situation, are you seeing I mean, obviously there's a lot of development in the pipeline, et cetera. In terms of, you know, like maybe two months ago, how supply pans out to the growth, are you still seeing the growth kind of overshooting the amount of supply?
Growth or pipeline? The pipeline.
Sai, are you talking about the pipeline of newly developed properties? This is Dan. Are you talking about just
Yeah.
what this year?
Yeah, Dan. I mean.
Last year deliveries look like?
Yeah. No. Like to put it in a broader context of demand versus supply, obviously, you know, there were a lot of development proposals in the pipeline and properties coming out, but the picture three months ago was that the demand outweighed the supply coming in. Do you see that still continuing heading into, let's say, 12 months from now?
Well, I actually. Yeah. This is Dan. The question relates to, do we see net supply and net absorption continuing to replicate what we've seen in the last year? I think what's important to look at first is what have we seen in the last year. Let's take Houston, Texas, as a good snapshot, right? On average, Houston's gonna produce about 15,000 new units a year, and the net absorption is gonna be about 15,000. To date, in 2021, we've seen Houston drop their new supply number down to about 13,000 units. We've seen 32,000-38,000 units absorbed in the city of Houston, in the MSA. Dallas and Austin look a whole lot similar.
You can see that fundamental ingredient of rental demand and that the net absorption vastly outpacing the net supply, driving the economics in our market. You could see that occurring in 2021. Now, if I look forward into next year, let me pull out my crystal ball. What some of the analytical providers in the core markets are telling us is that, let's use Houston as another example. Next year, Houston deliveries look to drop another 1,500 units down to 11,500 units. Their absorption is estimated to sit at about, call it 13,000-15,000.
You're still seeing a kind of breach in that net supply, creating a gap in the new renters coming to our markets. That's Houston. Austin is our unicorn market. We continue to see, as well as every other multifamily owner in Austin, heavy supply numbers, but absorption numbers sometimes two and three times what we're seeing in the supply. That's what's driving that rental growth, that's what's driving those high occupancies that us and the rest of our colleagues are talking about. From what we're seeing, that phenomenon does not seem to stop in the next two years. As a matter of fact, we kind of see.
We, you know, we love the clip we got in Q3 lease rates as a result of that and our hard work. When we look forward, I mean, the nation-leading projected population growth, the Blue Ribbon winner is Houston, Texas, between 2021 and 2026. Our three markets are in the top eight, you know. We see that compound population growth driven by job growth continuing to create these economies where our absorption exceeds supply.
That's fantastic, Dan. It's great hearing that, and thank you for that. I'll turn it back.
Thank you. Your next question does come from Kyle Stanley from Desjardins. Please go ahead.
Thanks. Good afternoon, everyone.
Hello, Kyle.
Hey, good afternoon.
Maybe just building on your commentary on Houston, Dan. Would you say the slightly lower leasing spreads seen there, and thanks for the new disclosure you provided this quarter. Would that reflect, you know, a number of vacant units being leased, and then maybe, you know, as you know, the absorption takes hold that you just mentioned, we'll start to see those spreads really ramp up and be more in line with what you're seeing in your other Texas markets?
Yeah. The short answer to your question is yes, but I'd like to be long. I wanna point out that Houston, I mean, we feel like we unfairly beat up on Houston all the time. I think we printed 8% YoY effective rent growth in Houston.
Okay.
That's not too shabby. What I think we're gonna see in Houston is, yeah, it's gonna continue to pick up. That supply and net absorption dynamic in Houston was somewhat muted by Houston's recovery from the COVID, and I'll say the other Black Swan and the oil situation that went on in Houston last year. As a result, Houston's recovered about 61% of the jobs they lost in connection with COVID. Now, if you dig in deeper, that's about 60,000 energy-related jobs that haven't recovered in Houston. Now, what do we have looking forward? We have lower supply. We've got a supply chain issue in one of the largest, as we can call, the sixth largest port in the world in the United States coming out of Houston.
We have a massive energy rebound. We have a healthcare, continued investment in healthcare and tech rolling into Houston, which is a very popular destination for those forms of job growth. I mean, all of those factors contribute into what I would call a very compounded bullish feeling on Houston for us and for our Houston colleagues. I'll say, we give Houston the best longer-term runway as far as all our markets are concerned, rolling into 2023.
Okay, great. Then maybe just sticking with the rent growth story for a minute. You know, it's good to see the blended rent growth momentum continuing so far in the fourth quarter with what you reported in October. Just wondering if you have any early indications for November, and then just more broadly, you know, how long do you think this really elevated pace of rent growth persists?
Yes, we do. November looks similar, if not a little bit better than October. Great question. One that, I think I'm struggling with as far as putting an exact date on it, as is all of our competitors in it. I feel good about the next year from a standpoint of the first half of the year. I can see the fourth quarter of our company shaping up very well, and I'm trying to get into the first quarter right now. Honestly, I'm bullish on everything that I'm seeing. If you look at our, I think some interesting stats that you guys would like is that if you look at the third quarter, our movements, and this points some quite a bit to Dan's migration and absorption.
If you look at the third quarter of our total portfolio movements, 19% of our new leases were from people moving in from out of state. That compares to 10%.
20. That is 43 states that people have moved from. That gives me a great feeling that this is going to continue for the foreseeable future. Also, the housing supply. You look at Austin, Dallas, we're talking about average house prices of $450 and above. I could tell you from experience living in Dallas, the housing market is very tight. I think that bodes well for our business. You put all those together, the headwinds are good. Now, how long that's gonna last into 2022, I don't think anybody said that yet.
Okay. Thank you. That's very helpful. Then just the last one for me. You know, when we think about the $70 million you have left to deploy year to date, how do you balance your cost of capital and accretion as you underwrite new investment opportunities? Just given, you know, the cap rate compression you've seen in your markets and, you know, do you worry about being priced out in some situations or, you know, would you consider looking at other Sun Belt markets with similar growth dynamics? Thanks.
Hey, Kyle, this is Dan. I'll take that one. There's a little bit to unpack there. Let's start out with our cost of capital. I think BSR is not unlike a lot of our colleagues in that, our stock price increases have been pleasant for our investors throughout the past year. They've been driven by NOI gains and some cap rate compression at that. As a result, the stock component of our weighted average cost of capital has lowered, certainly. Interest rates have remained the same, that's enabled the REIT to enjoy a lower net cost of capital YoY.
When we walk in and look at accretive acquisitions, we like that, we do measure the internal rate of return and the year three look-back cap against our weighted average cost of capital. We measure the going-in yield against the coupon on our equity. You know, we measure these things, and I'll tell you what's great about the current environment. Our cost of capital has shrunk just a tad. Cap rates have certainly shrunk, but what's driving the cap rate compression in our markets and others in the multifamily sector in general, it's not asset bubble driven by low interest rates. It's future compounding revenue growth, driving NOI and cash flow growth.
What that translates into is, you know, perhaps at day one, 3.75 cap, and at day 365 look back, 4.75 cap. We've said in the past that I think at the time it was a value-add acquisition. When we underwrote a value-add acquisition, what we wanted to see was a 75 basis point cap rate expansion on a three-year look back. Well, in some of these cases, if not all of them, we're seeing 75 basis points-125 basis point expansion in year one organically.
With those kind of NOI gains, it really makes that 3.50-4.50 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 two to three years of tailwinds on the horizon. With that said, sure, we get priced out all the time. We're pretty disciplined. We'll give some of the stats. We like to think we're disciplined. I know everybody else says that too. In the third quarter, it wasn't unlike any other quarter. We looked at 64 assets, about 26,000 suites, collective value of $5.9 billion. That's an average price per property for those counting at home of about $91 million. Average year construction of those assets were 2015.
I wanna reiterate the depth of our market. We looked at $6 billion of properties that were on and off market in our three core markets in a quarter that were built since 2015. That's how much depth there are in our three markets. Out of those 64 assets, we bought two. That's kind of at about a 3% success rate. That's in line with what we've seen in the past. I think we've gotten as high as 5% and probably as low as 2.5%. Those numbers are within our range. You could, I guess you could say the other 62 x somebody outbid us. The good thing about BSR is every single acquisition is more important than the last one, and every single acquisition is meaningful and moves the needle to our investors.
When we acquire Hangar 19 or when we acquire Aura 36Hundred, we can point to single-digit AFFO growth as a direct result of that acquisition. Not all REITs can do that, and that's why we think that every next deal is the most important deal we can do.
Okay, great. Thanks for the color. I'll turn it back.
Hey, hey Kyle. One thing I'd like to add to the you were asking about supply and everything that all y'all. I keep y'all abreast of each quarter, and it's my fault if I didn't give it at the time, but I think it's a really germane point, is the median income in our portfolio right now is right at $73,000. That's up 8% from the second quarter. That's up 36.5% YoY, which obviously states the type of properties that we're buying. This uptick in median income is across the board. I mean, we're really, that's a really good sign for continued success in the next year.
Okay. Thank you.
Thank you. Your next question comes from Matt Kornack from National Bank Financial. Please go ahead.
Hi, guys. Yeah, congrats again on an exceptionally strong quarter. Just with regards to the friction point in new leasing versus renewals, can you give us a sense as to what the spread is that you're willing to accept on the lower end to retain a tenant as opposed to pushing them maybe to market and getting at the turnover?
Yeah. Matt, this is Dan. I think 6% is a fair number, but remember, it's about following a discipline. Our leasing agents out on their desks in the field right now are quoting renewals for, as Blake said, December and January. They're doing that based on what they see new leases look like today. The art and the science in building that rent roll is determined by how many renewals you wanna have and how many news you wanna have, and that's how you create the blend. 6% is a fair number.
Yeah. Dan's right on. I wanna kind of refresh everybody because I talk about it every quarter, but it's really important. We look at these rates every day, and the balance, as Dan said, and I alluded to it on my earlier comments, is retaining occupancy at a satisfactory level but also raising income on an overall basis. We look at these rates literally with the help of LRO, which is a very important part of this. We look at these rates literally every day. We've got somebody assigned to that. They work with our senior VPs. I look at the renewals that are going in. I'm involved in it. As Dan said, it truly is, there's an art to it.
I feel like up to this point, we've strategically positioned ourselves with the 5% that I discussed earlier to really take advantage of what's happened in the third quarter.
Okay. No, that makes sense. If I heard Dan correctly, in terms of your underwriting, you haven't really had to look out beyond sort of one year, kind of where you've got some certainty around rent spreads. Is the market trending towards kind of figuring in year two and three, there's gonna be a maybe not similar pace, but a heightened pace of rent growth in some of the acquisition underwriting?
Yes. This is Dan again. I would say. You know, we'll look out as far as three years on our underwriting. You know, to me, betting on what year three rent growth is gonna be is like telling me what, you know, what interest rates are gonna be in three years. If I knew what it was gonna be in three years, I'd be sitting underneath a shade tree right now. What the experts are saying is we'll have continued growth in our market of somewhere around 4%-7% organic between 2022-2025. I'd love to have it. I think we'd all love to have more, but those are good numbers for us to underwrite to.
Yeah, I think we'd be happy with that. A last one for me, and I think it's probably a function or it is a function of newer assets, but your CapEx has actually been trending down, if anything, yet you're still getting these rent increases in organic growth. Is that entirely a function of the newer assets, or is there something else at play there as well?
Hey, Matt. Yeah, you're right. I mean, the majority of that has to do with the fact that our assets are just newer, so it costs less to maintain them. When we went public, I think Julie will recall that we said our recurring CapEx would be about $450-ish a door, and now we're looking at anywhere from $250 to maybe $350.
Okay. Perfect. Thanks, guys, and congrats.
Thank you, Matt.
Thank you. Your next question comes from Himanshu Gupta from Scotiabank. Please go ahead.
Thank you and good afternoon. Just to follow up on the rent quotes discussion, I think, Blake, you mentioned only 5% of leases are at or above market rents. Just wondering, you know, obviously 95% of leases are below market. Can you know, give a ballpark or quantify what is the mark-to-market opportunity on your portfolio as of today?
16%.
16% is based on the current trends as of October, and I know you are still underwriting and expecting bigger rent rolls in the next few quarters as well. That's pretty good. Is that pretty spread out between, you know, Austin, Dallas, and Houston, or is it, you know, more opportunity in one market versus the other?
I mean, Dan was discussing Houston and discussing Austin, but I watch that really closely, and there's not one that's really dragging the other one up or dragging it down. These are really consistent across the board in most of the areas. I know people would think Houston, but Houston is having some very good growth. I mean, as Dan alluded to, he was right. It's right at 8%. That's what we're excited about. We're also seeing another thing that can add into that is there's not just one city that people are moving into. When we're looking at all our stats and our new stat, there
The new people moving in from out of state and coming to these areas, they're all coming to all three of them, of our main MSAs.
Got it. Thank you, Blake. Dan, you want to add anything to it or, you're good there?
I thought Blake did a pretty good job addressing the main points. You know, I would say that we talked about Houston a little bit, and part of that is because Dallas and Austin, I mean, those two are giants right now. As I said earlier, Austin is a unicorn market, right? You've got asset value growth on a per pound basis. You've got cap rate compression, and that cap rate compression is driven by really some of the highest rent growths in the country, in the continent. Let's talk about the entire continent. That's really driven by fundamental landlord economics. There are more people moving into Austin than there's housing available. Gosh, I wish it was more difficult than that for us.
It makes us, again, very happy that we backed up the dump truck in 2019 and 2020 and bought a fairly decent-sized portfolio in that market. I don't wanna overshadow the Austin and Dallas markets with the Houston market. We just wanted to talk about how Houston's probably right on the heels of those two markets. It's just, it's always a favorite market for people to pick on. Dallas, job creator with an indisputable infrastructure advantage. Where we bought in those markets are some of the fastest-growing population and job centers in the country. We see double-digit revenue growth there. We're experiencing double-digit revenue growth.
It's almost a redundant comment for us to make there. I mean, the proof is in the pudding. You know, I think one key point for our secret sauce in BSR is that, you know, our Chief Operating Officer and Blake lives in Dallas, and he's from Dallas. Well, he's from Longview, but he'll call Dallas his home. Whenever we buy a property in Dallas, a pretty good chance he drove by it 25 years ago, when he was a younger man.
Looked at the map.
He drove by the ground. That's exactly right. That helps us with site selection in Dallas. It also helps us with developing strategic partnerships and your Dallas-based developers and owners.
To add to that, Austin, I was telling Dan, I've been going to Austin, I went to the University of Texas, my dad did too, so I've been going to Austin nearly 60 years. When I look at the growth of it's amazing. I'm gonna give the example because people have asked this question. Is Round Rock part of Austin? Well, Round Rock has grown into Austin. I mean, there's no line from Georgetown to the north, I mean, all the way to San Marcos on the south. I think that points to really what you're looking at the stats to amplify a little on Dan. I mean, Austin replaced the jobs lost during the pandemic quicker than any other town in the state.
I think it ranked second nationally, didn't it, Dan?
It did.
We're talking about dynamic growth and Dan's done a fabulous job finding the properties. Yes, I know all these cities pretty well. I think that goes with being older. We're positioned exactly where we need to be.
Awesome. No, I agree with everything you guys said, except one thing that Dan said that Blake was younger 25 years back. I think Blake is still younger there. Anyway, the next question is, I think, Dan, you mentioned 4%-7% of organic growth between 2022-2025. This is what, you know, market is underwriting or expecting. Just wondering, what was this number like six months back or 12 months back or, you know, pre-COVID? Has the market moved so fast on you that, you know, even the expectations have moved so much?
Well, Himanshu, I've slept since then, so I'll have to revert back to my notes. No, I mean, yeah, I think that it. What we were looking at 12 months ago on compound growth was 3.5% per year. I think that was probably a little bit lower in Dallas. Since that time, Dallas has really repositioned itself as the job locomotive of the United States. It's probably picked up a tad, and it's just picked up a tad for basic, you know, economics 101. You got more people moving into those markets than they have houses for.
You got single-family housing that's sitting around $450,000 a unit or a house in Dallas and Austin, and about $300,000 a house in Houston. Those are up anywhere between 13%-30% YoY. They keep picking up. Anytime you got ants moving into an anthill and it's not big enough, the rent goes up. It's just the fundamentals of what's going on. I think what COVID did in our markets was accelerated a trend that we've seen for 10 years, and that our markets have seen for 10 years. That's net migration is driven by job growth in a low tax environment. When we look at the next two or three years, the problem that...
I think the fundamental problem that has been generated is a lack of housing supply. COVID shut down a window for new construction and deliveries for an entire year in three markets, among others, where absorption was going through the roof, and they were three affordable markets. COVID occurs, and people begin to relocate to more affordable Sun Belt, center-driven markets, and there's just simply not enough houses and not enough apartments, and no one's building them, right? You got a one-year, I'll say Goldilocks environment for multifamily, and you can't fix it in a year. It's gonna be fixed over two to three years. Thus, the increase from 3.5% to more like 4%-7% a year in organic.
Got it. No, that's very helpful. Thank you, Dan. My final question is, you know, the portfolio occupancy is around 96%, and obviously demand is very strong. I mean, should we think about any occupancy gains next year, or it will be all, you know, rent growth driven, rental growth?
Occupancy gains? You know, I think it all, you know, depends on how well we execute our leasing strategy. I think Blake mentioned a little bit earlier that we're gonna be a little bit more aggressive pursuing our new leases. I think our existing retention rate so far this year is 56.3%. I think 95%-97% is a fair occupancy number. If we pick up more renewals, we'll see that occupancy get closer to 97%. If we pick up more new leases, we'll see the occupancy dip down in the mid-90s or mid-95 to the kind of higher maybe 96% range. The result is what our investors want, is making more money per unit off rent.
Just to back up Dan's point, the early returns are that, being aggressive on the rents, you could lose a few people, but your income is going up. That's the goal, as Dan said, and the early returns are that's exactly what's working.
Got it. No, thank you, Dan. Thank you, Blake. Thank you, everyone, and I'll turn you back.
Thank you. Your next question comes from Joanne Chen from BMO Capital Markets. Please go ahead.
Hey, good afternoon and congrats again. Congrats again on a very solid quarter. I just, well, a lot of the questions have been addressed, but just wanted to follow up on one thing on the rent growth. You did mention earlier that only about 5% of your portfolio is, you know, are currently at market rents. Could you maybe comment on, you know, what your thinking is around turnover activity and how you can kind of get up more of that percentage up to market rents through 2022?
Well, our turnover has been pretty consistent, as Dan said. I think our retention rate was close to 57%. You know, most of our models are based upon the turnover rate. You know, I think to really pinpoint that will have a lot to do with how the rate increases are accepted in different areas. Different areas, specifically submarkets, are different. What do we think? I think it's gonna be a positive retention, and I could see it might slip a tiny bit, but I think it's gonna be in the same range.
Okay. Got it.
Blake asked me if I agree. This is Dan, and I certainly do with what he said. I think the key is a reminder that BSR is a professional landlord. We're managers. That's what our focus is. We're not developers.
Mm-hmm.
You know, we feel like we're good at what we do a lot of, and we do a lot of property management. When we try to manage our rent roll, and we look on a look-forward on rent gains or declines, we think that those generally roll through between 12-18 months after they start showing up.
Okay.
Now, in this case, we started seeing these rent increases show up, Joanne, in July, just like the rest of the market.
Wow. Okay.
By our watch, we're just counting forward 18 months, and we're measuring that success, you know, each week and each month.
Got it. Okay.
Yeah.
Oh.
I think that's a good way to put it, Dan.
All right. Got it.
I would understand.
Sorry. Go ahead.
Joanne, I would add, and I wanna say this again, I don't know if I said it the last time. This is an incredible market and phenomenon that we're in right now. It's literally we're watching this closer than I have in 40 years of doing this type thing on a daily basis. You know, it everything in it that we're looking at daily is a positive right now. We intend, when you're saying retention and what we're gonna do, we're going to do everything we can to maximize the income. Some people may decide they wanna go another place. We're gonna be sure that we've got someone to put in that unit before we do anything that decreases our retention percentage to any degree.
Right. Okay, no, that's, that is helpful. Maybe just one last one for me, just shifting gears more, back on the acquisition side of things. I just wanna clarify, did you say you expect to complete about $70 million of acquisitions by the end of this year? I just wanted to double check on that. Then whether-
Yeah, sure.
You know, given how competitive the environment is right now, are you starting to see a lot of, I guess you're competing against the new players coming into the market that's making it even tougher, and how should we think about the cadence, I guess, going into 2022?
Joanne, this is Dan. I think our investors will be. You know, I think that we've got a Christmas present under the tree or two in the acquisition pipeline for them.
Okay.
I feel pretty confident, and so do we, that we'll fill that order between now and the end of the year. Don't really wanna say much more about that. As far as the beat of the drum, I know that our acquisitions teams are out in the markets really kind of mapping out our strategy for 2022, and thinking about the components of it and where we would like to own properties, and working with our ops teams to see what's most efficient for us. We feel fairly confident that our investors will be happy this year with our filling orders on acquisition pipelines.
Okay.
I think the presence is gonna be a really good presence when it comes to location and where they're gonna be located.
Okay. Well, no supply chain issue there on the delivery for the Christmas present. That's good. That's good to hear. Okay, that's it for me. I will turn it back. Thanks very much.
Great.
Thank you. Your next question comes from Matt Logan from RBC. Please go ahead.
Thank you, and good afternoon.
Hey, good afternoon, Matt.
Good, Matt.
Hey, guys. Wondering if we could touch for a minute on the labor side of your business. Certainly, it's a very tight job market, and your expense growth this quarter was fairly muted. Just wondering what you're seeing there and what your outlook is going forward.
Yeah. We've had about a 5% increase in same-store operating expenses, right, on a year-to-date basis, and that will probably continue through the end of the year. As far as 2022 goes, we're in the middle of budgeting right now. It's still a moving target, and so I'm not super comfortable at this point giving guidance over what we think those expense increases will be in the next 12 months.
In terms of your retention, how would that generally compare to the market? I know historically you guys have had, you know, a really good culture, and that's helped the retention. Is that, you know, a real benefit in today's market?
I think so. Yeah, we continue to have great retention. BSR was once again recognized as a great place to work in the state of Arkansas for the fifth year in a row, and that certainly has been serving us well.
I'll add one thing, because I'm proud of this, and I think everybody around this table contributed to it. We've talked about it in the past, but our training programs are, I think, as good as anybody's, and we've worked on them hard. Scott Wray that's sitting here works with Jennifer Gulledge. If you look at what I think's been one of the keys for our retainage, but also in controlling labor costs, is the ability to train people properly, and then have a succession program. It's a robust one, where people are able to see a pathway for an assistant manager becoming a community manager, leasing agent becoming an assistant manager. When people can see a pathway for their careers, it makes a tremendous difference.
Frankly, it's helped us on the labor cost basis, as opposed to having to go out and hire in the market on a lot of our employees. That's been a thing that I think has really paid off for us, and we continue to really work on it.
That's great color. Maybe changing gears to the affordability. It's, you know, pretty amazing to think that, you know, your incomes, at least for new tenants, are up, you know, 8% sequentially and 36% YoY. Like, how much of that is a function of in-migration with perhaps a different tenant base and just organic wage growth in your market?
This is Dan, Matt. I think those are two components of it. But I always have fun breaking down the numbers on it. You know, I think Blake mentioned earlier, our average resident makes about $72,600 a month. In the state of Texas, that turns into about, call it, I don't know if I'm rounding, $4,612 a month in your paycheck after all the taxes and everything else is taken out. At BSR, you can live with us, and you can have a two-story athletic facility, a walking trail, and a property next to a lake you can go fishing in the middle of a thriving kind of work, live, play area.
You can pay anywhere between, call it as little as $890 bucks and as much as $2,000 bucks, right? On that $72,600 a year, or that $4,600 a paycheck. Now, if you wanna buy the average house in, let's say, Dallas or Austin. Dallas is a good one. That's about 40% of our NOI. You're paying $450,000. Scrape together that 20% for your down payment, right? Go out and get a mortgage and pay your taxes and insurance, and your housing costs just to buy that median income house, that average house is gonna be about $2,600 a month.
That's about $1,000-$1,500 higher than you're paying to live with us over in your residence at one of our properties. That's about 56% of your take-home income after taxes. You're simply not gonna underwrite to a home loan at $72,600 a month, but you can happily live with BSR and a lot of our competitors. That's why that equation works out in each of our markets.
I think that and to Dan, which I think is really a great synopsis. That's if you can find a house to buy. That's how tight the housing market is in our areas.
When you look at your rent-to-income metrics YoY, would you say those have changed or perhaps even gone down given the income growth?
It hadn't changed a bit. This is John Bailey's favorite stat. We came into the IPO, and we're at, I think, around 19% rent to income in our properties. Currently, we're at 21%. I think we came into the IPO. I have a hard time remembering numbers, but I think it was $777 a month in average rent. We're sitting now at somewhere around $1,200, and we're at 21%. There's a ton of room to grow in paying more rent to live with us at our great properties.
That's a pretty great stat. Maybe last one for me. I mean, the capital recycling program is effectively mission accomplished. You know, congrats on achieving that because, you know, I think it really does show in the numbers. When you look ahead to 2022, what do you see as the biggest opportunity for the REIT?
Oh, that's a great question. This is Matt. This is Dan again. You know, I think executing on the organic rent that we see the opportunity to obtain as fast as possible is one of the big opportunity ahead of us. I think managing and maintaining our weighted average cost of capital and being very disciplined in our allocation of capital as we acquire on a look forward, that's the second very important thing we can do. The third, as one of our board members say, the most important asset and the most important liability of any company is not on its balance sheet, it's its people.
Preserving our five-year track record as a Best Place to Work and making it a sixth and a seventh and a tenth, that would be on the top of our list at BSR, because it's the culture and the people. You know, we talked a little bit about the retention rate with employees. Look, I'll toot my own horn. I started at BSR as an accounting intern when I was in high school, and, didn't do a good job there. Then I moved over to painting tennis courts and spent some time leasing apartments. I think John and Blake and Susie put me where I could do the least amount of damage.
I think that when you have your incoming CEO as a part of your succession plan, that sends a really positive message to your people that you can come to BSR and have a career. We're gonna make you really good at what we do, and we do a lot of what we do. Top line growth is capturing that organic. Acquisition growth needs to be disciplined and needs to be in our markets. We need to investigate new markets, but we don't really. You know, we got a long runway in these three massive growth markets, and our shareholders can earn the largest total unit return for BSR in our three core markets right now.
I think we keep our eyes down, keep focusing on what we do, and maintain a disciplined approach to our balance sheet and keep our culture.
That's great color. I really appreciate the commentary. I'll turn the call back. Thank you.
Thank you. Your next question comes from David Chrystal from Echelon Capital Markets. Please go ahead.
Hey, afternoon, guys.
Hey, good afternoon.
Just maybe building a little bit on Matt's question there. If you look at, you know, your remaining non-core, maybe I'll call them less core assets, have you seen similar cap rate compression in Oklahoma and Little Rock? Is there any thoughts of those being on the chopping block now or in the future?
Yeah. You know, that's a good question, David. This is Dan. I'll take that. We've seen the same amount of cap rate compression. As a matter of fact, when we look at the cap rate spread between major markets and non-major markets, it's compressing even further. So what's happening in just overall in the U.S. markets on cap rate compression, we're seeing that primary, secondary, tertiary markets across the board. We like our Oklahoma City market. We love our properties there. They're well capitalized, they're well-maintained, and they're well run. Our properties in Little Rock the same way. I wanna remind the people, we have two properties in Little Rock that remain. We like our operations there.
With that said, we find a way to sell our properties and enter into a market that can generate a higher yield and a higher total unit holder return. We will always look at that opportunity, including gardening in our existing markets. It's not just our " non-core". It's gardening in our existing markets. We're constantly
Couple quick housekeeping questions for you. On the guarantee income in the quarter, is there any contribution left expected in Q4 at the AFFO line, or are those properties fully stabilized and it'll all be picked up in the NOI going forward?
Yeah. We have one property left that is not yet fully stabilized that will recognize some of the rent guarantee in Q4. After that, we'll take the remaining cash flow which won't go through AFFO, but we will recognize as part of our balance sheet thereafter.
Any guidance on what the Q4 quantum will be?
About $300,000.
Okay, perfect. Thank you. In terms of the financing activity and the kind of refinancing and rate reductions at quarter end, can you give us a sense of the going forward run rate on interest expense?
Yeah. The 3.1 that you used that got to about $5.8 million is a good run rate as of today. However, that doesn't take into account any refinancing we do over the next 12 months, where we have about $28.9 million to refinance before the end of the year, and then another $36.8 million next year in 2022.
Okay, perfect. That's helpful. That's all for me.
Okay. Thanks, David.
Thanks, guys.
Thank you. Your last question comes from Brad Sturges from Raymond James. Please go ahead.
Hi there. I'll keep this pretty quick. I guess in the disclosures, acquisition capacity total was $250 million. What leverage does that assume if you deployed that full capacity?
$250 million.
What leverage does that?
Brad, you asked the resulting leverage if we deployed 250 of our capacity.
Yeah.
In our view, I think we've previously got it to as high as 55. We don't see it touching that. Probably given the NAV increases we've seen in the market, call it 50, just sub-50.
That, you know, given the organic growth and the NAV growth that you've seen to date, plus, you know, obviously the outlook that you're providing, like, does that change your longer term view of where you'd like to run in terms of leverage, let's say, on a debt-to-assets basis?
It most certainly does. You know, we're mindful that in a compressing cap rate environment where you're seeing massive outpacing NOI gains, you always gotta be careful for when that tide comes up. You wanna make sure you got a bathing suit on. We dropped to about 43% debt to GBV this quarter. We bought our NAV gain. We do have some unencumbered assets. We stress test our balance sheet looking at 50 basis point , 100 basis point shocks to cap rates. We still wanna maintain that original leverage profile that we went public with. It can get pretty dangerous when you're down at a 4 cap and 43 leverage. If you move up to a 5 cap, if you're not careful, you can over-lever yourself.
We're gonna be disciplined and keep ourselves from doing that.
So maybe not running at 50-55, it could be, you know, more like 45-50 is maybe the new target right now?
I think 45-50 is a fantastic number to underwrite to.
Okay. Sounds good. Thanks a lot.
There are no further questions at this time. You may proceed.
All right. Well, that concludes our call this afternoon. Thank you for your interest in BSR REIT. We look forward to speaking with you again after the report of our fourth quarter 2021 results next year. Thank you, and God bless you, and God bless BSR.
Ladies and gentlemen, this concludes your conference call for today. We thank you very much for participating and ask that you please disconnect your lines.