Earnings Call: Q3 2020

Nov 11, 2020

Earnings release

Good afternoon. My name is Sylvie, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q3 2020 Financial Results Conference Call. Thank you. Mr. Bailey, you may now begin the conference. Thank you, Sylvie, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the Q3 ended September 30, 2020. I am joined by Susie Kane, our Chief Financial Officer and also with us today are Dan Obersee, President and Chief Investment Officer and Blake Brazil, our Co President and Chief Operating Officer, who will both be available to answer questions following our prepared remarks. I'll start this call by providing an overview of our Q3 performance and other corporate developments. Susie will then review the financials and I'll conclude with some comments on our outlook and strategy. After that, we will hold a Q and A session. Before we begin, I need 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 risks, 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 and A dated November 10, 2020 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 are not recognized measures and do not have standardized meanings under IFRS. Please see our MD and A for additional information regarding our non IFRS financial measures, including for reconciliations to the nearest IRFS measures. Also please note that all dollar amounts are denominated in U. S. Currency. We continue to operate our business with relatively minimal disruptions created by the COVID-nineteen pandemic. Our highest priority is the health and safety of our residents and BSR team members. Management will continue to monitor all of our markets and properties to adjust policies and procedures as necessary to provide a safe environment to live and work. Our rent collections remain within the pre COVID historical levels. Specifically, during Q3 2020, we collected 98% of the total monthly revenue compared to our historical average of 99%. We continue to advance our capital recycling program. On July 30, we acquired Broadstone Park West constructed in 2014, a high quality property in Houston market with 370 Suites for $51,000,000 or $137,838 per apartment unit. On September 24, we acquired Aurora Castle Hills constructed in 2019, a 276 suite garden style residential community and a Dallas Fort Worth market for $51,800,000 or $187,681 per apartment unit. Subsequent to quarter end, earlier this week, we continued the recycling program with the sale of 6 non core properties comprising of 1483 apartment units, 4 in Little Rock, Arkansas and 2 in Houston, Texas, generating gross proceeds of $130,000,000 We are very pleased with the progress of the capital recycling program. Since our IPO in Q2 2018, we have acquired 12 properties comprising of 3,000 511 apartment units, while selling 26 properties comprising of 5,149 apartment units. Net operating income from properties located in our primary markets now comprises 88% of total NOI compared to 52% at the time of the IPO. Moreover, our asset quality has improved substantially and our portfolio's weighted average age has decreased from 29 years to 18 years old, reducing our CapEx requirements going forward. We are very excited to see our portfolio improve as we continue to recycle capital to take advantage of the compression and cap rate spreads between primary and secondary markets. The REIT's debt to gross book value is currently at 48.1 percent, providing the flexibility to add approximately 200,000,000 dollars of assets without further equity. We also remain confident we will sell an additional $120,000,000 to $140,000,000 in assets before year end. Our ongoing transformation of our portfolio was evident in our Q3 results. Weighted average rent at September 30 was $10.11 per apartment unit, representing a substantial year over year increase of 12.3%. We expect our financial performance to strengthen further as we continue to redeploy capital into primary Sunbelt market MSAs with some of the strongest long term economic fundamentals in the country. Economic uncertainty obviously remains heightened in the near term due to COVID-nineteen. But with our current liquidity position of approximately $103,000,000 we are well positioned to manage our business, while also executing on our capital recycling program and growth strategy. Now I'll turn it over to Susie to review our Q3 results in more detail. Susie? Thank you, John. Same community revenue increased 3.1% in the Q3 over the prior year to $20,300,000 reflecting an increase in average rental rates from $900 per apartment unit as of September 2019 to $909 per apartment unit as of September 2020, as well as $400,000 increase in utility reimbursement. This was partially offset by the absence of late rental fees of $100,000 related to the COVID-nineteen pandemic. We resumed charging late fees in mid August of 2020. Total portfolio revenue for Q3 2020 increased 7.2% from $27,800,000 in Q3 2019 to $29,800,000 this year. The increase was primarily the result of property acquisitions, which contributed $7,400,000 in revenue, as well as higher rental rates across the portfolio and an increase in utility reimbursements, partially offset by dispositions that reduced revenue by $6,000,000 NOI for the same community properties totaled $10,600,000 an increase of 4.9% compared to $10,100,000 in Q3 last year. This was primarily due to the revenue increase, partially offset by $100,000 in additional COVID-nineteen pandemic expenses. NOI for the full portfolio increased by 4.8 percent to 15 point $2,000,000 compared to $14,500,000 in Q3 last year. This increase was primarily attributable to acquisitions contributing $3,600,000 as well as the increase in NOI from Same Community Properties, partially offset by property disposition, reducing NOI by $3,400,000 As we continue to redeploy the recycled capital from secondary markets into primary markets, we expect the accretive impact of long term growth to be reflected in our financial performance. FFO for the Q3 was $7,400,000 or $0.16 per unit, compared to $7,100,000 or $0.18 per unit last year. The increase of $300,000 was mainly the result of higher NOI, partially offset by an increase in the amortization of deferred financing costs of 0 point $2,000,000 and an increase in interest expense of $100,000 as well as higher general and administrative expenses of $100,000 related to share based compensation. Q3 2020 AFFO of $6,500,000 flat compared to last year, equal to $0.14 versus $0.16 on a per unit basis. The increase of $300,000 in FFO was primarily offset by an increase in maintenance capital expenditures of $200,000 related to emergency only maintenance performed during the previous quarter. Hence, we had lower spending on maintenance CapEx in Q2, which shifted these costs to Q3. The REIT paid quarterly cash distributions of $0.1251 per unit in Q3 of those years, representing an AFFO payout ratio of 87.5 percent in Q3 2020 compared to 80.3% last year. Turning to our balance sheet. On September 3, the REIT issued $40,000,000 of 5% convertible debentures maturing September 30, 2025, with a conversion price of $14.40 per unit. Subsequent to Fortran, on October 5, the underwriters of the offering exercised their option to acquire a further $2,500,000 Our debt to gross book value ratio at September 30, 2020 was 50 0.8%. As John indicated earlier, following the subsequent dispositions of the 6 non core properties and the partial exercise of the overallotment option, our debt to GBV now stands at 48.1%. As previously mentioned, our current total liquidity following the sales and the offering is $103,000,000 This includes cash and cash equivalents of 6,800,000 dollars 61,000,000 of borrowing capacity under our credit facility and $35,000,000 available under our revolving line of credit. As of September 30, we had total mortgage notes payable of $396,900,000 excluding the credit facility and the line of credit, with a weighted average contractual interest rate of 3.9 percent with a weighted average term to maturity of 9 years. Total loans and borrowings at quarter end were $595,000,000 excluding the debentures and 77% of the REIT set was fixed or economically hedged to fixed rates. Total loans and borrowings are $474,000,000 after the sale of the 6 properties week excluding the debentures. I will now turn it back over to John for some closing comments. John? Thanks, Susie. Last week, we announced a change to the REIT's senior management structure. Dan Oberstein has been appointed President and Chief Investment Officer, having previously served as Executive Vice President and Chief Investment Officer. In this new role, Dan will retain oversight over the REIT's investment strategy, while also assuming responsibility Blake's primary focus will continue to be the oversight of the REIT's property operations and the management platform. Dan and Blake will both report to me and work alongside me in determining the REIT's strategic direction. Dan's appointment as President reflects his contribution to the growth and success of the REIT and his promotion is reflective of the REIT's long term succession planning. The year 2020 has been a challenging one, but we have continued to deliver solid operating performance, while also successfully executing on our capital recycling program. This high level performance is attributable to the platform's added value to the REIT. We operate in a highly liquid market. And as you have seen, our pace of both acquisitions dispositions has remained consistent during the pandemic. Once again, we feel confident we will complete our targeted range of $120,000,000 to $140,000,000 in dispositions before year end. We have a robust acquisitions pipeline, and we are looking forward to continuing growth in our primary markets. We are monitoring the spread of the COVID-nineteen closely. We are comfortable that we have made all the appropriate adjustments to our daily operations. But if we determine further changes are necessary, we stand prepared to implement them rapidly across our portfolio. COVID notwithstanding notwithstanding, we believe the REIT is advantageously positioning itself to continue our strategic transformation in our primary markets. The economic performance of our markets has historically outpaced the country as a whole, and we expect that trend continue. Our portfolio has improved significantly in terms of location, asset quality and age, And we have a strong liquidity position and an excellent pipeline of opportunities for the portfolio growth. That concludes our remarks this morning. Susie, Dan, Blake and I would now be pleased to answer any questions you may have. So operator, if you would please open the line for questions. Thank you, And your first question will be from Fred Blondeau at IA Securities. Please go ahead. Thanks and good afternoon and obviously big congrats to Daniel. John, just on your current asset for sale in the pipeline, where would that put your NOI generated by non core assets at year end in 2020? I believe it was around 12%, Fred. If we were to continue to execute in the way that we've been saying and are confident the way that we have in our pipeline of non core assets that we're looking to queue to sell. Yes. I saw the 12% in the MD and A, but I thought that you had more sales in the pipe until the end of the year. In the Q4 sale beyond the 12%? Sorry, I'm seeing in your MD and A that you are currently 12% non core of NOI, not related by your non core assets today. So we're just wondering what are your expectations in terms of asset sales there between now and the end of the year and where would that put you at the end of 2020 in terms of your NOI generated by non core assets, if that makes sense? Fred, it should go down to about half that amount and that we ought to have around 6% of the non core. We had noted that we would be selling Pascagoula, the rest of the properties that we had in Beaumont, Texas, we have in Houston and Little Rock property that leaves just a few of the properties that are outside. So I'm going to say about 6%. Okay. No, that's great. And so just segue to my next question, Susie, how would you feel today about your current debt ratio at 48%? Yes, it's a little low. We're still in the middle of recycling and we just sold fixed assets. We're still holding true to that we'd like to be no higher than 55% as we finish the capital recycling program. That's great. And then maybe lastly, last one for me. It looks like the portfolio continued to perform well in October. What would be your base scenario in terms of occupancy for Q4 and Q1? And where do you see greater challenges across the portfolio today? This is Blake. I would expect the I would not expect an increase in occupancy of any substantial amount. I think it will be along the historical lines. The main things that we will be looking at that could pop up is obviously the pandemic. We're keeping our eye on that. Feel like we handled the 1st wave of the pandemic in a very effective manner, which did not affect our daily operations to any great degree. And that will be one of the main things that we'll be keeping our eye on as the next wave of the pandemic. And do you feel like part of the portfolio is more at risk than others today, geographically speaking? Well, the reason one of the main things that I think is an advantage to our portfolio, frankly, is we're in an areas that are as you've seen through the last almost year pro business and have continued to operate during the most, I guess, at the time, the most affected and percentage wise pandemic growth. So we feel good about that and we're also in areas that continue to grow with people that moving in at the highest rates of anywhere in America. So we're obviously not immune to worrying about that. It is something that we're keeping our eye on, but we feel like we're in one of the best areas in America. Our portfolio is in order to handle an outbreak. That's great. Thank you. Thank you. Next question will be from Brad Sturges at Raymond James. Please go ahead. Hi there. Hey Brad. Just a follow on to Fred's question on the cap rate or the capital recycling discussion, but just more in the general context about pricing. I guess a few quarters ago, you were guiding towards a spread between primary and secondary markets of all the 100 basis points. Has that changed in any way? Because it does seem like there is some cap rate compression happening within some of your core markets. This is Dan. That's a good question. So I mean, I think if we look at the historic spread between major and nonmajor markets, set around 110 basis points recently. The current spreads compressed down to about 90 basis points. So yes, we're seeing further compression between major and non major markets. I think when you yank out of some of that data, you're defining your major markets as really the urban population centers that have probably been hit more fundamentally than our Sunbelt markets. And what I'm referring to is New York that has negative absorption and leads the nation in deliveries, San Francisco, Seattle, Chicago. When you think about the cap rates for those markets, yes, they've creeped up a tad maybe. But you compare that to the markets that we're in, in Dallas and Houston and Austin. As Blake mentioned, the ramp up in COVID cases in Texas occurred more recently than March relative to those cities we just talked about. And so you continue to see good performance. You see great net migration going into those markets, right? And I would say the cap rates are compressing. The risk is compressing specifically for Austin, where we're really seeing cap rate compression. For going in cap rates now, what would be kind of the range you're seeing in some of your core markets like Austin or Dallas? Going in, Bahshad? That's a good question. It can run the gamut. I mean, I would say, Austin, right now today in that market, you're seeing a whole lot of high-3s. That's not to say that's what we acquired, the $212,000,000 of assets we bought in Austin the last year. We didn't have a 3 handle on our cap rates, but that's what we're seeing right now for those assets. We're happy to compete with those individuals, just not at best prices. Not for sure. Where we're seeing Dallas and Houston where we're seeing Dallas and Houston sit is probably between $45,000,000 nominally, call it, a $450,000,000 cap for our style of asset. I think what continues to be interesting is that the value add, I'll say, a little bit older assets in these markets. We're seeing transaction volume continue to outpace kind of the core and core plus assets. And we're seeing cap rates for those value add assets remain low, which is impressive. Okay. Great. That's good color. Thank you. Thank you. Next question will be from Kyle Stanley at Desjardins. Please go ahead. Thanks. Good afternoon. Hi, Kyle. Just looking at Just looking at the occupancy, I'm wondering, could you provide a bit of color on the sequential decline in the same property portfolio? Sure. Kyle, this is Blake. When you really look at it the way I'm looking at it, we're talking about 70 5 units. And if you really go granular on it, They're basically made up in 3 different properties or 4 different properties. One of them is heritage in Austin. We were down 10 units. At this current moment, we've made up that difference and are right along where we were. We just had a dip. It was a timing issue. Beaumont was another area, which has always been kind of an up and down area. And if you look at the last quarter, it was at 98%, which was very high for Vanderbilt. So I mean, excuse me, for Beaumont, which now both of those assets are back at the range, not at 98%, but back above what is showing in the MD and A right now. Dallas stayed relatively flat. Houston was down about 23 units. Of those units, that was 2 properties that made up the whole amount. Those have come back. I want to add also that the 6 properties we disposed of yesterday, those were their combined effect were below our averages. And the assets that we that John alluded to earlier that we'll be selling in the different MSA, those are also below our averages. So where does that leave us? The core assets that we expect to be in our portfolio are performing as we would want them to perform. Now the next question that I would assume you would ask is over the year over year. That is a hard one from each year to compare because the non same store properties are a different mix of properties each year. Last year, for instance, we had the Tulsa portfolio, which was running at 98%, that was in that number. And also this year, we've added 2 properties, one of our latest properties that we bought, the Broadhurst that is running at when we bought it, it was running at 82% and now it's at 88%. And we've added another one that we bought that was at 91% statutory that is leasing up and we at 93% and stabilized. So that creates that gap in the non same store comparing year over year. So Okay, great. That's really good color. Yes, definitely answers the question. I guess this is probably a question more for Susie. The NOI margin impacted a bit by some of that acquired vacancy that Blake was just talking about. Just wondering where you see the NOI margin kind of trending into the back or the end of the year and into 2021 as maybe the lease up progresses a bit further? Yes. I'm sticking with the 54% that I've said on the last few calls. This quarter, yes, we did see margins go down a bit. So the reasons you just mentioned, but also because we had some expenses that were a little bit higher due to timing, some additional health care costs that were all booked this quarter as well as a shift in turnover costs. We didn't have as many last quarter because we went to emergency only maintenance and therefore we picked up some of those costs in Q3. Okay. That makes sense. And I wanted to add one more thing, and I'm sorry I didn't add it when we were talking. But I think it is remains in the conversation is that October was our highest move in, move out ratio of units, which was 97 units that we've had by far since before the pandemic. So we netted up 97 units in our portfolio and those are we're basically based in the core units. So that's obviously something that's a really good sign also. There was some pent up demand in our leads and tours and everything, which I can talk about later, are all up. Okay. Maybe just one last one for me here. Can you just provide an update with regards to the in suite rental program on lease turnover? Just maybe have you continued to do those year to date? Are you still seeing pretty healthy demand for that kind of product and maybe the spread that you've seen? Yes, we've continued to do those. But obviously with the pandemic, we weren't a we have not been able to do as many as we were thinking we would do this year. We've really picked up the pace over the last quarter in dealing and doing more and more of these. Through the year, we've done 157 partial upgrades and 120 signature upgrades. Wimberley and Dallas is performing at a 20% return. And we've got 76 unit upgrades at that property in particular. We've really got 3 areas of properties that have shown a real affinity for producing the returns. And those are Wimbledon Wimberley, River Hill and Aubrey. So we've been pretty strategical during this time. But even with that, we completed 15 more than we budgeted. We just really thought we would produce more during the year. That was my original plan at dance too when we started to bud the pandemic kind of threw us for a loop for a 6 month period there. Okay, thanks. That's great color. I'll turn it back. Thank you. Thanks, Paul. Next question will be from Matt Logan at RBC. Please go ahead. Thank you and good afternoon. Hello, Matt. Hey, good afternoon. Blake, appreciate all the commentary on your leasing. It certainly sounds like things are trending positively in Q4. Can you give us a sense for what you're seeing in terms of relocations from major markets or if you're seeing a shift from the downtown to the suburbs. Just any commentary you can provide on what is driving demand would be appreciated. Do you mean aside from CBRE's recent decision to relocate their corporate headquarters from LA to Dallas or Tesla's construction of its $2,000,000,000 factory about 10 miles from our properties. Yes, I guess we can go into that. So I think what's interesting is when we look at the net absorption in the second and third quarters, you're seeing Houston lead the pack. And we saw that we talked about this in the last few quarters. Houston had a 20 eighteen-nineteen year where they had really low deliveries with sustained net migration. And the majority of that was coming for job growth and with some international migration in Houston. So we talked about it last year, particularly when we acquired a couple of assets in Houston, about how we saw this year, probably in Houston, outperforming the expectations, and it has. Most of that is driven just, I'll say, the same type of organic net migration that you've seen in Houston in the last 10 years, make it one of the 2nd fastest growing population center in the country at that time. Dallas, it's the same story. I mean, you're seeing PGA of America relocate their corporate headquarters, CBRE, Toyota, a lot of jobs moving and a lot of U Haul and other moving trucks kind of sucking residents out of, call it, Northeastern Employment Centers into the vast open beautiful spaces in Dallas, Texas. Austin is somewhat of a different story. We're seeing a net migration from Austin come in from all over the world, but it really predominantly has to suck from, I'll call it, the West Coast. You're seeing tech salary growths and tech jobs be created in and around Austin. I want to say that WalletHub named Austin the best college town in America for the 3rd consecutive year. Wall Street Journal just came out for the 2nd consecutive year named Austin as the hottest U. S. Job market. U. S. News last year for the 3rd year in a row named Austin as the best city to live in in the United States. Austin has kind of got it all going on and they're sucking from all over the country, but we are seeing a higher percentage of net migration from the West Coast, particularly California going into Austin relative to Dallas And I don't think that's there's no sign of that stopping. I would say it's quite the alternative. We see that accelerating on the look forward. So I guess in short, is this continued job growth and the migration as opposed to people living in the downtown quarters moving more towards the suburbs? Yes. Thank you for hitting on that. Yes, we are seeing a little bit of weakness in the urban, call it, high rise areas of these markets and all markets. BSR is pretty well situated and always has been in the suburban areas around these MSAs. I think it comes down I mean, you can just naturally place yourself into that environment where your job no longer requires you to work downtown. You can see a rent discount by moving out into the suburbs. And I mean that just makes total logical sense. This last 6 months, you've got a lot of white collar employees that haven't had to commute to work and are deciding perhaps to get a nicer apartment unit or a bigger apartment unit just outside of the urban center and the suburban areas, kind of like the Aura Castle Hills property we bought a month and a half ago. You save $700 on rent, you're in a brand new property, you're across the street from a lake in the middle of a city that has 9,000,000 people. And your 5 minute drive, as Blake is telling me, your 5 minute drive to everything you need to do in Dallas, including the airport. With BSR having acquired more newer assets over the past 12 to 24 months, Is there any signs of new supply on the horizon that you see potentially impacting any of those newer assets? A little bit. I would say that Dallas and Austin continue to kind of lead the country in net absorptions and New York, I think I mentioned earlier. The difference between New York, Dallas and Austin or Dallas and Houston right now is Dallas and Houston actually have net positive absorption. What we really focus on is, I would say, I'll pick up on Austin. We want to look at completions as a percentage of total inventory. And when I'm looking at the trailing 12 months completions in Austin, it's about 4.5%, 4.4% of total inventory. That's a little high. Houston, Dallas always have great deliveries, but they're always sitting anywhere between 1.8% and 3%. And I think if you look in the last year, they're at about 2.5% to 3%. Austin at about 4.4%, a little high. If you zoom into the Austin area, we a lot of those deliveries kind of occurring up in the northern corridors. They're Class A product. There's a lot of urban delivery in Austin that's coming online. We don't think those deliveries really compete with our properties. And we feel pretty confident in our business strategy in Austin. I would say, I'm happy that we spent the last 12 months deploying capital in Austin and not the next 12 months deploying capital in Austin. Did you have any further questions, Matt? I did. Sorry. I was on mute there, guys. My apologies. Just in terms of the dispositions that were completed post quarter, is it possible for you guys to provide a broad range for the cap rate on those? Yes. This is Dan again. We don't like to talk about cap rates. I would say historically, we've talked about how, let's say, the buy cap rate on this one going in probably looks like a 5. And I think historically, we've said our exit cap rates are about 75 basis points to 125 basis points north of the going in cap rate. And based on this transaction, we don't see anything surprising on our exit that could cause us to deviate from that comment. Good color. That's really all we need. And maybe just one last one for me in terms of rolling up some of the prior commentary. When we think about the leasing demand and the outlook for Q4 and potentially into 2021, would it be fair to say that we should look for a modest same property lift in revenue and NOI? I couldn't hear the last part of the question. Just would it be fair to say the run rate NOI and revenue might tick up slightly going into Q4 given some of the leasing demand and higher NOI margins? Higher than 4.9% year over year? On a sequential basis. On a sequential basis? I don't I wouldn't want to say that it would be slight if there is any. Most people have been predicting not large increases. And at this point, with everything that's going on in the world, I would hate to predict anything substantial. So I got firm to slightly positive plan? Yes. But I will say this that it's probably a good time to tell everybody that we when you look at the Q3, we had close to 4,000 virtual tours on the Internet and self guided tours. And 70% of those were self guided tours. We closed on 48% of those. So that's a pretty good demand of 4,000 on those just alone. And our leads that in our portfolio were up 30% year over year for the Q3. So all those things tell me that those are very good signs, obviously. So as I hesitate to tell you exactly what it would be, those are good signs. Well, I appreciate the commentary. That's all for me. I'll turn it back. Thank you. Thank you. Next question will be from Joanna Chen at BMO Capital Markets. Please go ahead. Hi, good afternoon. Most of my questions have Go ahead. Hi. Most of my questions have been answered, but maybe just wanted to confirm, I might have missed this earlier, and I do apologize. But you did say that there's about $120,000,000 to $140,000,000 of remaining capital recycling by the end of this year? That's right. As Fred had asked earlier in regards to the number of total asset value, we had told the market early going that we would sell between 250,000,000 to 270,000,000 dollars And given that we closed on $130,000,000 we're right at $120,000,000 to $140,000,000 to go. And that was non core assets and the threat asset and we said it would be about 6%. It's actually a little bit lower to have we're going to say closer to 2% to 3% of non core assets remaining in our portfolio, maybe 2%. Okay, That's great. Thanks for clarifying. And maybe just one last one for me, kind of just how should we think about in terms of I know things are moving obviously day by day, but in terms of the pace of acquisition kind of in Q4 and kind of looking into 2021, Should we imagine it to be somewhat similar to what we've done in 2019 2020? Joanna, it's Dan. That's a good question. Yes, I think if you take a look back, COVID notwithstanding, we're set up to buy about $100,000,000 to $200,000,000 a quarter. We don't think that pace slows down and for the remainder of the year and moving into next year. Okay. That's great. That's it for me really. I'll turn it back. Thank you. Thank you. Thank you. Next question will be from Dean Wilkinson at CIBC. Please go ahead. Thank you and good afternoon everybody. Blake, I just want to say it's good to see your Dallas assets doing better than Jerry's Dallas assets, but that's an entirely different Wait a minute, what did he say that? I think that was a jab. No, no, that was not a jab. That was me commiserating in the misery of my team. Oh, okay. Yes, yes. No doubt about it. There's always 2021, right? Just a simple question for me, Susie. In the issue of the and it's a small number for you and hopefully it doesn't get larger. The 14 declarations related to tenants that can't pay and they've got the temporary halt on the evictions. What's the threshold that they have to meet sort of to pass that declaration? And how do you deal with that into like does that just become a bad expense once you can sort of get those people out of there? Is there recourse to go back and get, I'm assuming not sort of the rent? And what are you seeing just generally on sort of the trend of bad debts and how that might look sort of next couple of quarters? So I'll so Dean, first, I'll answer the question regarding how we record bad debt expense and then I'll let Blaise explain more about the declaration process. For bad debt, if someone quit paying and it becomes clear that they can't pay, right, and they would be evicted otherwise, but we can't right now because of the CDC, when it becomes apparent that they're not going to pay, we immediately would write off the rent that they would have a reserve for bad debt, right, and continue to reserve for it through the length of time they're living at our property with that going to bad debt expense, of course, up until they move out. So you would see some of that pass through bad before they leave depending on the amount of time they're in the property. Now Blake can explain how the debt expiration process works. Yes, they basically have to answer 5 questions, but they revolve around the fact that they've lost their job and they're trying to find the job and they've got a subsidy check on the 1st round of subsidy when the government sent out the checks. But really basically, Dean, it's I'm looking for a job, I can't find one, I'm out of work because of the pandemic and that's what it amounts to. And I feel like when you look back over our I feel good about the rent deferrals, how those paid off. I mean, we basically have nothing left on those. And when you look at these agreements, we have very few compared to most companies. So fingers crossed that it's not going to be a big issue for us going forward, which I think also pretty much points to the fact that the previous question and what we were talking about in terms of people keeping their jobs in a lot of the areas that we're located. Yes. No, makes total sense. That clears it up for me. Thanks, guys. I'll hand the call back over. Thank you. And your next question will be from Yash Sankpal at Laurentian Bank. Please go ahead. Good afternoon. Good afternoon. Yes. So the your incentives at this point, like where are they as compared to say a year ago? I'm sorry, can you repeat that? Yes, we couldn't understand. The amount of incentives you are offering to your tenants at this point, what is the level as compared to what you were offering, say, a year ago? The dollar amount? Yes, we use the LRO platform and that platform takes into account the actual rent rates that are calculated daily based on the exposure, leasing velocity, submarket comps and demand supply forecast. So actually we do not offer concessions in our properties. We offer we have a each day, our leasing agents come in, there's a calculation run, they can print it out as to what the leasing or the lease rate will be on a 12 month, 15 month and 18 month lease. So in terms of saying we're I think where you're leaving that is free rent or any of that. Those we do not do that. So there are no free month of rent of for a month or anything like that? No, we have not. It's rolled anything is of that nature is taken into account in the actual lease rate that they're given. We have very few concessions on our if you'll notice our financial statements, we have very few concessions. Okay. So let me ask you differently. Your same property rent growth was about 1% year over year this quarter. If the pandemic was not there, what would be your rent growth? Maybe growing. That's going to be a that's a tough one. I haven't been asked that. If you look at the let me back into it just a little bit. The rent growth in the 3rd quarter blended rates was 1.3%. So Q2 was around 1.3% of blended rates. So I would say probably between 2.5% to 3%. Okay. And That's a very tough question. All right. And just one more. Once you have disposed all your non core assets and redeployed the capital and the assets you are interested in, where would your payout ratio be at that time? Yes. So you're asking what are our what's the portfolio stabilized, what would the AFFO payout ratio be? Yes. Is that the question? Yes. So it's a drop right now. We're in the 80s and 85% 87% is too high. We're thinking maybe 75%, 80% at the most. Okay. All right. Yes, that's it for me. Thank you. All right. Thank you. Thank you. Next question will be from Matt Kornack of National Bank Financial. Please go ahead. Hi, guys. Hey, Les. Hi. Just wanted to quickly follow-up on that question with regards to rent growth and maybe get some sense as to the performance of the same property portfolio versus the non same property portfolio. And I understand that you don't have a year over year comparison because you haven't owned them for a year. But maybe given sequential growth rates and you may have known what the rents were when the prior owner owned them. Are the growth rates in rents higher than the same property portfolio? Are you asking for the sequential growth rate of the Nonsense store? Is that what you're saying? Yes. I mean, you would have I think historically, the newer assets that you were acquiring, the view was that they produce better organic growth. Is that coming true essentially even in this environment? Yes. Actually in the Q3, if you look at the blended rate, the acquired properties, they had a 1.8% growth. Same store was 1.2 1.3, excuse me. So they are showing a higher one. In the Q2, it was actually right around the same amount and the blended rates for acquired crop, the blended rates for the same store were 1.1. So they went up sequentially on the same store, acquired stayed around the same. Okay. That makes sense. With regards to acquisition activity, you've done a lot of one off single properties. Is that the approach going forward? Or would you look at portfolio transactions? And then as the buyer and seller base of assets changed at all as a result of COVID? So, yes, this is Dan. Let me address your first question first. So we've always looked at portfolios, but if you think about what the management team and the REIT's done in the last 2 years is we're structuring rotation of assets using tax deferred, 1031 transactions. And timing is crucial and execution is crucial on that. Portfolios have a little bit of a they're a little bit slower burn. They take a little bit longer to take down. The elephant hunting takes a little bit longer to bring in the prey. We found success by buying 1 offs and 2 offs from repeat sellers, oftentimes in off market transactions. And that just kind of props up our ability to rotate. It's not to say we hadn't looked at portfolios in the past. But I think as we near the completion of this rotation cycle, we'll probably deploy a little bit more resources into portfolio style growth. I mean the platform that we've built here really afford to double or perhaps even triple in size without a meaningful impact to our G and A. So yes, we look at portfolios. We'd like to see them come in. I think as we finish the rotations, it makes a little bit easier for us to finance and take down 1. And then on your 10/30 1 And then on your second question, could you Sorry. Yes. Go ahead. What was my second question? In terms of the buyer and seller base for assets, if it's changed at all as a result of COVID? No, that's a good question. You see a lot of private buyers right now. We see a lot of the Public REITs sitting on the sidelines, but that's based on the product that Public REITs kind of are attracted to, which is in the last 3 or 4 years has been kind of that urban core, massively expensive high rep product and that's getting punished the most right now. So we've seen them sit on the sidelines, seen a lot more family office and private high net worth individual buyers. But the message remains really the same over the last four quarters. You're seeing a pretty wide bid ask spread between cap rates on seller expectations and buyer offers. That hadn't changed. And I think what you are seeing in Austin is kind of a buyer capitulation. And that's why you're seeing that cap rate decline in Austin, I'll say, in the last quarter. But other than that, it's even though transaction volume is down, deals are still getting done. If you have a developed reputation in the market like BSR does. We live in our markets. We spend a great deal of time cultivating our relationships and building our reputation as a party that executes. So for people like BSR, we closed an asset, I want to say, on March 15. We closed an asset in June. We closed an asset in August in the middle of COVID. The sell side picks up on that and that helps drop up perhaps our offers on the buy side as we look to kind of build the acquisition pipeline. The CIL side is not ignorant to that and neither is the brokerage community. So that's the summary. What was your second is that tackled your second question? Yes. That was both of them. I guess the last question for me also on the acquisition side. Presumably given it's a 1031 exchange, you've got a timeline to redeploy the capital. It sounds like Austin is not necessarily the destination for near term dollars. So does that mean Houston and Dallas exclusively? I know at the time you were talking Oklahoma City, I believe, and Northwest Arkansas. Are those still on the list of potential places you deploy some of that capital? Yes, we keep an open mind and we play a disciplined game of whack a mole in this company on how we buy product. So right now, we think Austin is a little pricey. We also think Northwest Arkansas is very pricey. We see a ton of buy side support in the Northwest Arkansas. So I don't see us buying in the next quarter in that area. Now as it relates to Dallas, Dallas is really the fundamentals of Dallas haven't changed at all. And I think you could expect us to look more heavily into Dallas to grow that NOI concentration. Houston, Houston is the Wild West. You can find excellent deals in Houston and horrible deals in Houston at any given time. So it's about sifting through the high volume of deals in Houston. And I think we found several in our pipeline that we like and we continue to monitor. But yes, that's probably a fair bet, Dallas and Houston. Now when you look at Oklahoma City, you haven't seen a lot of transactions take place in the last year in OKC. But what you have seen is when you look at the last quarter, maybe last 2 quarters, everyone else is seeing occupancy slight occupancy dips and slight rent decreases. Oklahoma City is sitting about 1.5% to 2% on both of those factors, and it just has to do with low deliveries. So we're going to continue to monitor OKC. Haven't seen a lot of transactions take place there, and that probably has to do with just the wide bid ask spread. And then the expectation would be Dallas and Houston for the next quarter. Okay. Thanks. But I'm going to add to that is that we have now successfully satisfied our tenthirty one on $130,000,000 of backfilling into the properties that we had already bought. So there's no pressure. We do like we had said, we anticipate buying another to satisfy the sales that we have in our queue. We said $120,000,000 to $140,000,000 that we anticipate selling. So you can anticipate, as Dan was saying before, that we have that we $150,000,000 of acquisitions in Q4 and again in Q1 of 2021. Okay. So just to clarify, the 130 that you sold, you've already dealt with the 1031 exchange on that with the acquisitions that you've done? Okay, fair enough. Okay, that's great. Appreciate the color guys. Stay safe and healthy. Thank you. You too, Matt. Take care of that baby. There was a question asked this is Blake. There was a question asked earlier about what I thought the growth rate on rent would be without the pandemic. And got thinking about that, I think it's at 2.5% to 3%. So I went back and checked on my numbers in Q3 of 'nineteen, the blended rate increase was 3.4%. So that was that 2.5% to 3% should be a pretty good number. I just wanted to clarify that. Thank you, sir. And at this time, Mr. Bailey, we have no further questions registered. Please proceed. Okay. Well, thank you everyone. That concludes our call this morning and thank you for your interest in BSR REIT. And we look forward to speaking with you again following our Q4 financial reporting. In the meantime, we wish you all good health and God bless. Thank you, sir. Ladies and gentlemen, this does indeed conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.