Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT's Q4 2019 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 would like to withdraw your question, please press star followed by two. Thank you. Mr. Bailey, you may begin your conference.
Thank you, Joanna, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for fourth quarter and year ended December 31, 2019. I am John Bailey, BSR's Chief Executive Officer. I'm joined today by Susan Koehn, our Chief Financial Officer. Also with us are Blake Brazeal, President and Chief Operating Officer, and Daniel Oberste, Executive Vice President and Chief Investment Officer, who will both be available to answer questions. I'll start this call by providing an overview of our results during Q4 and some commentary on the performance drivers. Susan will then review the financials, and I'll conclude with some comments on our outlook and strategy. After that, we'll be pleased to answer questions that you may have. 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 March 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&A for additional information regarding our non-IFRS measures, including reconciliations to the nearest IFRS measures. Also, please note that all dollar amounts are denominated in U.S. currency. Let me begin with a quick clarification of the results that we will be discussing today. As you know, we completed our initial public offering and commenced trading on the Toronto Stock Exchange during the second quarter of 2018.
The REIT had no operations prior to that date. As a result, the year-over-year comparisons for the fourth quarter are apples to apples. However, the full-year numbers would not be. Accordingly, in order to provide investors with a more complete understanding of our full-year performance in 2019, we will discuss revenue, NOI, and same community metrics for the entire applicable twelve-month period in 2018 for the properties that were acquired by the REIT upon completion of the IPO. In the fourth quarter, we maintained our track record of producing strong operating performance. We generated solid growth in revenue and NOI, maintained high occupancy, and increased average rent per unit. We generated this growth both from organic rent increases and from accretive property acquisitions. Let me quickly recap the Q4 performance.
Weighted average rent at the end of the fourth quarter was $942 per apartment unit, up from $821 last year. Same community weighted average rent was $864 per apartment unit, compared to $845 a year ago. The substantial increase for the portfolio as a whole reflects the impact of our successful capital rotation strategy and reinvestment program, while we continue to transition the portfolio into higher rent communities located in our target property markets. Total revenue for Q4 2019 increased 7.1% as compared to Q4 2018, while total NOI increased 7.7%. On a same community basis, revenue increased 3.3%, and NOI was up 7.3% year-over-year. Total revenue for the year ended 2019 increased 10.7%, while NOI increased 12.5%. On a same community basis, revenue increased 3.7%, and NOI was up 6% year-over-year.
The strong same community NOI numbers underline the fact that we continue to generate growth in our rental rates. Our success in raising rent has not affected our occupancy rate. As of December 31st, 2019, we had a weighted average occupancy of 93.6%, up slightly from 93.3% at the end of 2018. We continue to see runway for further rent increases going forward. During Q4, we also continued to deliver on our property rotation strategy. On October 31st, we acquired Satori at Long Meadow Apartments in Richmond, Texas, comprising 300 apartment units, and Auberry at Twin Creeks in Allen, Texas, comprising 216 apartment units, for a total of $92.8 million. Richmond is located in the Houston MSA, where we now own eight properties and 1,962 total apartment units, representing 20% of our portfolio's NOI on a pro forma basis.
Allen is located in the Dallas-Fort Worth MSA, where we now own five properties and 1,708 total apartment units, representing 22% of the portfolio's NOI on a pro forma basis. We sold properties in Tulsa and Oklahoma City, Oklahoma, Baton Rouge and Shreveport, Louisiana, and Hot Springs, Arkansas, as a part of a nine-property sales process begun in Q3, which raised a total of $119.2 million. Subsequent to year-end, we sold Westwood Village in Shreveport, Louisiana, for gross proceeds of $16 million. As we said we would, we have now completely exited the Louisiana market. This continues the ongoing process of transitioning our portfolio into suburban communities located in targeted high-growth primary markets. The spread in cap rates between the primary and secondary markets in the U.S. Sun Belt remains at historically low levels.
We will continue to capitalize on rotating out of our identified secondary markets and into the high-growth targeted markets. I'll speak more on capital recycling later in the call. Looking ahead to the year now underway, we are very pleased with BSR's competitive position. We are delivering on our internal and external growth strategies, as we said we would do, and see multiple opportunities to continue to enhance our portfolio and generate unitholder value. I'll now turn it over to Susan to review our fourth quarter and full-year results in more detail. Susan.
Thanks, John. Same-community revenue in Q4 2019 was $20 million, up 3.3% from last year, primarily reflecting an increase in same-community rental rates to $864 per month from $845 per month at year-end 2018. Total revenue for the quarter increased 7.1% to $28.1 million, which was largely the result of property acquisitions, net of dispositions subsequent to December 31st, 2018, as well as higher rental rates across the portfolio. NOI for the same-community properties totaled $10.9 million compared to $10.2 million last year. The 7.3% increase was due to the increase in rental rates that I just discussed. NOI for the full portfolio was $14.9 million compared to $13.8 million last year. The 7.7% increase was primarily the result of property acquisitions, net of dispositions subsequent to December 31st, 2018, as well as the contribution from the same-community assets.
FFO for the fourth quarter of 2019 was $6.7 million, or $0.15 per unit, compared to $7.7 million, or $0.19 per unit last year. The decrease was primarily the result of a net increase in finance costs resulting from the timing of the repayment of debt due to the accumulation of cash that occurs when all property sales included in the same tax-deferred exchange must close before the proceeds can be recycled, as well as an increase in the amortization of net discounts related to the fair value of debt and deferred loan costs. Additionally, G&A contributed approximately $500,000 to the decrease in FFO over the prior year, predominantly due to a purchase price allocation adjustment taken in the fourth quarter of 2018 in connection with our IPO.
AFFO for the fourth quarter of 2019 was $6.3 million, or $0.14 per unit, compared with $6.2 million or $0.16 per unit. The increase in the dollar amount reflects the inclusion of income related to the rent guarantee on the acquisition of Satori of $600,000 and a decrease in maintenance capital expenditures of $200,000 and the exclusion of retention and severance costs associated with capital recycling of about $200,000. The per-unit figure reflects the September offering. The REIT paid quarterly cash distributions of $0.125 per unit in Q4 of both years, representing an AFFO payout ratio of 89.6% in Q4 2019 compared to 79.9% last year. As previously stated, during 2019, BSR acquired five apartment communities for $250 million and sold 15 non-core properties for $173 million. We are not finished yet.
The high level of capital recycling created choppiness in AFFO during Q4 2019, and this will continue through 2020, increasing unitholder value at the end of the program. I'll now briefly review our results for the year ended December 31st, 2019. As John indicated, the revenue, NOI, and same community metrics for 2018 comprised the entire 12-month period for the properties that were acquired by the REIT upon completion of the IPO. Revenue was $111.7 million, which was 10.7% higher than last year. The increase was primarily the result of property acquisitions, which contributed $14.9 million in revenue, as well as higher rental rates across the portfolio, partially offset by dispositions reducing revenue by $8 million. Same-community revenue for the full year was $79.2 million, an increase of 3.7% from the 2018 level, primarily reflecting increased rental revenue.
Full year NOI for the portfolio was $59.7 million, representing a year-over-year increase of 12.5%. The increase was primarily the result of property acquisitions that contributed $7.9 million, partially offset by $3.7 million attributable to dispositions and a higher same-community NOI. Same-community NOI for the full year increased 6% to $42.8 million due to the higher revenue level. FFO was $29.3 million in 2019, or $0.71 per unit. AFFO was $26.4 million or $0.64 per unit. The REIT paid cash distributions of $0.50 per unit for the year, representing an AFFO payout ratio of 78.6%. As previously stated, the high level of capital recycling created choppiness in AFFO during 2019, this will continue through 2020, increasing unit holder value at the end of the program. Turning to our balance sheet. As of December 31st, 2019, our debt-to-gross book value ratio was 48.3%.
Taking into account the $32.4 million repayment of our credit facility and the sale of Westwood Village subsequent to year-end, our debt to GBV is now 46.4%. As of December 31st, 2019, liquidity was $106 million, including cash and cash equivalents of $37 million, $33.6 million of borrowing capacity under our credit facility, and $35 million available under our revolving line of credit. We had total mortgage notes payable of $409 million, excluding the credit facility, with a weighted average contractual interest rate of 3.9% and a weighted average terms and maturity of 9.6 years. As of December 31st, 2019, total loans and borrowings were $542 million. I will now turn it back over to John for some closing comments. John?
All right. Well, thank you, Susan. In 2019, BSR took advantage of historically low cap rate spreads among asset types in primary and secondary markets to accelerate our capital recycling strategy and reinvestment program. While we met our objective of generating strong financial performance, we also materially upgraded our portfolio. The weighted average age of our property portfolio dropped to 23 years at end of December 2019, compared to 29 years at the end of our IPO. Our weighted average rent as of December 31, 2019 increased 14.7% compared to the prior year. In addition, in the fourth quarter of 2019, 72% of our NOI was generated from properties in our five targeted markets: Austin, Dallas, Houston, Oklahoma City, and Northwest Arkansas. That compares to 52% in the fourth quarter of 2018, calculated on a pro forma basis. There's more we can do.
Assuming market conditions continue to be constructive, we still plan to exit the following markets: Beaumont, Texas, Longview, Texas, Blytheville , Arkansas, and Pascagoula, Mississippi. The anticipated sales of the 10 properties we own across these four markets, as well as certain assets in Little Rock and Houston no longer meeting our investment criteria, should provide us with substantial additional capital to invest in modernizing our portfolio while investing in quality properties in our targeted primary markets. We have $106 million in liquidity for additional accretive acquisitions. Our strategy is working, and we plan to stick with it. Our future outlook for BSR REIT is very bright.
We have the ability to continue to recycle capital from secondary markets to BSR's target primary markets on a tax-deferred basis, taking advantage of the compression in cap rates previously discussed, and the market for garden-style assets in our target markets continues to be deep and liquid. That concludes our remarks this morning. Susan, Dan, Blake, and I would now be pleased to answer any questions you may have. Operator, would you please open the line for questions?
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. Should you have a question, please press the star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging your request. If you are using a speakerphone, please lift the handset before pressing any keys. If you require any assistance, please press star zero. Your first question comes from Dean Wilkinson from CIBC. Please go ahead.
Morning, Dean.
Susan, just have a question for you on the accounting treatment on the income subsidy on Satori. I guess, is it dealt with as a purchase price adjustment, and that's why it doesn't show up in the P&L? You make that adjustment at the AFFO line, and then as that leases up, that goes away, and we'll kind of see that $0.01-$0.02 adjustment come back into FFO. A run rate higher than what we saw in Q4 from an operational perspective.
Hey, Dean. Yeah, you're absolutely right. Under IFRS, we're required to record the rent guarantee as a receivable. Then as we collect the cash, it goes against the receivable, and it doesn't go to the P&L.
Okay.
However, from a cash flow perspective, that is cash we're collecting, you're right. As that goes away, and as we lease the property up, it'll flip to NOI and, of course, FFO.
Okay. Conceptually, if I added that back to the FFO as a normalized number, it might not be the way the accountants want to look at it, but from a sort of run rate perspective, it does make sense.
Correct.
Okay. That was it for me. I will hand it back and let others have an opportunity. Thank you.
Thank you. The next question is from Stephan Boire from Echelon Wealth Partners. Please go ahead.
Hi, good morning. I'll kick it off with a fairly difficult question, I think. In terms of the virus, obviously none of us are experts on the question, but we're seeing an increasing number of major cities declaring the state of emergency. I was wondering if you could give us a little bit more color on your base scenario and how this situation could potentially affect the performance of the portfolio in the midterm.
Hello, Stephan, this is John. Thank you for your question. We take the virus very seriously here. We have had meetings, I've delegated a charge to Blake Brazeal to oversee this process about how we're going to handle it. Blake, would you mind commenting on this for Stephan?
Sure. We are taking this very seriously and have already had meetings. Internally, I'm heading this up in order to come up with contingency plans. As of this call, the CDC's reported that there's been less than 20 travel-related cases across our markets and no deaths. Although the communities spread, we expect it to spread, but as you just said, this is a difficult thing, I mean, for us to predict, but we're preparing for it to spread. 10 days ago, we put together a crisis response team specific to this threat, and the team represents multiple BSR departments. We're meeting regularly to manage our response. BSR is following the guidance from the CDC and the local health departments, as well as considering industry-specific recommendations from the National Multifamily Housing Council.
While we're cautiously optimistic that the effects of the virus could be less for the multifamily industry compared to others, as has been written and talked about as compared to some of hotels and different things of that nature, we will remain vigilant, and we're taking recommendations to health and safety precautions to protect our team members, residents, and shareholders. At this point, we feel like we're doing everything we can and are taking the issue very seriously.
From your comments, I understand that you haven't, or you don't necessarily have a base scenario or made any forecasts on the potential impact in your numbers at this point.
No, not at this point. We have not.
Okay.
We do know that in the past, in situations through the years of different viruses that have come up, that the multifamily industry has been not as affected as malls and hotels. We're not going to give any kind of an idea of what we think it will do to our occupancy at this point.
Okay. Thank you for the details. Just the last question. Susan, I understand you touched a little bit on the subject in your opening remark, but could you give us a little more details on the G&A expense and potentially also the finance expense, which came in higher than expected? All again, it all comes down to what kind of run rate per quarter should we expect going forward and from a modeling standpoint, and if we should forecast any seasonality, for example, especially in the G&A?
First off with the G&A. We had a purchase price allocation adjustment done in the fourth quarter of last year that was related to a liability that belonged on the opening balance sheet, which makes our increase in G&A look larger than it normally would. However, as far as the run rate goes, we're expecting about $8 million in G&A next year. That's $2 million a quarter. The year was $7.4, that's a little bit of an increase. It's related to stock-based compensation, which will be our third year of adding stock-based compensation to the stack, and then it should capitalize, as well as some costs related to payroll for employees whose payroll was formerly capitalized as they worked on development and capital redevelopment, which we are keeping on staff as we continue to recycle capital.
Their payroll basically goes through the income statement until we've got adequate projects again for them to work on. We expect to have that as we acquire in 2020. Regarding interest expense, yeah. That's very disproportionate, and I'm glad you asked this question. When you do a 1031 exchange in the U.S., basically, in order to defer taxes, you have to wait until every property that's going to be included in the exchange has to close. If you sold one property, I'm using this as an example, in October, and another one doesn't close in February, and they're part of the same exchange, you just accumulate the cash on the balance sheet. You saw that happen because we had about $37 million in cash at the end of the year.
Once all properties close, you're allowed to turn around and pay down debt with that cash, which is exactly what we did. This had about a $430,000 impact on our numbers for the year and about $300,000 for the fourth quarter.
Okay. Just taking notes. Okay, perfect. That answers my question. Thank you so much.
Yeah. My pleasure.
Thank you. The next question comes from Brad Sturges from IA Securities. Please go ahead.
Hi, good morning. In terms of the COVID virus, can appreciate it's evolving pretty quickly, so it's really tough to predict. I guess when you're looking at other impacts from previous events like this, could you expect a slowdown in leasing activity or leads that you would have within the portfolio, and how could that impact potential turnover rates?
Well, Brad. Hey, Brad. This is Blake. At this point, as I was talking earlier about looking at what we thought it would do to us, I don't see, and I'm just not going to make a prediction on exactly what it will do to the leasing. It's so new. I will say this, it has not affected us to this point at all in our markets. Having said that, as I quoted on the statistic on in our markets, our markets have not been affected by this, like other markets have in the past. At this point, I have not seen anything, and I really don't want to give you my thoughts on it right now because it would just not be grounded in facts.
Yeah. In terms of Houston and the change in the energy market, I know there has been more diversification in the economy there. I just want to get your initial thoughts on Houston specifically.
Sure, Brad, this is Dan. I want to start this out by saying that we lease apartments for a living. We're not economists. First things first, Houston's not Alberta. Houston is not the Permian Basin. What I mean by that is, in Houston, about a quarter of a million of the three and a half million jobs coming out of Houston are directly related to oil. That's less than 10%. Okay? If you're looking specifically into those oil-related jobs, those jobs are more related to global headquarters and engineering centers built on executive and technical talent. What we've seen historically is a few quarter lag in job creation. The average jobs that come out of Houston, about 65,000. We don't see the direct impact in even a sustained market like what we saw in 2014 and 2015.
With all that being said, the ups and downs are part of the oil and natural gas business, and the Houston businesses have proven pretty nimble and innovative in how they challenge that. I think I would direct the group to look into our performance in Houston in 2014 and 2015. Let's talk about 2014 and 2015. In 2014 and 2015, you had a $50 a barrel sustained drop in oil. You had a 77% reduction in the rig count, right? You had eight consecutive quarters of declines in the rig counts. Between 2014 and 2015, and 2015 and 2016, and 2016 and 2017, we saw, I would say, about a 10% sustained and sequential increase in our NOI at our properties. The reason for that is our properties cater to the middle class, and we've said that before, and we'll continue to say that.
We might have a different type of resident in, I'll say, a $30-$40 sustained oil economy than we have currently or than we had last year. Our occupancy and rates improved between 2014 and 2015, and 2015 and 2016, and 2016 and 2017. With that said, we feel like we're pretty well-positioned in Houston, in particular, whether the market's up or down for oil. We also want to remind the group that the market of oil, while Houston is the energy capital of the world, the economy and GDP of Houston, only 10% of that is related directly to oil.
We do understand that there is a halo around a job loss, but we would just point the group back to our 2014 to 2017 performance and say we outperformed the market of Houston in those years, and we would expect nothing different moving forward. Lastly on that, two more points I'd like to make on that. I would like to direct the group's attention to the University of Houston's economic projections. They are economists, and specifically to their Q4 2019 assessment, where they assess a sustained oil per barrel cost of, call it $40, and its economic impact on the city of Houston and the Houston MSA, its GDP, its unemployment. What University of Houston says is, a sub $40 price of oil per barrel could impact roughly 19,000 of the 60,000 anticipated jobs to be created in Houston in 2020.
They would expect a one-time downward shift and then a gradual recovery. There's that. There's also the worry factor. We're not really worried about the short-term pricing war, and its impact on our properties in Houston at this time. The last thing that we find interesting is, we've been in Houston for 20 years. We feel very confident and familiar with the market, its ebbs and flows, its ups and downs. I'm of the opinion that a quick drop in the price of oil is probably going to chase some capital that was otherwise chasing deals in Houston, could provide a buying opportunity for properties in our market. We could see some cap rate expansion in that market, as we look at the pipeline on a look-forward basis, and I think that's probably going to last for about a quarter.
Taking a longer-term view and trying to be opportunistic if something arises.
That's exactly right. I think the overall take is, we exited Shreveport on January 31st. We exited Louisiana in January 31st. When we look at acquisitions and pipelines in core markets, the first thing we ask ourselves is, where do we feel comfortable owning for the next 10, 20, and 30 years? Houston being the fourth largest city, the energy capital of the world, the million people that live in and around the Med Center, the education, the port, we want to be in Houston for the next 20 years. Now, we may garden from time to time, but it's a solid bet.
With respect to Satori, what's your expectations in terms of further lease up and stabilization of occupancy?
Yeah. We modeled You saw the $600,000 impact to the rent escrow agreement in connection with sale. That's right in line with our modeling. We underwrote, I'll say, three different lease-up parameters. I think we're sitting right there in the middle, which calls for a lease-up and stabilization, call it, coming out of the summer. It's right in line with what we thought we were going to see there. We expect stabilized occupancy at the property to be a little bit in excess of the overall average market. Average market in Houston sits at about 90%-92%. We love that pocket of growth in Katy and West Houston. Given the property's brand new and superior to all its comps, we see the occupancy sitting anywhere between 90%-95%, rate dependent.
I'll dovetail on Dan. We feel like the last probably 45 days really hit our sweet spot. We monitor this through our LRO system, and it's one of our main ones we look at really every day, and the rents, we really hit a good buy. We've pre-leased 50 units over the last 30 days, and we've also had over 20 people move in net of that. That kind of gives you the lease, the velocity, and December is December, and it's a harder, slower pace, but we have really seen it take off, and we're really excited, and feel like we're right on track as Dan laid out for you.
Sorry, maybe I missed it. What's the current occupancy right now?
The current occupancy right now is 45%.
45? Okay.
Yeah.
The lease rate is about 15% higher than that. We expect them, on the end, about 15 points higher.
The lease rate is 15% higher than that.
Okay, perfect. I'll turn it back. Thank you.
Thank you. The next question is from Brendon Abrams from Canaccord Genuity. Please go ahead.
Hi, good morning, everyone. Maybe just following up on the energy discussion, Dan, you provided a lot of good insights there. Obviously, as a REIT, you can't control maybe the impact on the leasing environment from energy prices, but I guess within your control would be future capital allocation decisions. Just given your current exposure to Texas being at about 2/3 of total suites, I'm just wondering how you're thinking about future acquisitions. Do you have an upper limit concentration exposure to the state in your mind? Maybe there is no limit. On the flip side, I think two of the markets you referenced in the non-core on the disposition, how do you see the environment playing out on that side of things?
Hello, Brendon, this is John. Listen, I want to state for first of all, let's just talk about the energy markets in Houston, and Dan noted that it is the fourth largest market. It's one of the most diverse markets. Houston used to be much like the Alberta territory. If you were to know that, it highly depended upon energy back in the 1980s. However, today, as Dan noted, it's about 10% of the jobs are energy-related, with the majority of those jobs being white-collar jobs, and we don't see those as being unstable. For the most part, Houston is a dynamic and diverse growing market that we want long-term exposure. For the Dallas-Fort Worth, Austin, and those two different markets, BSR has a very low exposure in those markets right now, and we are extremely highly scalable.
As you might think about BSR's scalable platform, that we have room to grow and double the size of this company and continuing to grow in these markets. We feel every bit as what has been predicted for the renter migration, the economic growth, all being double digits in these markets. We are moving and capitalizing and exploiting totally the opportunity to take the current cap rate compression and moving assets out of our tertiary markets into the primary targeted markets that we've discussed, all for the same reason as the high economic and population growth that are going in these areas. From the standpoint of how long, I can tell you that we can continue to drive increased margin and scale by continuing to grow in these markets where we know them quite well. We've been exposed to them, like Dan had said, 20+ years.
This is our backyard, and we certainly want to grow all the way through the Sun Belt region. We are trying to take this in terms of a step-by-step and do it in a very efficient manner.
Okay. That's very helpful. Seems like the near-term volatility and, I guess existing exposure won't preclude future acquisitions in that market, obviously. Maybe just from your opening remarks on the capital recycling, I think you referenced five markets. I think I may have missed the fifth. Beaumont, Longview, Pascagoula, and Blytheville. I think I missed the fifth one. If you could just name that, also of the 10 properties, what would the approximate IFRS value be?
Well, let me first speak to the properties. I think your question was, were you asking about what are our targeted side markets, or were you asking about the markets we're moving out of? I'll just say this, the Pascagoula, Mississippi, we have one property, and it's in a very small MSA, and we anticipate moving out of that for sure. It's being targeted as one of our exiting markets. It's the only property we have in the state of Mississippi, so you can expect us to be moving out of that property. Secondly, in Blytheville, Arkansas, we have one property in the northeast part of the state, and we're going to do the same there, where our plans are to exit Blytheville this year, as well as Longview, Texas. We've been in Longview for 20+ years. It's been an outstanding market for us.
It doesn't meet our strategic criteria to rotate and take our equity and recycle it into the primary high-growth targeted markets. We're going to essentially monetize and securitize all the investments made in all of those markets and rotate it into the five targeted markets of Northwest Arkansas, Oklahoma City, Oklahoma, Dallas-Fort Worth, Austin, Texas, and Houston, Texas. When you think about that's really our total overall strategy that we've been executing on in 2019, and we're going to be having a more fulsome rotation this year based on the activity that we have planned. Susan, you might want to speak to the IFRS.
Yeah, sure. Total IFRS value of total planned dispositions right now in 2020 is about $350 million. That includes the assets that we added this quarter, a few assets in Little Rock as well as Houston.
With the capacity of going another $100 million on top of that.
Yes.
Great. Okay. Yeah, that's very helpful. Last question from me before I turn it over. Just kind of the impact in the bond market and where yields are right now. Any refinancing opportunities available to the REIT, or would early interest or early penalty payments be too prohibitive?
Sure, Brendon, this is Dan. Before I get into refi opportunities, I'm kind of chomping at the bit to talk a little bit more about our Texas markets and how we rank our acquisition targets. First, just a little thought on geography. What's happening in the oil markets is a direct attack against the shale oil markets, or the shale oil play coming out of Texas. We see that as concentrated in the Permian Basin, right? That's Midland and Odessa. Now, I'm not the best at geography, but if I used a ruler and I measured the distance between Dallas and Lubbock or Dallas and Odessa, probably be about the same distance between Dallas and Atlanta. That's the geography we're talking about. Now, I get that there's economics, there's a lot of related parts, there's butterfly effects, so on and so forth.
From the human side, we do see the Midland and Odessa and the Southwest Texas market, where the cost to make profit on oil is $50 a barrel relative to Russia's $42 and Saudi Arabia's $75 a barrel. We do see that as a problem in those particular markets. You lose your job in Midland and Odessa, where are you going to go? We believe you're going to go into Dallas and Austin, and Houston. I would say that's been what we've seen historically when you see a massive movement or a sharp movement in rig count reductions or in the price of oil, one way or the other. Now, how we rank them. Right now, the team ranks Austin as our top target, Dallas right behind it.
We're looking purely at three, five, seven, 10, 15-year total unitholder returns for our investors. We're driving a higher percent of that on organic growth projections. Austin is the best place to live in America, best place for a job in America. It's a hot market. It has been for a decade, and it continues to be a hot market. Dallas has a pretty diverse economy. It's neck and neck with Houston as the fourth largest city in America. Every other year, we see a movement between the two. It stands on four to eight legs of GDP growth in various interrelated industries, and we expect it to continue to climb. What we're doing in Dallas now, and more so in Houston, is looking at pockets. We see pockets of growth in Dallas and Houston, and then we see pockets of oversupply.
As I said last quarter, supply in the South has always been the boogeyman. We're looking keenly at supply issues. I would say an acute impact in Houston is the 6,000-10,000 units that were built last year. We looked at a projection for next year ranging from 15,000-27,000 units. You've got about an average of 15,000 units that are built each year in Houston. We would probably revise our expectations on deliveries in Houston for new product a little bit downward as a direct result of this oil drop. That's good for us and our product, that's good for absorption, and that's good for, I'll say, rate and occupancy support. If I'm moving over into Oklahoma City. Oklahoma City, sure, it's in the oil patch.
That would be our fourth-ranked target, OKC in Northwest Arkansas we'll use as a little bit of a yield check against some of the downward cap rates in Texas that we're seeing. In Oklahoma City, I just want to highlight here, zero of the top 18 and four of the top 50 employers in OKC are related to oil at all. That's Devon, Chesapeake, Enable, and Continental. 3% of the total jobs in OKC have anything to do with oil. That means 97% of the jobs have nothing to do with oil.
I don't see any anticipated impact, and when I look at Oklahoma City, what I see is a 15.7% population growth since 2010, a current 2.8% unemployment rate, and 10 consecutive quarters of rental increase. When I look over at Northwest Arkansas, which is home to J.B. Hunt, Walmart, Tyson, a few other Fortune 500 or Fortune 5 companies.
What I'm seeing is an average effective rent and AMR of about $715. That $715 is low, I believe, relative to median income, and it represents a 28% increase over the past five years. I also see vacancy below 5%. That rounds up our markets. Now, to get to your question, refi potential. What we're seeing right now is agency credit spreads widening a little bit. If you're looking to finance with a Fannie Mae or Freddie Mac product or HUD product, I think you can target rates leverage-dependent anywhere between 295 and 360, 350. As far as BSR's borrowing rates, I would just direct the group to look at the disclosed terms of our BMO-led facility, which I think is anywhere between 150 and 170 basis points over LIBOR.
Just reflect that we like fixed-rate debt at the point of acquisition, so we like to execute swaps against our credit spreads. Right now, five-year swap rate ranges anywhere between 60 and call it 120 basis points. On the high end of that, you're looking at a BSR borrowing cost of, let's say, 150 plus 120, 270. We think that gives us a little bit of a competitive advantage, though we're going to remain disciplined. We're not going to chase cap rates down into unreasonable territory and build an IRR based on debt yields.
That's very helpful. I'll turn it over. Thank you.
Hey, thanks.
Thanks, Brendon.
Thank you. The next question comes from Kyle Stanley from Desjardins. Please go ahead.
Thanks. Morning, everyone.
Hey, good morning, Kyle.
Hello, Kyle.
There was a nice improvement in the sequential and year-over-year same-property NOI margin during the quarter. I'm just wondering, was there anything non-recurring in the OpEx line that could have contributed to that?
Hey, Kyle, I'll take this one. Yeah. In the fourth quarter, we received a large number of tax refunds, which reduced operating expenses and of course, bolstered the margin. That would be non-recurring. While we do get tax refunds each year, and our team here is quite good at it, we don't ever know when they're coming, and it's hard to predict the exact amount.
Okay, that makes sense. Somewhere in that kind of 54% same-property NOI margin, is that an okay run rate, or would you guide maybe a little bit lower than that?
I think you lower. I'd say 52% right now, because you have to remember right now, we've got in the middle of all this recycling, right? We go through ebbs and flows where we have less properties after we've sold a bit before we acquire again, but our G&A stays the same, and we allocate a portion of that G&A to property operating expenses. While we have less units or less properties, we're still allocating the same amount of G&A, which is going to drive margins a little lower until we're stabilized again at the end of 2020. The good news here is, of course, is then our G&A doesn't grow anymore, and the larger we get, the cheaper it is to run the properties.
Pretty scale.
Okay. Yeah, that makes sense. That's good color. I guess similarly along that line, just wondering, on new acquisitions, does the REIT incur any incremental property management costs as that property management function is transferred in-house? Or is that potentially captured in that severance or retention cost?
Right. The severance and retention costs are for properties that we're selling. We pay that to keep the employees on site and to keep the properties performing up to the date of sale. We take over the properties the day on acquisition as far as that we acquire, as far as acquisitions go, no, there are no external management fees paid.
Okay, great. Just the last one from me. We saw a modest compression of your IFRS cap rate in the fourth quarter. I'm just wondering how you see that trending through 2020. There's been some recent transactions in your markets that suggest cap rates could be headed even lower. Just maybe your thoughts on that and what it'll look like in 2020.
Sure. This is Dan. What we're seeing is trading cap rates that are collapsing at about 25% to 50% of the pace of, call it, the 10-year. If I'm targeting the Austin market at the beginning of the year, I'm looking at a, call it a 4.75% cap, depending on whether you're buying value-add B or A, and I'm going to push that down to about a 4.25%. Dallas, the exact same numbers, and Houston probably a little bit higher. Cap rates for stabilized assets, let's call it As, are running 4.5%-5%. For Bs, are running 5%-5.5%.
You can see, if we see a 1980s vintage value add asset in Dallas trading at the same cap rate as a 2018 constructed 95% occupied property in the same sub-market, apples to apples, we're going to vet on that better positioned product and the newer product.
Yeah, no, that makes sense. Based on your commentary there, it sounds like there's definitely some runway for cap rates to continue compressing in your portfolio for sure. It should be good for valuation going forward.
Yeah, we believe that. Look, the method we use to value properties is pretty stable. I would say what I've seen in the past is a sustained reduction in your benchmark rates for a period of time is going to certainly drive systemically cap rates for assets lower. If it's me, I'd probably sit tight for a couple of quarters, see where the 10-year continues to trade down at these levels, and you're going to see a lot more, I'll say, revolutions in recap and dispose trading at lower caps that's going to provide us support and a benchmark for lowering cap rates.
Okay, great. Thanks very much for that. I'll turn it back.
Okay. Thanks, Kyle.
Thank you. The next question is from Matt Logan from RBC Capital Markets. Please go ahead.
Thank you, and good morning.
Hey, good morning.
Good morning, Matt.
On your capital recycling program, when I look at the organic growth between your five target markets and the rest of your portfolio, it seems that the same property NOI growth is much stronger in those five markets. Within those markets, there also seems to be some bifurcation. Could you talk about the operating strength in terms of how new supply and rent growth is trending in some of those five markets, and how we should think about the organic growth from the portfolio in 2020, perhaps excluding the impact of COVID-19 and any major economic events out of left field?
I'll take that one. I think we're anticipating overall NOI growth of 2%-4%. I think revenue will be in that range. When you look at what we projected at the end of the year, we felt like that we were right in line with the market, the individual markets that we have. We looked at that very closely and feel good that that's where we'll fall. As of this, the small sample size we had this year, we feel pretty good about what we're projecting.
Within your target markets, are you seeing new supply pick up, and how does that impact your thinking between buying newer assets versus buying older vintage assets?
Yeah, Matt, this is Dan. We are seeing some supply pick up in Dallas. Austin has had supply increases year-over-year for the past decade. What we're paying attention to is the net absorption, the annual job growth, and annual population growth statistics out of, let's say, the three Texas markets, are just astounding compared to relatively sized markets. The net absorption numbers continue to hold up. Those spec developers in those markets pay very close attention to the job growth forecasts and the population growth forecasts. We don't see any acute oversupply issues just affecting our rents or occupancies in those markets over the next, call it, year, or two years. Now, with that said, what we are seeing in Dallas is a glut of development and supply that has been built in 2018 and 2019 and moving into 2020.
Those spec developers are not in the business of owning and holding onto real estate. They're looking to rotate. I see them flooding the market in the past, call it, six months, for new product. The problem that we're seeing with it is this pricing for the new product is sitting right in par on cap rates and a cost per unit as the value-add construction, not dissimilar to what we bought in Wimberley and Riverhill two years ago. I think a lot of the buyers are thinking the same way that BSR is. Apples to apples, do you want to buy a 35-year-old car or a brand new car? You're kind of seeing some of that supply for the new construction being, are the bids going over to new construction relative to value add.
I think the issue that I'm finding some intrigue with is it's not doing anything to the depth of the buy side on value add. The historic value add buyer, like BSR in Dallas, may be moving over to buying a newer, I'll say, newer product for a similar price, leaving what you would think would be a hole on the buy side in Dallas. Dallas is now a gateway market, in my opinion. It's global. We're seeing inflows of capital into Dallas from areas that last year were not flowing in. They're picking up that gap on the buy side for the cost and the cap rate for value add product.
Appreciate the color. Maybe just on the quantum of asset sales. Susan, you mentioned that there was something to the tune of potentially $200 million-$300 million of asset sales in 2020. Would that include Little Rock, or would that be limited to Beaumont, Blytheville, Shreveport, Pascagoula, and Longview?
Yeah, I said $350 million, and that includes certain assets in Little Rock and certain assets in Houston as well.
Okay. Could you tell us the total number of units or properties associated with that figure?
Well, yeah. It's hard to say exactly. We know what we'd like to sell, but timing weighs into this. We believe our same-store unit count will be between 3,000 and 4,000 units by the end of the year.
3,000 and 4,000 units for the same-store portfolio.
Yep.
As you exit some of these slower growth markets, would we expect to see organic growth pick up from 2% to 4% and continue to converge maybe with the overall organic growth for the portfolio?
The same-store portion?
Yeah, I guess, would we see that same-store number increase beyond 2% to 4% over the next 12 months as you shed smaller markets?
I don't see it going north of 4%, but I run two different models, and I run it based on our disposition schedules that we look at. I look at that constantly. When you look at it does improve, but we're not gonna go north of 4%.
Okay. Appreciate the color. That's all for me. I'll turn the call back. Thank you.
Thank you, Matt.
Thank you. The next question is from Matt Kornack from National Bank Financial. Please go ahead.
Hi, guys.
Hey, Matt.
Just to follow up on Matt's question there. At this point, are you looking at portfolio sales, or are these all one-off transactions?
Matt, this is Dan. We like our likelihood so we can complete these rotations on hitting singles and doubles, and we said that last quarter and the quarter before. Single property acquisitions, two property acquisitions occurring in the same day, closing the same day, similar to what we did in the fourth quarter. That's what we're currently planning. With that said, there are a glut of portfolios into the market, and we look at them all, and if they make sense for BSR, we got the capacity to move forward and execute. If they don't, we can still complete our rotations on a one-off basis.
Okay. If I look at Longview looks like it's a pretty good market from a rent growth and occupancy standpoint. Beaumont looks like it requires a bit of work. Are you leasing these up and getting them to a point where it makes sense to sell, or how do you approach leasing in advance of selling the assets?
Yeah, I think they'd kick me to the curb if we bought high and sold low. You know what I'd refer is if you look in Q4, and you look at the disposition of the Tulsa assets and the resulting quarterly sequential drop in occupancy, well, those Tulsa assets were occupied at about 97% when we sold them.
Okay.
That's the lion's share of perhaps the Q3 to Q4 negative or the drop in same-store occupancy. We would've thought about these in 2018. Really analyzed them in early 2019 with a plan to roll them out in 2020. That's how we completed the 2019 sales, and that's how we'll complete the 2020 sales. It's probably, I call it a two-year process of assessment of a property's performance, its optimum performance relative to the sub-market and its comps, an economic analysis of the sub-market on a three, five, seven-year hold, and then the decision to move forward. With that said, I don't think you're going to see us ramping up performance on a property in any particular quarter. Those are all very highly occupied. The margins look great. The CapEx numbers look great, and they have for a year or two.
Okay.
I would add that that was part of our strategy. When we started this rotation, one of the real things that concerned me and concerned everyone else was just what you alluded to, and that's the performance going down once you start telling employees that you're going to sell them, and here comes a bunch of people on-site walking around. We went out and did a market study on what our competitors were doing as far as retention and severance agreements. John and myself looked at it, and we both decided we made it even better than they were doing. I think the proof's in the pudding because as Dan just said, our performance on properties that we're selling has stayed very consistent, and we have lost very few employees during this time.
Just a little color on our performance of the properties we're going to sell.
Interesting. With regards to the core target markets, everything looks good. Northwest Arkansas, occupancy is good, but rent growth on a year-over-year basis looks a little light. Is there anything to that, or what do you see happening in that market?
Yeah, we see some absorption issues up in Bentonville, which is the north side of that Northwest Arkansas market. We just see some seasonal, call it college town related rate flattening and softening in Fayetteville. Our properties are pretty well insulated from that, for the most part. We own right there in the middle of the MSA. Towne Park was the acquisition we closed on in October of 2018. We like where we're positioned, and we're very mindful of absorption issues and their impact on rate on, call it a smaller half a million plus person market of Northwest Arkansas. I think with that said, Northwest Arkansas grows rapidly relative to its population, 10,000 to 15,000 people a year. Job creation is there.
I think what you'll see with us on the buy side is, as I said before, we'll use it as a yield check against Austin, Dallas, and Houston. If we see an opportunity to acquire at what we consider to be a good value in Northwest Arkansas over the long period, we might enter that market. To say of the 40 assets we've looked at since January, not one of them has been in Northwest Arkansas. We're seeing pricing escalate, but we're paying real close attention to that rate softening number there.
Interesting. Then, we don't have the benefit of as long of a history with your company. On a year-over-year basis, occupancy looks consistent, but sequentially it's down a bit. I assume Q4, that's fairly typical.
Yeah, I think that's typical, and I hit on it. I'll pass it over to Blake, but I hit on that earlier. The quarter-over-quarter sequential number to me is solely driven, well, primarily driven by the disposition of the Tulsa portfolio.
Okay.
Blake is going to talk a little bit about some, I will say an intentional push on rate and its impact on occupancy, which we expected.
Yeah, we're talking about 75 units, and if you look at it's pretty strategic. We increased some rates because we had some occupancy. We were up pretty good, and we felt like we could, and it worked. We got some rent bumps, and at this point, we're always doing that with our portfolio. If you look at where we are right now, the occupancy has rebounded or around the areas that we were talking about. That was kind of by design, and it was on a handful of properties that drove that. An interesting thing is we look really hard at our revenue growth quarter-over-quarter in terms and looking at our renewals and our new rents and what our leases are showing us. For Q4, we were at a 2.1 blended rate and 3.6% for renewals.
That was pretty much across the board on our properties. We feel pretty good about how we are looking at our rents and calibrating that against our occupancies all in one.
Okay. No, that makes sense. Same property NOI growth is going to become a less relevant figure given the degree to which you're rolling over the portfolio. With regards to acquired assets, have those been performing at or ahead of your pro forma when you acquired them?
We monitor those very closely. Look at those just almost seems like weekly. Yes, in general, they have, and they are the ones that we really do a lot of rate monitoring, because when you're buying a property, you've got to really get your hands around the market and what's happening in it. We've been playing with the rates on a lot of these. When you look at it overall, we're right there on top of our performance. I run each month, all of them separately and all of them together to see where we are, and we're literally right on top. In our value add properties, that's where we've really been pleased. Wimberly, Riverhill, those two properties are averaging substantial rate increases against what we are putting into them.
On those two, which are our main value add properties, we're above what we forecasted.
Okay. Sounds good. A quick question for Susan. I think Kyle touched on the margin aspect with regards to property tax earlier, but if we wanted to normalize for the escrowed rent and severance, we'd just add those two numbers back. Are all the costs associated with Satori already in your op costs?
All the costs associated with Satori, meaning, it's fully staffed right now.
Okay.
Yes, we're paying way more in expense right now than we're collecting in revenue. Obviously, though, there would be some increase in repair and maintenance as it gets leased up and we have additional work to do for the normal wear and tear on the units.
I think you may be getting confused because I'm tired, and there are a few companies that reported today, but I think you've now disclosed development separately. That's the units you're adding on a specific property as sort of its.
Yeah.
You own the land. The CapEx number that we should use for the IPP is excluding that figure, correct?
Right. Yeah. We do disclose Wimbledon Green phase II separately in our financial statements. What was the second part of your question?
Just in terms of total CapEx, obviously, with regards to suite repositioning, there may be an increase, but should we use the run rate excluding the development-
Yeah
as a good number?
Sure. Back the development out. We're looking at about $448 per unit in maintenance CapEx next year. That's Wimbledon Green out, and the rest is your, what we call inner lodging CapEx.
Okay, perfect. You made a distinction, and I think we've discussed it in the past, but in terms of the allocation of some G&A into the OpEx, and I'm not sure that that's done universally across the peers, but can you speak to what amount that number is in terms of that G&A allocation?
Right. To be absolutely clear, and this is what I was alluding to earlier, we have a set amount of G&A, right? We're not going to lay off the entire corporate office while we have less units, and then go have to rehire them back six months from now. We have the exact same amount of G&A, and it costs us the same amount to run the property from a corporate perspective. Right now, we're allocating more of that G&A to property operating expense percentage wise than we would've when we were larger. This is what's exciting about our platform too, is the larger we get, the same amount gets allocated, so our property operating expenses overall come down as we grow. It was around 3%, but again, it's escalating right now as we increase our total unit count.
Okay, perfect. Thanks, guys. Congrats on the quarter.
I want to clarify something too on Satori, that I gave you a 42% that it's leased to today. It's actually 47% leased or occupied. Excuse me. It's 47%. One thing I'd like to add to this on Fayetteville. Fayetteville property at the rents are flat, as you alluded to. Springdale, which is another property we have, which is [stock and store] , which is what, Dan, 10 to nine probably?
Yeah.
We consider the Northwest market. Those rents have escalated.
Okay
Over the last two quarters. We feel good about that particular asset and that'll.
Perfect. Thanks. That's great color.
Thank you. The next question is from Johann Rodrigues from Raymond James. Please go ahead.
Actually, I'm good. All my questions have been answered.
O kay.
There you are.
The last question is from Sairam Srinivas from BMO. Please go ahead.
Thank you. Good morning, everybody.
Good morning.
Morning.
Thank you so much for all the color that's been given. That was really helpful. I don't mean to be the Debbie Downer here, but probably just a question on in the event that you do see a recession coming along. Does that change the way you look at acquisitions in terms of, does it change the markets you want to buy in? Or in terms of, would you buy under leased properties, or would you kind of pay a lower per door price? Is that something, do you have any thoughts on that?
Yes, certainly. F irst, and most importantly, every property we look at, and I mentioned that we looked at about 40 so far year to date, what we're paying attention to is those residents within that property, where do they work? How much do they make? What's our average rent? If we see any correlation between where they work in certain industries, we investigate the industries within the sub-market. A recession coming, we've been hearing about that for two years. I don't think that an expansion just dies of old age. Right now, you look at the February jobs report at 275,000. You're seeing the top-line numbers continue to support, I think, the low unemployment rate of 3.5%. Those top-line numbers are continuing to support job growth.
Sure, the financial markets and the fiscal policy we see associated with that tends to signal a recession. We account for that when we look at individual acquisitions. We account for that when we look at our particular core markets. I would just reiterate that the markets that we're targeting for acquisitions and the properties within those markets, the markets have population and job growth well in excess of many of our Sun Belt and national peers. The properties within those markets are generally situated in a B rent environment. That's important for, I would say, for two reasons. Number one, as we've said all along, when times are good, we benefit from expansion of rents and new household formations, net supply, absorption. When times are bad, the rates that we currently enjoy on our portfolio tend to be supported.
We just look at a different style of resident that moves in, perhaps a resident that has moved out of a home or been relocated in connection with the recession.
Thanks, Dan. That was really helpful. Blake, I know you mentioned the repositioning assets actually having really good returns from what you underwrote before. Would you be able to give us an idea in terms of what that underwriting would be in terms of the rent growth expected on repositioning?
You're talking about cap rate spreads on recycling?
No, I'm talking about when you undertake a repositioning project on any of your apartments, the kind of rent growth you're underwriting on those versus what you're actually getting. I know Blake referred to the fact that you're getting really good rent growth on those kind of projects. I'm just trying to put a number to that.
Sure, yeah. Let's highlight Riverh ill and Wimberley last year. Last year, we renovated about 25% of the units on those properties. We're seeing returns of 14% and 20%. What that equates to on those two is, I'll say, a one or two-month drop in total revenue, which impacts our non-same store margins as we renovate those units and turn them out. A sustained $125-$150 rent increase, post-renovation. When I say sustained, I said about 160 units done on those two properties, we see it across the board. We see new rent established in those properties, and call it of 8%-12% gains from pre-acquisition to post-repositioning and stabilized. Notwithstanding organic increases in the sub-market.
Awesome. Thanks, Dan. Thanks, everyone. That's all from me.
My pleasure.
Thank you. There are no further questions. You may proceed.
All right. Well, thank you, everyone. That concludes our meeting this morning. Thank you for your interest in BSR REIT. We look forward to speaking with you again following our Q1 2020 reporting. God bless. Stay healthy. Goodbye.
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