Good afternoon. My name is Sylvie, 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. Note that 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 one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. Mr. Bailey, you may now begin the conference.
Thank you, Sylvie. Good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the third quarter ended September 30, 2020. I am joined by Susie Koehn, our Chief Financial Officer, and also with us today are Dan Oberste, President and Chief Investment Officer, and Blake Brazeal, 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&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&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'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 all dollar amounts are denominated in U.S. currency. We continue to operate our business with relatively minimal disruptions created by the COVID-19 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-19 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 30th, we acquired Broadstone Park West, constructed in 2014, a high-quality property in Houston market with 370 suites for $51 million, or $137,838 per apartment unit. On September 24th, we acquired Aura Castle Hills, constructed in 2019, a 276-suite garden-style residential community in the Dallas-Fort Worth market for $51.8 million, or $187,681 per apartment unit. Subsequent to quarter end, earlier this week, we continued the recycling program with the sale of six non-core properties comprising of 1,483 apartment units.
4 in Little Rock, Arkansas, and 2 in Houston, Texas, generating gross proceeds of $130 million. 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 3,511 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 in cap rate spreads between primary and secondary markets.
The REIT's debt to gross book value is currently at 48.1%, providing the flexibility to add approximately $200 million of assets without further equity. We also remain confident we will sell an additional $120 million-$140 million in assets before year-end. Our ongoing transformation of our portfolio was evident in our Q3 results. Weighted average rent at September 30 was $1,011 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 Sun Belt 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-19. With our current liquidity position of approximately $103 million, 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 third quarter results in more detail. Susie?
Thank you, John. Same community revenue increased 3.1% in the third quarter over the prior year to $20.3 million, reflecting an increase in average rental rates from $900 per apartment unit as of September 2019 to $999 per apartment unit as of September 2020, as well as a $0.4 million increase in utility reimbursement. This was partially offset by the absence of late rental fees of $0.1 million related to the COVID-19 pandemic. We resumed charging late fees in mid-August of 2020. Total portfolio revenue for Q3 2020 increased 7.2% from $27.8 million in Q3 2019 to $29.8 million this year. The increase was primarily the result of property acquisitions, which contributed $7.4 million in revenue, as well as higher rental rates across the portfolio and an increase in utility reimbursement, partially offset by dispositions that reduced revenue by $6 million.
NOI for the same community properties totaled $10.6 million, an increase of 4.9% compared to $10.1 million in Q3 last year. This was primarily due to the revenue increase, partially offset by $0.1 million in additional COVID-19 pandemic expenses. NOI for the full portfolio increased by 4.8% to $15.2 million, compared to $14.5 million in Q3 last year. This increase was primarily attributable to acquisitions contributing $3.6 million, as well as the increase in NOI from same community properties, partially offset by property dispositions, reducing NOI by $3.4 million. 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 third quarter was $7.4 million, or $0.16 per unit, compared to $7.1 million or $0.18 per unit last year.
The increase of $0.3 million was mainly the result of higher NOI, partially offset by an increase in the amortization of deferred financing costs of $0.2 million and an increase in interest expense of $0.1 million, as well as higher general and administrative expenses of $0.1 million related to share-based compensation. Q3 2020 AFFO of $6.5 million was flat compared to last year, equal to $0.14 versus $0.16 on a per-unit basis. The increase of $0.3 million in FFO was primarily offset by an increase in maintenance capital expenditures of $0.2 million 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 $0.125 per unit in Q3 of both years, representing an AFFO payout ratio of 87.5% in Q3 2020 compared to 80.3% last year.
Turning to our balance sheet. On September 3, the REIT issued $40 million of 5% convertible debentures maturing September 30, 2025, with a conversion price of $14.40 per unit. Subsequent to quarter end, on October 5, the underwriters of the offering exercised their option to acquire a further $2.5 million. Our debt-to-gross book value ratio at September 30, 2020, was 50.8%. As John indicated earlier, following the subsequent dispositions of the six 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 million. This includes cash and cash equivalents of $6.8 million, $61 million of borrowing capacity under our credit facility, and $35 million available under a revolving line of credit.
As of September 30th, we had total mortgage notes payable of $396.9 million, excluding the credit facility and the line of credit, with a weighted average contractual interest rate of 3.9% with a weighted average term to maturity of nine years. Total loans and borrowings at quarter end were $595 million, excluding the debentures, and 77% of the REIT debt was fixed or economically hedged to fixed rates. Total loans and borrowings are $474 million after the sale of the six properties this 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 Oberste 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 for our capital markets program. Blake Brazeal continues as the REIT's Chief Operating Officer while also assuming the role of Co-President. 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 and dispositions has remained consistent during the pandemic. Once again, we feel confident we will complete our targeted range of $120 million-$140 million 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-19 closely. We are comfortable that we have made all the appropriate adjustments to our daily operations. If we determine further changes are necessary, we stand prepared to implement them rapidly across our portfolio.
COVID 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 to 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. Operator, if you would please open the line for questions.
Thank you, sir. Ladies and gentlemen, if you do have a question at this time, please press star followed by one on your touch tone phone. You will then hear a three-tone prompt acknowledging your request. If you should like to withdraw your question, simply press star followed by two. If you're using a speakerphone, we do ask that you please lift your handset before pressing any keys. Please go ahead and press star one now if you have a question. Your first question will be from Fred Blondeau at iA Securities. Please go ahead.
Thanks. Good afternoon. 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 executing 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.
Yeah, I saw the 12% in the MD&A, but I thought that you had more sales in the pipe until the end of the year.
In the queue for sale beyond the 12%?
Sorry, I'm seeing in your MD&A that you are currently 12% non-core of NOI generated by your non-core assets today. I was just wondering what are your expectations in terms of asset sales?
That's right.
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.
Okay.
We ought to have around 6%-
Right
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 a Houston and Little Rock property. That leaves just a few of the properties that are outside. I'm going to say about 6%.
Okay. No, that's great. Just to segue to my next question, Susie, how would you feel today about your current debt ratio at 48%?
Yeah, it's a little low. We're still in the middle of recycling, and we just sold six 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. Maybe lastly, last one from me. 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 not expect an increase in occupancy of any substantial amount. I think it'll 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. We feel like we handled the first wave of the pandemic in a very effective. It did not affect our daily operations to any great degree. That will be one of the main things that we'll be keeping our eye on as the next wave of the pandemic.
Mm-hmm. Do you feel like part of the portfolio is more at risk than others today, geographically speaking?
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. We feel good about that, and we're also in areas that continue to grow with people that are moving in at the highest rates of anywhere in America. 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.
Mm-hmm. No, that's great. Thank you.
Thank you. Next question will be from Brad Sturges at Raymond James. Please go ahead.
Hi there.
Hey, Brad.
Hey, Brad.
Just to follow on to Fred's question on the cap rates or the capital recycling discussion, just more in the general context about pricing. I guess a few quarters ago, you were guiding towards a spread between primary, secondary markets of call it 100 basis points. Has that changed in any way? It does seem like there is some cap rate compression happening within some of your core markets.
Hey, this is Dan. That's a good question. I think if we look at the historic spread between major and non-major markets, it's sat around 110 basis points recently. The current spread's compressed down to about 90 basis points. Yeah, 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 Sun Belt markets. 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, yeah, they've creeped up a tad maybe. You compare that to the markets that we're in Dallas and Houston and Austin.
As Blake mentioned, the ramp up in COVID-19 cases in Texas occurred more recently than March relative to those cities we just talked about. You continue to see good performance. You continue to see great net migration going into those markets, right. I would say the cap rates are compressing. The risk is compressing specifically for Austin, where we're really seeing cap rate compression.
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?
Oh, going in, Yashan? Yeah. That's a good question. It can run the gamut. I would say Austin, right now, today, in that market, you're seeing a whole lot of high threes. That's not to say, well, that's what we acquired, the $212 million of assets we bought in Austin in the last year. We didn't have a three 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 those prices.
For you-
Where we're seeing Dallas and Houston sit is probably between four and five, nominally call it a 450 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. We're seeing cap rates for those value add assets remain low, which is impressive.
Yeah. Great. That's a good call out. Thank you.
Thank you. Next question will be from Kyle Stanley at Desjardins. Please go ahead.
Thanks. Good afternoon.
Hello, Kyle.
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 75 units. If you really go granular on it, Kyle, they're basically made up in three different properties or four 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. If you look at the last quarter, it was at 98%, which was very high for Vanderbilt. Excuse me, for Beaumont, which now both of those assets are back at the right, not at 98%, but back above what is showing in the MD&A right now. Dallas stayed relatively flat.
Houston was down about 23 units. Of those units, that was two properties that made up the whole amount. Those have come back. I want to add also that of the six properties we disposed of yesterday, their combined effect were below our averages. The assets that John alluded to earlier that we'll be selling in the different MSAs, those are also below our averages. 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.
Also this year, we've added two properties. One of our latest properties that we bought, the Broadstone, when we bought it was running at 82%, and now it's at 88%. We've added another one that we bought that was at 91%, Satori, that is leasing up, and we had put it in there, and it's actually leased at 93% and stabilized. That creates that gap in the not same store comparing year-over-year.
Okay, great.
Does that answer?
That's a really good color. Yeah, 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.
Yep. I'm sticking with the 54% that I've said on the last few calls. This quarter, yeah, we did see margins go down a bit for the reasons you just mentioned, but also because we had some expenses that were a little bit higher due to timing. Some additional healthcare 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.
I wanted to add one more thing, and I'm sorry I didn't add it when we were talking, but I think it 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. We netted up 97 units in our portfolio, and those were basically based in the core units. 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 these turnovers? 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?
Yeah, we've continued to do those, but obviously with the pandemic, 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 doing more and more of these. Through the year, we've done 157 partial upgrades and 120 signature upgrades. Wimberley in Dallas is performing at a 20% return, and we've got 76 unit upgrades at that property in particular. We've really got three areas, three properties that have shown a real.
for reducing the returns, and those are Wimberley, River Hill, and Aubrey. We've been pretty strategical during this time. Even with that, we've completed 15 more than we budgeted. We just really thought we would produce more during the year. That was my original plan advance, too, when we started, but the pandemic kind of threw us for a loop for a six-month period there.
Okay, thanks. That's great color. I'll turn it back.
Thank you. 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 L.A. to Dallas, or Tesla's construction of its $2 billion factory about 10 miles from our properties? I guess we can go into that. 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. We talked about this in the last few quarters. Houston had a 2018-19 year where they had really low deliveries, which sustained net migration. The majority of that was coming for job growth and with some international migration in Houston. We talked about it last year, particularly when we acquired a couple assets in Houston, about how we saw this year, probably in Houston, outperforming the expectations. 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. Made it one of the second fastest-growing population center in the country at that time. Dallas, it's the same story. You're seeing PGA of America relocate their corporate headquarters, CBRE, Toyota. A lot of jobs moving, 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. 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 third consecutive year. Wall Street Journal just came out, and for the second consecutive year, named Austin as the hottest U.S. job market. U.S. News last year, for the third year in a row, named Austin as the best city to live in the United States. Austin's kind of got it all going on, and they're sucking from all over the country. We are seeing a higher percentage of net migration from the West Coast, particularly California, going into Austin relative to Dallas and Houston. I don't think there's no sign of that stopping. I would say it's quite the alternative. We see that accelerating on the look forward.
I guess in short, it's just continued job growth and then migration as opposed to people living in the downtown cores moving more towards the suburbs.
Yeah. Thank you for hitting on that. Yeah, 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 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 that just makes total logical sense. This last six 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 in 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 nine million people, you're a five-minute drive, as Blake's telling me, you're a five-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. 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. 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%. 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 see a lot of those deliveries 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. 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?
Yeah. 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, the going in probably looks like a five, and I think historically we've said our exit cap rates are about 75 to 125 basis points north of the going-in cap rate. Based on this transaction, we don't see anything surprising on our exit that would cause us to deviate from that comment.
Good color. That's really all we need. 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 that 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 wouldn't want to say that it would be slight if there is any. Most people have been predicting not large increases, at this point, with everything that's going on in the world, I would hate to predict anything substantial.
Again, firm to slightly positive then.
Yeah. I will say this, that it's probably a good time to tell everybody that when you look at the third quarter, 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. That's a pretty good demand of 4,000 on those just alone. Our leads that in our portfolio were up 30% year-over-year for the third quarter. All those things tell me that those are very good signs, obviously. As I hesitate to tell you exactly what it would be, those are good signs.
Well, I appreciate the commentary. That's all from me. I'll turn it back. Thank you.
Thank you. Next question will be from Joanne Chen at BMO Capital Markets. Please go ahead.
Hi, good afternoon.
Hello, Joanne.
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 million-$140 million 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 million-$270 million. Given that we closed on $130 million, we're right at $120 million-$140 million to go. That was non- core assets. When Fred asked that, and we said it would be about 6%, it's actually a little bit lower. We're going to say closer to 2%-3% of non-core assets remaining in our portfolio, maybe 2%.
Okay. That's great. Thanks for clarifying. Maybe just one last one for me, 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 in Q4 and looking into 2021, should we imagine it to be somewhat similar to what you've done in 2019 and 2020?
Hey Joanne, this is Dan. That's a good question. Yeah, I think if you take a look back, COVID notwithstanding. We're set up to buy about $100 million-$200 million a quarter. We don't think that pace slows down 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, good afternoon, everybody.
Hello, Dean.
Good afternoon.
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? I think that was a jab.
No, that was not a jab. That was me commiserating in the misery of my team.
Oh, okay. Yeah. No doubt about it.
Yeah. There's always 2021, right? Just a simple question for me, Susie. On 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 to pass that declaration? How do you deal with that into? Does that just become a bad expense, once you can get those people out of there? Is there recourse to go back and get, I'm assuming not, the rent? What are you seeing just generally on the trend of bad debts and how that might look sort of next couple quarters?
Dean, first I'll answer the question regarding how we record bad debt expense, and then I'll let Blake explain more about the declarations process. For bad debt, if someone quits paying and it becomes clear that they can't pay, 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, 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. You would see some of that pass through bad debt before they leave, depending on the amount of time they're in the property. Blake can explain how the declaration process works.
Yes, they basically have to answer five questions, but they revolve around the fact that they've lost their job and they're trying to find a job, and they got a subsidy check on the first round of subsidy when the government sent out the checks. 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. I feel like, when you look back over our I feel good about the rent deferrals, how those paid off. We basically have nothing left on those. When you look at these agreements, we have very few compared to most companies.
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.
Yep. No, makes total sense. That clears it up for me. Thanks, guys. I'll hand the call back over.
Thank you. Ladies and gentlemen, as a reminder, if you do have a question, please press star followed by one on your touchtone phone. Your next question will be from Yash Sankpal at Laurentian Bank. Please go ahead.
Good afternoon.
Good afternoon.
Yeah. Susie, your incentives at this point, where are they as compared to, say, a year ago?
I'm sorry, can you repeat that, Yash? We couldn't understand.
The amount of incentives you're 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, sub-market comps, and demand and supply forecast. Actually, we do not offer concessions in our properties. Each day, our leasing agents come in, there's a calculation run. They can print it out as to what the lease rate will be on a 12-month, a 15-month, an 18-month lease. In terms of saying where, I think where you're leading with that is free rent or any of that, those, we do not do that.
There are no free month or rent for a month or anything like that?
No, we have not. Anything of that nature is taken into account in the actual lease rate that they're given.
Okay.
If you'll notice our financial statements, we have very few concessions.
Okay. 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?
Boy, that's a tough one. I haven't been asked that. Let me back into it just a little bit. The rent growth in the third quarter, blended rates was 1.3%. Q2 was around 1.3% on blended rates. I would say probably between 2.5% to 3%.
Okay.
That's a very tough question.
All right. Just one more. Once you have disposed all your non-core assets and redeployed the capital in the assets you are interested in, where would your payout ratio be at that time?
Yash, you're asking once the portfolio is stabilized, what would the AFFO payout ratio be?
Yes.
Is that the question you asked?
Yes.
This is Rob. 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. Yeah, that's it for me. Thank you.
All right. Thank you.
Thank you. Next question will be from Matt Kornack at National Bank Financial. Please go ahead.
Hi, guys.
Hey, Matt.
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. I understand that you don't have a year-over-year comparison because you haven't owned them for a year. Maybe given sequential growth rates, and you may have known what the rents were when the prior owner owned them. Are the growth rates and rents higher in the non-same property portfolio than the same property portfolio?
Are you asking for the sequential growth rate of the non-same store?
Yeah. I think historically, the newer assets that you were acquiring, the view was that they'd produce better organic growth. Is that coming true essentially even in this environment?
Yeah. Actually, in the third quarter, 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. They are showing a higher one. In the Q2, it was actually right around the same amount, the blended rates for the same store were 1.1%, they actually went up sequentially on same store. Acquired stayed around the same.
Okay. No, 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? Has the buyer and seller base of assets changed at all as a result of COVID?
Yeah, this is Dan. Let me address your first question first. We've always looked at portfolios, but if you think about what the management team and the REIT's done in the last two years is we're structuring a rotation of assets using tax-deferred 1031 transactions. Timing is crucial, and execution is crucial on that. Portfolios, 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've found success by buying one-offs and two-offs from repeat sellers, oftentimes in off-market transactions. That just kind of props up our ability to rotate. It's not to say we hadn't looked at portfolios in the past. I think as we near the completion of this rotation cycle, we'll probably deploy a little bit more resources into portfolio style growth.
The platform that we've built here can really afford to double or perhaps even triple in size without a meaningful impact to our G&A. Yeah, we look at portfolios. We'd like to see them come in. I think as we finish the rotations, it makes it a little bit easier for us to finance and take down one.
On your 1031 exchange.
Now, your second question.
Oh, sorry. Yep.
Go ahead.
What was my second question? Oh, 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 are attracted to, which is, in the last three or four years, has been that urban core, massively expensive, high rent product, and that's getting punished the most right now. We've seen them sit on the sidelines, seen a lot more family office and private high-net-worth individual buyers. 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. I think what you are seeing in Austin is kind of a buyer capitulation. That's why you're seeing that cap rate decline in Austin, I'll say, in the last quarter.
Other than that, 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. For people like BSR, we closed an asset, I want to say, on March 15th. We closed an asset in June. We closed an asset in August, in the middle of COVID-19. The sell side picks up on that, and that helps prop up perhaps our offers on the buy side, as we look to build the acquisition pipeline. The sell side's not ignorant to that, and neither is the brokerage community. That's the summary. That tackled your second question?
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's not necessarily the destination for near-term dollars. 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'd deploy some of that capital?
Yeah, we keep an open mind, and we play a discipline game of Whac-A-Mole in this company on how we buy product. Right now, we think Austin's a little pricey. We also think Northwest Arkansas is very pricey. We see a ton of buy-side support into Northwest Arkansas, so I don't see us buying in the next quarter in that area. As it relates to Dallas, really, the fundamentals of Dallas haven't changed at all. I think you could expect us to look more heavily into Dallas to grow that NOI concentration. Houston's the Wild West. You can find excellent deals in Houston and horrible deals in Houston at any given time. 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.
Yeah, that's probably a fair bet. Dallas and Houston. 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, maybe look in the last quarter, maybe the last two quarters, everyone else is seeing slight occupancy dips and slight rent decreases. Oklahoma City is sitting about 1.5%-2% on both of those factors, and it just has to do with low deliveries. We're going to continue to monitor OKC. Haven't seen a lot of transactions take place there. That probably has to do with just the wide bid-ask spread. The expectation would be Dallas and Houston for the next quarter.
Okay.
I'm going to add to that, is that we have now successfully satisfied our 1031 on $130 million of backfilling into the properties that we had already bought. There's no pressure. Like we had said, we anticipate buying to satisfy the sales that we have in our queue, we said $120 million-$140 million that we anticipate selling. You can anticipate, as Dan was saying before, that we will continue looking for about $100 million-$150 million of acquisitions in Q4, and again in Q1 of 2021.
Just to clarify, the 130 that you sold, you've already dealt with the 1031 exchange on that?
That's right.
acquisitions that you've done? Okay. Fair enough.
Correct.
Okay. That's great. Appreciate the color, guys. Stay safe and healthy.
Thank you. You too, Matt.
Thanks, Matt.
Take care of that baby.
This is Blake. There was a question asked earlier about what I thought the growth rate on rents would be without the pandemic, and got to thinking about that. I think I said 2.5%-3%. I went back and checked all my numbers. In Q3 of 2019, the blended rate increase was 3.4%. That 2.5%-3% should be a pretty good number. I just wanted to clarify that.
Thank you, sir. 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. We look forward to speaking with you again following our fourth quarter 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. At this time, we do ask that you please disconnect your lines.