Earnings Call: Q3 2019

Nov 13, 2019

Earnings release

Good morning. My name is Jessica, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q3 2019 Financial Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question and answer session. Thank you. Mr. Bailey, you may begin your conference. Thank you, Jessica, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the Q3 9 months ended September 30, 2019. I am John Bailey, BSR's Chief Executive Officer. I'm joined today by Susie Kane, our Chief Financial Officer. Also with us are Blake Brazil, President and Chief Operating Officer and Dan Obersteep, 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 Q3 and some commentary on the performance drivers. Susie will then review the financials, and I'll conclude with some comments on our outlook and strategy. After that, we will be pleased to answer any questions you may have. Before I 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 the forward looking information in our news release and MD and A dated November 12, 2019 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 and A for additional information regarding our non IFRS financial measures, including for reconciliations to the nearest IFRS measures. Also, please note, all dollar amounts are denominated in the U. S. Currency. Let me begin with a quick clarification of our 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 Q2 of 2018. The REIT had no operations prior to that date. As a result, the year over year comparisons for the Q3 are apples to apples. However, the year to date numbers would not be. Accordingly, in order to provide investors with a full understanding of our year to date performance in 2019, we will discuss revenue, NOI and same community metrics for the entire comparable 9 month periods in 2018 for the properties that were acquired by the REIT upon completion of the IPO. As you know, we have established a track record of strong operating performance since our IPO, and I'm pleased to say that this continued in the Q3 as we delivered solid revenue and NOI growth. Let me speak quickly to recap our Q3 performance. Weighted average rent at the end of the third quarter was $900 per apartment unit compared to $806 last year. Same community weighted average rent was $8.49 per apartment unit compared to $8.27 a year ago. The substantial weighted average rent increase is the result of our ongoing capital recycle program, whereby we are modernizing and enhancing our portfolio by rotating into higher quality assets in BSR's target markets. Total revenue for Q3 2019 increased 8 0.8% compared to Q3 last year, while total NOI increased 7.9%. On a same community basis, revenue increased 3.1% year over year and NOI was up 3.2%. Those same community numbers underline the fact that while the level of investment in our capital redevelopment program on the same community portfolio has slowed, it has increased on assets acquired post IPO, and we continue to generate stronger top line and bottom line performance. Despite the increase in our average rents occupancy continues to be strong. We had weighted average occupancy of 94.9% as of September 30 compared to 93.6% on the same day last year. Given that we always have some apartment units under renovation, this is close to maximum occupancy and is a very strong result. This suggests there continues to be room for further rent increases going forward. As I highlighted a moment ago, we also continue to deliver on our asset rotation strategy post Q2 as we were both a buyer and a seller. The spread in cap rates between primary and secondary markets in the U. S. Sunbelt is at historical low levels. So we are transforming our portfolio by recycling capital from non core assets on a tax deferred basis into suburban communities located in high growth markets. Post Q2, we made 9 strategic property dispositions on a tax deferred basis. Specifically, during Q3, we sold Dove Creek Apartments and Long Ridge Apartments in Baton Rouge, Louisiana and Summer Point Apartments in Shreveport, Louisiana. Subsequent to Q3, BSR sold 9,320 Apartments, Ridge Park Apartments, Inverness Apartments and Charleston Crossing Apartments in Tulsa, Oklahoma. Additionally, we sold Countryside Village Apartments in Moore, Oklahoma and Ridgewood Apartments in Hot Springs, Arkansas. The combined sales price was $119,000,000 and is in line with the IPO appraised values. We also recycled capital into 3 targeted suburban high growth markets. During Q3, we acquired 2 adjacent 2014 2015 constructed apartment communities, Cielo and Madrone, located in Austin, Texas, totaling 554 Apartment Units for an aggregate purchase price of $104,400,000 Post Q3, we acquired a newly constructed 2019 community, Satori at Longmeadow Apartments in Richmond, Texas, totaling 300 Apartment Units and a 2,004 constructed apartment community, Aubrey at Twin Creeks in Allen, Texas, totaling 2 16 apartment units for a combined purchase price of $92,800,000 Cielo, Madrone, Satori and Auberry are modern properties with a clear potential for rental growth using the BSR platform. These properties increase our scale in Austin, Houston and Dallas, all target markets for BSR with above average population and employment growth. As we move toward year end, we are very pleased with BSR's competitive position. We continue to deliver on what we said we would do and see multiple opportunities to continue to enhance our portfolio. Now, I will turn it over to Susie to review our Q3 9 month results in more detail. Susie? Thanks, Don. Same community revenue in Q3 2019 was $22,200,000 dollars up 3.1 percent from last year as a result of increased rental rates attributable to the capital redevelopment program. Total revenue for the quarter increased 8.8 percent to $27,800,000 which was primarily attributable to property acquisitions, net of dispositions as well as higher rental rates across the portfolio. Same community NOI was $11,900,000 an increase of 3 point 2% from Q3 2018. The increase was due to higher rental rates attributable to the REIT capital redevelopment program, partially offset by higher property taxes and insurance costs as well as higher repair, maintenance and turnover expenses due to timing. Repair, maintenance and turnover costs are 2.5% less on a year to date basis when compared to the prior year. NOI for the portfolio was $14,500,000 for the Q3 of 2019, an increase of 7.9% over the 3rd quarter of 2018. This increase is primarily the result of property acquisitions, net of dispositions, in addition to the contribution from the same community portfolio. The concentration of NOI from the non same community portfolio is expected to increase as we continue our location strategy. FFO for the Q3 of 2019 was $7,100,000 or $0.18 per unit, compared with $7,600,000 or $0.19 per unit last year. The solid increase in NOI was offset by an increase in finance costs resulting from the following: of the acquisition, the timing related to the rotation of equity from disposition into qualified intermediaries, thus delaying the repayment of debt, but deferring taxes the timing related to the completion of the follow on offering and private placement in September in relation to the acquisition of CLO to Amazurin in August and the amortization of deferred loan costs. Furthermore, G and A increased over the prior year due to a shift in certain payroll expenses recognized in Q3 of the current year as opposed to Q4 of the prior year as well as additional share based compensation. AFFO for the Q3 of 2019 was $6,500,000 or $0.16 per unit compared to $6,300,000 or $0.16 per unit in Q3 last year. The increase is primarily the result of the change in FFO offset by lower maintenance capital expenditures for the Q3 of 2019. The REIT paid quarterly cash distributions of $0.125 per unit in both years, representing an AFFO payout ratio of 80.3% in Q3 2019 compared with 78.5% last year. I'll now briefly review our results for the 9 month period ended September 30, 2019. As John indicated, the revenue, NOI and same community metrics for 2018 comprise the entire 9 month period for the properties that were acquired by the REIT upon completion of the ITA. Revenue was $83,500,000 This was 12% higher than last year due to the impact of acquisitions and organic rent growth, partially offset by disposition. Same community revenue for the full year to date period was $65,800,000 an increase of 3.8% from the period a year ago, reflecting higher rental rates attributable primarily to the Capital redevelopment program as well as higher occupancy. Year to date, NOI for the portfolio was $34,800,000 representing a year over year increase of 14.2%. The increase was primarily the result of property acquisitions, net of dispositions, subsequent to Q3 2018, as well as a 6.1% increase in same community NOI, again attributable to our capital redevelopment program. FFO was $22,600,000 in the 9 month period or $0.56 per unit. AFFO was $20,100,000 or $0.50 per unit. The REIT paid cash distributions of $0.375 per unit for the 9 month period, representing an AFFO payout ratio of 75 0.2%. Turning to our balance sheet. As of September 30, our debt to gross book value ratio was 46.2%. Low form a, the other transactions that we have engaged in since the end of Q3, our debt to GBV now stands at 46 point 6%. As a reminder, our long term target is 50% to 55%. Total liquidity at quarter end was RMB 111,600,000, including cash and equivalent of RMB 20,700,000, $55,900,000 of borrowing capacity under our credit facility and $35,000,000 available under our revolving line of credit. We had total mortgage notes payable of $389,300,000 excluding the credit facility, with a weighted average contractual interest rate of 4% and a weighted average term to maturity of 10.1 years. As of September 30, 2019, total loans and borrowings were $500,000,000 During Q3, we completed the initial hedging of our credit facility with $100,000,000 effectively hedged at a fixed rate of 3.6%. Per form of the other transactions we have engaged in since the end of Q3, we have total liquidity of $105,000,000 On September 17, the REIT completed a follow on offering and private placement of 5,200,000 units for total gross proceeds of $55,300,000 or $53,100,000 net of issued and other transaction costs. I will now turn it back over to John for some closing comments. John? Thank you, Susie. Our focus on capital recycling is yielding strong results. These transactions continued the enhancement and the transformation of our portfolio from secondary markets into our target primary markets on a tax deferred basis. To put this process into perspective, since the completion of our IPO on May 18, 2018, the portfolio's weighted average age has decreased by 6 years to 23 years old directly as a result of these acquisitions and dispositions. The REIT's 8 acquisitions following the IPO added 2,213 apartment units with a weighted average age of 11 years compared to the 15 dispositions totaling 2,534 apartment units with a weighted average age of 38 years. NOI from properties located in the REIT's target and primary markets now comprise 71% of our total NOI compared to 52% as of the Q3 of 2018 on a pro form a basis. Looking forward, the outlook for our business is excellent. The economic fundamentals of our target and primary markets are strong, supporting steady rent growth. And we expect to continue to capitalize on current market dynamics through our capital recycling program. That concludes our remarks this morning. Susie, Dan and I would be pleased to answer any questions you may have. So operator, would you please open the line for questions? Thank Your first question comes from Fred Blondeau of Echelon Wealth Partners. Please go ahead. Thank you and good morning. Susan, you mentioned your target debt to GBV of 50% to 55%. What would be your timeline to get back to these levels? And what should we expect for next year on that front? Fred? So obviously, that's not that's the target we have that we won't go over. But all of that depends on the timing of acquisitions and dispositions, but it's a lumpy process. And until we finish our disposition cycle and then continue to acquire properties, I can't really tell you at this point. Dan can take the timing of what generally takes to the business. Yes. Fred, this is John. And we're early at 46 point 6% debt to GBV. And what our MO has been is in order to reduce risk to our investors on a tax deferred basis, our MO has primarily been buying an asset first, one that we've identified that we want to own for the longer term that we could lay the platform on and continue to create value. And then on the back end is to sell properties to do what we call the reverse 1031 by taking that equity and replacing it into that newer asset that we just bought. And so, as we go through the process, it's going to be a little lumpy. Sometimes, we'll get it up to maybe going into the mid-50s, but we may bring it right back down because we'll end up buying or selling properties right behind it. So, if you want to look at what we have at least $150,000,000 of runway to buy properties in order get up to around 51%, 52%. And if we want to just do nothing but continue using our equity that's available on our balance sheet. And so if we and that's somewhat more of our plan than to continue selling as we want to be ahead of the game by continue to target acquisitions first on those properties that we want to buy. And then on the back end, we sell those assets that we've identified that we're going to rotate and recycle the capital. That's great. And just in terms of your non core markets, what would be or do you have an ideal targeted timeline to entirely exit your non core markets at this point? Well, Dan, what? Fred, this is Dan Oberstein. I think in a vacuum and ideally, we would slate the rotation process to take anywhere between 2 3 years. However, and as evidenced by the last quarter, we're not going to be ignorant of opportunities. We feel like we're probably about 50% to 60% complete with our original anticipated rotations out of non core markets. We would project that remaining 40% to take place over the course of the next 12 to 15 months. However, if the market conditions that we're currently seeing continue to persist, and what I mean by that is compression of cap rates in secondary markets for value add product that we own against the product that we're acquiring in Dallas, Houston and Austin. If we continue to see those economics, we'll accelerate the pace. And Susan, you mentioned the R and M expense in the G and A. What are your views on the repair in in the light of rising costs? Should we expect any major changes on that front in the coming year? Shredder, this is John. I'll just answer in regard to the IRR and our investments. When we look at our CapEx and reinvestment CapEx, we've targeted and we've told the market that we expect to have no less than a 10% cash on cash return on those investments. And some costs have gone up. But nonetheless, we still would expect to have a 10% cash on cash return as we will continue to deploy, if you want to call it, our capital redevelopment program across our portfolio where we can identify the highest returns going down to the lower level of 10%. So just to answer that, I think it's more broadly and sorry we can't be more succinct with it, but we don't see our R and M costs having gone up tremendously as we had put over $52,000,000 into our portfolio prior to going public. And it really has helped mitigate the expenses as you've seen and heard from our expenses have really relatively been flat year over year. And so, we would expect to see somewhat of a lower expense increase in costs perhaps relative to the rest of our peer group just because we had already put so much money back into our assets over the last 3 4 years when I'm talking about same store. That's fair. And Susan, do you have any comments on the R and M expense at this point? Sure. So with the repair and maintenance, I think we have said that they were just lumpy this quarter, right? On an year to date basis, they've gone down roughly 2.5%. Going forward, we would expect them to be close to what we had last year. Blake, do you want to add to that? Sure. This is Blake, Brazil. Actually, when you look at the Q3, we were below what our internal analysis and expectations were for the Q3. And if you look at year to date, as Susie stated before, we're actually down 2.5%. And we expect in the Q4 to be in line with our internal expectations and we don't see a dramatic increase coming. And a lot of that has to do with what John alluded to earlier. And I'll reference back to what we referenced in the Q1. We overall we were saying 3% to 5% increase in NOI for year to date, and we're sitting at 6.1 percent. And overall, for expenses for the Q3, we couldn't have been happier where they failed internally For our internal guidance, we absolutely expected everything that happened, and it fell like we thought it would. That's great. And last one for me, maybe John, would you consider more ambitious development projects at this point in the cycle? Or I guess, what would you like to what would be the winning conditions, if I may, to see you guys consider a more ambitious development project? Sure, Ravi. Let's just talk about intensification first. You know that we have started and we are nearing completion at least for some deliverables on a project in Little Rock in Wimbledon Green. We have 156 units that we're constructing and that was an intensification project. We are not commercial builders and developers, but we will take advantage and be opportunistic when we know that there is a real gap in what we're building to compare to what the cap rate would be on the otherwise so it's a nice yield for us. It's opportunistic, Fred. And we are not going to be looking in the near term at all and most likely not in the foreseeable future to be contractors and developers of raw land. So in regard to what we do, we are very efficient and capable expert in our capabilities to surveil and understand where the highest returns will be to do some redevelopment within our assets and on our assets in order to increase occupancy and rents. So those are two areas that we're going to stay right in the middle of the pipeline of what we do and what we said we would do. In terms of acquisitions, I'll give Dan a high five, his whole team a huge call out for what they've been able to find and compare to the market. I'd like Dan to talk about that in regard to Satori because that's a brand new project that we bought. And Dan, would you mind commenting about Satori and how we came about that project? Yes, sure. Houston, we think, has been a bit overlooked in the last 12 months from a market depth perspective. To us, the Suntory acquisition was, I'll say, just a nice double or potential for a triple. There's four main reasons. Number 1, supply and demand. We've seen about 150,000 new population growth in Houston in the last 12 months, about 81,000 jobs were created, about 90,000 net end user migration. We've seen a decline of about 50% in 2019 deliveries of new construction. Now that to me is just a simple fundamental supply and demand argument on Satori. And number 2, we're rotating out of some assets, let's call it, in Baton Rouge. And we found the ability to rotate out of our equity in Baton Rouge at almost a par on the cap rate into Satori, into Houston. So if you put that in perspective, that singular transaction, you're using your equity, you're using your property ownership and you can do it at almost a par cap rate. That seems like fantastic execution. Then I think the last part is the growth that we see in the property on a look forward basis. I want to point out that the rent per square foot at Satori is 1.44 dollars Its comp set sitting at $1.49 We like that organic increase opportunity next year and the year after. And what we see is not only a city that's rapidly growing and continues to rapidly growing or to grow, But in the submarket of that city, it's growing 3 times faster in the last 10 years than that particular city of Houston, which has grown by from a population standpoint 11% to 13% over the last 10 years. We're seeing 34% population growth in the submarket over that same time period. So that's Satori execution. For all those reasons to us seems like just a no brainer. Young, deepening up our portfolio, rotating out of a market in Baton Rouge into an improved market in Houston and improved submarket in that Houston area. We had a hiccup here. And mitigating your lease up risk on new acquisitions with the rent guarantee escrow, which guarantees a 94% occupancy really over the term of any lease up. So we were able to buy the property at a discount to appraise value and mitigate our lease up risk at the same time. It's a win, win, win, win. Your next question comes from Kyle Stanley of Desjardins. Could you just talk a little bit about what maybe contributed to the higher insurance costs and property taxes during the quarter? And maybe if there's any specific geographies that were affected? Sure. I'll take insurance, Kyle. We were thrown into probably with a group of the insurance went up in the industry. And we've got a bump of in the 18% range. And that had nothing to do with our performance or our portfolio. That was more of a market driven execution. But what we're seeing for the next renewal, we're expecting that to be a lower double digit number. And we're expecting to not see it quite as much, but it was more of a market situation than anything else. Now, and from the tax standpoint, I'll let Dan discuss that. Sure, thanks. Yes, and just to follow-up on what Blake said, mid double digits growth, we anticipated that rate increase, just a little bit of Gil by association. I think our competitors and colleagues in Camden and M and A are seeing similar increases. It's not just Southern it's not any one market in particular, it's more like the multifamily habitual space. And we expect low double digit rate increases next year in our insurance costs. From a tax standpoint, that's nothing more than kind of a I'll say more seasonality. Last year, we were able to true up our accruals and settle some appeals in Q4. This year, we received information a little bit earlier than last year in Q3. As a result, creates a little bit of bumpiness in those tax numbers. I got to say, as a management team, how really proud we are of our senior management staff and their ability to successfully negotiate appeals very swiftly. Normally, we expect this kind of news to come in, in the 4th quarter. And this year, it just happened to come in, in the 3rd quarter. It caused us to readjust some of our accruals. With that said, we still have a couple of lingering appeals coming back. We expect some positive news on that, but shouldn't really shouldn't be as impactful as the 3rd quarter numbers from a year over year standpoint. And I'll add this on, Dan, from the tax standpoint, Kyle. Internally with our expectations analysis that we have done, we're actually ahead of that number. And Dan's group did a fabulous job on that. So once again, kind of on the R and M that I discussed earlier, this was exactly what we thought it would be. And just as Dan said, it came a little earlier, but frankly, it's a little better than we thought it would be. Yes. From an expectation moving forward, the state of Texas just passed some legislation capping any county's ability to increase their asset values year over year by about 3.5%. We think that is part of the reason we were able to accelerate some of our field feedback as some of these counties tried to get ahead of the 2020 field cycle. We also think that's fundamentally positive for multifamily owner in Texas on a look forward basis relative to year over year increases that we received in the past decade in Texas. Okay, great. That was great color. I guess just another thing I was looking at. The NOI margin from the non same property portfolio is a little bit lower. I'm just wondering if you can talk about what is driving that? And is that going forward with Satori during lease up? I know you've got the rent guarantee in place, but I'm wondering how you expect that to look. Kyle, it's Susie. I'll take this one. So yes, first off, you have to remember that the non same community portfolio includes dispositions as well as acquisitions. It includes any property that was included in the portfolio that wasn't owned for a full 12 months in the current year or prior year. So therefore, you can't really compare the non same community grouping to the prior year because it has a different property count depending on when something was bought or sold. Regarding the margins, we sold a lot of property that has lower margins in general. And you also have to remember that when we sell a property, we no longer have revenue, but we do have some expenses trickle in after the fact with no revenue to offset it. So that causes the Morgan to look odd as well. Okay, great. That makes sense. And then just one more for me. How much was spent on the rev gen program this quarter? And I'm wondering, as you start to focus more on the new acquisitions, how you expect that to trend? Yes, this is Dan. We spent about $2,700,000 in the 3rd quarter on our rev gen and redevelopment CapEx. That turns into, I'd say we're carrying about 70 to 75 units a month of units taken down. So over the quarter, that's about 2 10 units and an average investment of about $8,400 a unit. About 2 thirds of that 2.7 went into suite improvements and another third went into exterior redevelopment. As we move forward, we would expect a lot of the same. However, what we're repositioning now is we're redeploying, I'll say, those funds into more of our acquisitions and non same store acquisition properties as we see higher returns in those acquisition properties, then we're experiencing some of our same store that really we've invested already invested a significant amount. So I think on a look forward, you'll probably see more of that bump and those rate increases on the acquisition properties than on the same store NOI. Yes. Kyle, on our tour, the properties that you all saw, I mean, and the discussion that we had about the upticks in rent and how many we're doing and continue to do. And then on our pro formas for Albury and our newer properties, we've got some good upgrades planned in the next year. So based on the ticks we were getting and I was talking to you guys about that, obviously, that's where our money is going to be flowing more often. Next question comes from Johan Rodrigues of Raymond James. Can you maybe talk about what you'd expect same property NOI growth to be in the assets that you bought versus the assets that you sold like the 2,200 assets you bought versus I think, the 25 you sold? What would be the difference in like your same property NOI expectation? Well, good morning, Johan. This is Dan. I think the way I'd hit it is organic increases that we see in NOI and what we bought are going to be in excess of what we sold, otherwise we wouldn't make the trade. From a look back, specifically on some of our Tulsa assets, the timing for us was pretty impeccable. We saw I think we saw a flattening Tulsa market. And we'll say that Tulsa average organic rent increase over the last 12 months for CoStar could be about 0.5% on the margin. That's about a 1% to 2% NOI increase. We'll just say using those same dollars and numbers, we're seeing a CoStar is seeing an 8% organic rent increase in our Austin acquisition submarket. CoStar is seeing a 2.7% to 2.5% to 4% increase in Richmond and the same type of numbers we're seeing in our Dallas acquisition. So we would expect that organic growth I'd say rapidly increase, especially with the fuel of redevelopment CapEx and rev gen that we're putting into those acquisitions relative to what we sold out of. Yes, I would agree with that. And Johan, quickly, I was going to say, remember that the acquisitions are not going to roll into the same community grouping for another year, right? So anything we've acquired this year won't be saying community until 2021. Yes. No, I'm just theoretically trying to get a sense for difference in kind of growth prospects. Okay. And then what would be the spread between like you've talked about kind of maybe the biggest rationale for selling some of the non core stuff has been the spread compression that's occurred in primary and secondary market assets. So maybe what would be the spread today on average versus, I don't know, 2 years ago, I guess? Johan, this is John. And we're we are at a historically a historical low in terms of spreads of cap rate spreads for similar product between the primary and secondary markets. And it's been proven from what we've been able to execute. And when you look at just the buy side spread of coming in on about 80 basis points, if you want to just talk generalities because I've got to be there in terms of just a general spread is about 80 bps for same B class product that you might be selling or buying in a secondary market versus when you're buying in a primary. However, the way we look at it is that we are actually above that number. And we would be approximately we're losing, I'm going to say about a point because on the sell side versus the buy side, let that be dependent on the property and what Dan is able to rotate into on the other side of it. But it's typically about 1 full percentage point difference that we're coming out of in the terms of our secondary markets on the sell side of that cap rate spread. And what would it have been historically? It's been as high as I'm going to say around 2.5% is what I remember seeing in terms of these 2. And it has been lower. I had some data. It came back, I believe, it was in 1 quarter in 2011 that it was 0.4%. Today, it's at 0.8%. And this is just a it's a wonderful time, like Dan said, as long as we have the opportunity to execute on this rotation strategy. This is where we're building value for our investors and that we're buying newer products with the capability of adding value with our continued capital redevelopment program, starting all over again. Okay. And how many more assets would you like to sell? Dan, do you have that number by any chance? I think when you add it up in our markets based on what we've announced in the addition of a long view this quarter, I think that's probably another 2,000 units given the same time parameters that we discussed earlier on the call. So 2,000 units over another, call it, 12 to 24 months. Okay. And just last question. Could you maybe reconcile what you just talked about, about the spread rate compression, especially in secondary market assets with the fact that in the press release from last week about the sale of the 9 assets, it said that the sale price was essentially in line with the IPO appraised values. Should there have been a gain there if spreads had compressed over the last 18 months or so? That's a great question, and we discuss that a lot. So I think we've sold 15 assets so far this year. And we're seeing those gains on the vast majority of the assets. I think that comment about right in line with appraisals is probably driven by our Baton Rouge assets that were sold for a little bit less than appraisals. I want to but I want to point out and highlight 2 things. In Baton Rouge, when we originally looked at disposing of the assets about this time last year, since that time, Baton Rouge has seen some sequential quarterly declines in rate and occupancy. So we were somewhat selling a falling knife there. We were successful and able to rotate that equity, like we said, at or close to par on a cap rate over into our assets and for comparison sake into Dallas and into Houston. But the majority of that lag behind the price values sits in Baton Rouge. The rest of our markets and our asset sales really are not remarkably different than the spread that we saw at the beginning of the year in Shreveport and Little Rock asset sales. And we would expect that same trend to continue. Okay. Perfect. Sorry. Last question. In terms of recycling into primary markets, will it be mostly markets you're already in? Or are you guys looking at a new market? Johan, this is John. We've identified 5 primary core markets. One is in Northwest Arkansas, which is in the 14th fastest growing market in the country. It is Walmart stores. You have JV Hunt, you have about 3 or 4 different Fortune 500 Companies that rest there. In addition, Walmart Stores requires their vendors to all have their vendors have presence in Northwest Arkansas as well as University of Arkansas is there. So we'd like to have a presence using our clustering strategy to build a portfolio of about 1100 units. We've got about 600 units there today. So we'd like to be in that market and have that exposure. The other market is in Oklahoma City. And that is a nice yield market for us. It's growing. And we like Oklahoma. We've been there for at least over the last 10 years. So we know the market well and have created a number of great excellent relationships, great reputation for BSR. But we've named the other 3 markets as the ones that we've been primarily growing our massive part of our equity exposure has been in Houston, Dallas, Fort Worth and Austin. And we love the Texas markets not only because the state of Texas has no income tax, it's also been noted as one of the most business friendly states in the U. S. Over the last 2 or the last 3 years. It was the number one state noted by CNBC to be a business friendly state. But it also has a huge amount of population and economic growth that's been a tremendous driver for the state. So we love our presence there. We have a very low exposure as a percentage of the market in each one of those markets. And the company has a is very scalable. And we could almost double the size of our company. And it still would not have a very much of an impact as it would be as a percentage to the whole. So we're very pleased with those 5 markets. That's where we're going to grow, and that's where we're targeted to grow for the foreseeable future. Your next question comes from Matt Kornack of put a finer point on it, in terms of the margins, if we use the year to date figure, which I think is about 53.5%, is that a good sort of use for 2020 in terms of margins? Like do you expect the overall NOI margin to get better or worse or stay roughly the same? Hi, Matt. It's Suzy. So yes, definitely not the quarter's margin. I would definitely look at the year to date basis. 53.5%, 54% seems reasonable. As we continue to buy newer properties, they generally have Okay. That makes sense. With Okay. That makes sense. With regards to the dispositions that took place in the quarter, you gave the months in which they took place, but were they sort of the beginning of the month and mid end of month? I'm just trying to get a sense for how much NOI was included and then also for the ones that took place subsequent to quarter end? Yes. I'll speak to the timing. Yes. Sure. The Baton Rouge assets were disposed of, I believe, on August 28. Then Summer Point was the end of October. And then the ones we just recently announced, all were on Friday, November 8. Okay, perfect. And then you this quarter, you broke out a development property, which I think was previously just included in IPP. But is that the renovation or redevelopment that you were talking about earlier on the call? Yes. That's the property intensification at Wimbledon Green Phase 2. That's the land that we already owned that we're building a Phase 2 on. And what would be the total expected cost of that project? Dan? Yes. This is Dan. I'd say it's the total expected cost about $16,000,000 And as of last week, we're about 81% complete with the project, expect to begin leasing up units in January with the full delivery of the project in April and a stabilization to occur. A little bit quicker than normal as we already have a Phase 1 and there's really a double opportunity as we see occupancy Phase 1 move over into Phase 2, affording us ability to renovate some units in Phase 1 and generate some additional returns on Phase 1 as well. And then you may have mentioned it earlier, and I may not have been paying attention, but what would be the yield on that cost in terms of NOI on the $16,000,000 Let me think about that. I don't have the numbers in front of me, but I would say a good range of yield expectations is 6.5%, 6.75%. Percent. Okay. Perfect. And then last question with regards to the spread. It sounds like it's about 100 basis points. But if you had to do, again, what was disclosed this quarter and next versus what was purchased, would that hold true on the 100 basis points? Or is it a bit more because you had those more challenged assets in that grouping? You mean in that grouping on a look forward? Or are you talking are you referencing the assets we sold in November? The ones The The cap rates, I mean, a couple of things to highlight there. The cap rates for the product that we're buying, the product is at a slightly different price point from a rate standpoint than what we're selling. With that said, that product remains solid B and B plus assets in our market. So that 100 spread is going to remain on our foregone to our going end cap rates. Your next question comes from Matt Logan with RBC Capital Markets. Your disposition program seems to have a fair bit of momentum. Can you just help me understand the future asset sales? The 2,000 units that you've outlined, would that be everything outside of your 5 target markets? Not necessarily. I think we haven't discussed Little Rock. So that would probably include everything else. And there's one property in Shreveport. There is the Longview market. There's a little bit of gardening we have in some of our core markets where we'll take advantage of an opportunity to rotate and really continue to improve. In guarding opportunities, we like to see that cap rate spread almost at a flat number. When we're rotating from a non core market into a core market, we expect that 100 spread. So call it everything but Little Rock. Everything but Little Rock would basically be potential sale outside of your five core markets and then maybe some pruning in Little Rock? That's exactly what we see. Okay. And in terms of the assets that you sold in Q3, if we're thinking about kind of 100 basis point spread, would it be fair to kind of add that to the IFRS cap rate of 6% and say maybe it's a range of 6.5% to 7.5%, somewhere in that ballpark? Well, I would say, first off, that IFRS cap rate is a weighted average, and there's some disparity between our cap rates. And I would argue that, that cap rate also doesn't take into account any of the normal accoutrement that you see for enterprise value of platform. But with that said, sure, our foregone caps are in our markets that we're seeing for our type of product ranges from anywhere between 6 and I'll say, dollars 5.75 $6.75 And for products that we're buying, that range on the buy side looks to be 5 to 5.25. Okay. That's great color here. And maybe just changing gears on the organic growth in the portfolio. You mentioned that we'll hopefully see a little bit of a snapback in the growth rate, maybe not in the same property pool, but on the assets that you own today. Would that be largely in line with, say, the 6 month or the 9 month year to date figure for the same property pool of 6%, is it kind of in that mid single digit range for 2020? Yes, absolutely. That's a good way to look at it. And in terms of the expense side of the equation, I know we've seen some pressure on the insurance. But for the overall expense rate, do you think that's kind of maybe just low single digits and say that 2% to 4% range and you get a little bit of margin expansion as you drive forward? Yes. I think that's a good way to look at it. When you look at our overall expenses this year from a non controllable standpoint, we're actually less. And a lot of the big drivers that you all have asked about in previous calls, you look at year over year, year to date on our personnel. This speaks to the platform and being able to move people around into different positions, particularly the properties that we've disposed of moving them to newer properties. Our year over year increase is 2.76 in employees and employee costs, payroll costs. And as we said earlier, our R and M is actually down. So I feel like a 2% to 4% increase is a good way to look at it. With the caveat, I'm right in the middle of budgets right now. So I'm getting a pretty we've had our first review, and we'll be getting a better look at it. But from what I'm seeing, that's a good way to look at it. Of course. I mean, certainly, it's still early days for 2020. But maybe just taking a step back, can you talk a little bit about the cap on property taxes in Texas? And asset values are capped? Yes, sure. It depends on the this is Dan. It depends on the county. In some counties, millage rates can be increased without a referendum of people. In some counties, that's not the case. The specifics of the bill I'm referencing that was passed in, I want to say, late I would say capped the 3.5% increase is a total asset value increase on a year over year basis. So what that means is, it doesn't cap each individual's millage or value at 3.5%, right? So you can see some movement in millage. But you can also see a property's asset value increase by 15% or 20% on a year over year basis, provided that, that taxable county sits at a 3.5% year over year assessment increase. Does that make sense? An individual property can take up a larger share of that 3.5% increase if the taxing authority wants it. Got you. So the individual properties can increase by more, but the aggregate for the county can only be 3.5%. There you go. You said it better. What I want to reference here is if you go to the you can go to the Texas controller's office and look at 3 year average year over year asset value increases. And from a look back, we've seen 14%, 15%, 11.5%, 12% year over year asset value increases. And if you're going to compare that apples to apples on a look forward, that should be 3.5%. So that's very fundamentally positive for multifamily owner in Texas. Certainly, that's been one of the big challenges for the last few years and should hopefully be a nice tailwind for yourself as well as the industry. Maybe just last question from me. On your Auberry at Twin Creeks acquisition in Dallas. Can you just talk a little bit about the asset and what the value add strategy for that one is? Yes, sure. And I'll hit the first, and I want to remind the group that Blake lives about 3 miles from Mulberry. So he'll correct me if I'm wrong here. But Aubury is 2014 construction, 216 suites. 2,004, my apologies. And I think our redevelopment plan for that project would be what we consider to be a traditional 3 year suite redevelopment. We're seeing potential for 12% to 13% cash on cash returns on suite renovations at the project. We assumed in place agency debt on the property and really at a nice fundamental interest rate. But the highlight that I want to provide here on Auberry is we were able to close that property and exceed the expectations of the seller on a timing from a timing standpoint. It would really technically mark the 5th acquisition in the last 12 months that we've been able to close, call it within 30 days of putting the property under contract. I want to remind the group that coming into the IPO, 11 of our last 13 acquisitions were off market from repeat sellers. And it's that type of behavior, that execution, that establishing the price, the execution and the closing date and then hitting those metrics that really sets the reputation of BSR as an excellent transaction partner. Now moving into post acquisition and operation mode, I'll let Bilic hit on a little bit. But we're projecting, call it, 4000 to 6000 a suite on renovations, and we like to see a 12% to 13% cash on cash return for the suite renovations outside of organic. So Blake? Sure. The property is in tremendous shape. It really is a well maintained property. Normally, we go in and do an analysis of what kind of amenities and CapEx we may have need to do to start out. And this property is basically put in a couple of grill station and package pickup. I mean that's the it's just a pristine property for the age being 15 years old. What Dan just to key in a little bit more, we're looking at doing 55 upgrades over the next 12 months and we're hoping to get $110 to $120 uptick on that, which would be a good thing. The one thing that we're going to have that we've run into on 3 River Hill, Wimberley, the same thing. It's a good problem, but the occupancies are up at 95%, 96%. So you're the there's a real we're going to have to be very careful on how many people we renew and how many units we can get our hands on to be able to do that, because this is a unique property. And that 42 of the units have lived at the property 3 years or more, 25% have lived at the property 5 years or more. So it's a very stable property from that standpoint. But we've got a good staff there. We put 3 out of the 5 transfer from other BSR properties. And one thing that I want to stress that I think is an important thing about the capabilities and we keep talking about the platform. But I think it's a very important thing and it has to do with us being able to control our payroll expenses is that out of Satori, Madrone and Albury, there's 22 positions we had to fill and 12 of them came internally. Well, that has a big impact on the P and L. So we've been able to do that at this property. And as Dan alluded to, I live pretty close to it, know the area and really am excited about the upside that we're going to have at it. Yes. And to finish up on that, when you take Albury as a nice case study and you talk about the 100 basis point spread we have on rotations, what we're looking at in the Allen submarket is about a 4.25% effective rate increase while holding serve on occupancy for the 12 months. This is just the data that the analytics parties like Axiometrics, Reis and CoStar provide. When you fold that on top of what we just rotated out of and referencing the earlier carve about 0.5% year over year organic growth in Tulsa, What that does is that collapses that 100 basis point spread a little bit quicker than the 2 to 3 years we originally anticipate. So when we look at that, call it, 2 3 year look back cap, we see that look back cap rate being about 100 basis points north of what we really bought at, just essentially even in and out the spread over about a 24 month to 36 month period. And now you've got a newer asset, it's about 20 years newer than what we let go, with faster growth opportunities in a primary market and less CapEx. Makes for a pretty impressive acquisition or transaction when you roll it all up. Exactly, Matt. I mean, that was the whole thesis of the strategy. When we put it together by the team, by our Board, It's been very strategic and the execution has been outstanding by the group. Well, that's all for me. I thank you very much for the color and I'll turn the call back. Thank you. Your next question comes from Brendan Abrams of Canaccord Genuity. Please go ahead. Hi, everybody. Just a good thing on the recent acquisitions, I guess, the 2 in Austin and one each in Houston and Dallas, it looks like purchase price translates to about $185,000 per suite. I mean, that would seem to be a pretty attractive cost base. I'm just wondering if you could provide some color or maybe your best estimates around what you believe replacement costs for the in those markets or for these assets specifically might be? Well, that's a tough one. I don't want to tell you my estimate of replacement costs. This is Dan. I would just revert you back on the Austin deal. If you would acquire that land today and anticipate the average construction cost for building a property, you'd look that we I think the math turns out, the replacement cost on that asset was probably anywhere from $205,000,000 to $2.25 a unit depending on how aggressive you want to be on replacement cost against the $186,000,000 we paid for it. We're seeing similar numbers on the Satori acquisition and more I would say similar numbers a little bit lighter on the Albury acquisition. So all three of those were acquired for below replacement costs. Yes. And I'll add this, living in Dallas for all these years, the land cost on these properties just make it prohibited to replace them. So I echo Dan's comments. It's hard to put a dollar figure on it, but these land prices of where we're buying will just be astronomical. Right. Okay. That's helpful. And with these acquisitions, now the Texas market is, I guess, well over 50% of NOI, as you grow the portfolio, is there a concentration limit you would be focused on or do you see the state given the sizable population and various larger rental markets, there's really no limit for you guys. Brennan, this is John. I think for the larger markets in Texas, meaning the Austin, the Houston, and the Dallas Fort Worth, in particular, I think we have so much room of a runway to continue before we consider our exposure to becoming a or getting past the threshold that we won't talk about that. However, we'll go to Oklahoma City and Northwest Arkansas. We're looking to just fulfill a clustering strategy, if you will, in both communities. It's going to be somewhere in Oklahoma City. They have a population of almost 1,100,000 people. And that is a widely diverse economy and still growing. And we like the market, but it's a little bit more of a yield play. But we would still like to have 1500 or so units there as we know the market. And we also would like to be in Northwest Arkansas having exposure of maybe 1200 units because that population base is also around 700,000, but it's growing. As I said before, it has the 14th fastest growing market in the United States. Right. Okay. And then just last question for me, maybe just following up on that or in that context. If you were to enter a new market, how many what type of scale or how many suites would you want to would be the minimum you'd want to initially go in at in an ideal world, I guess? Minimum, this is Dan. Minimum, we'd want to see a road map to get to 1200 Suites in any individual market before we would decide to enter into it. So we would I would say we would probably not enter a market. It's up to our Board and our CEO. We wouldn't look to enter a market until we can make a splash with 1200 units. And we've said before, we're going to continue to do 1s and 2s acquisitions. So in the short term, we don't see an entrance into a new market. Now when we do, it's going to be a market where we see a total unitholder return in excess of what we're currently finding in Austin and in Dallas and in Houston. Right now, we don't see really markets that we love, where total unitholder returns are north of what we're seeing in Texas. And in our target core markets there, Brendan, we're very excited to be a part of it and have known these markets. They've been in our backyard for all the years that we've been in business. And we've seen these markets continue to grow, and we've been proud to be a part of it. And we're excited to be able for our unitholders to create value and be able to play along and grow with these markets as we continue to go in the future. Your next question comes from Brad Sturges of IA Securities. Maybe go back circle back to the Satori acquisition. I know there's a rental guarantee. I'm curious to know and I apologize if I missed it, but is there any concession being provided to help with the lease up? I think the prior owner was using this is Dan. I think the prior owner was using 1 month concession, which is pretty standard for a lease up. With that said, we see concessions in the particular market against our effective rents of about 0.1% to 0.6%. Now with all that said, the rent and guaranteed lease up does not take into account any concessions. It's a pure 94% fiscal, 94% economic occupancy guarantee against our asking rents. As you recall, our revenue maximization program that we use, it does not use concessions. And that is up and running on the property as of this week. So I don't expect to see concessions going forward, Brad. And within that submarket, what type of rent growth in the market are you seeing right now? The rent growth is in excess of what we're seeing in Houston. From a trailing 12 month, we look at 0.8% to 1% in Houston. The rent growth in that market, I'd say compared to the occupancy average of about 5.5%, rent growth that we're seeing is given to be 2% to 3.5% effective. And that's just a factor of inside Houston, end user migration. So we're seeing some submarkets of pancake growth year over year and some submarkets like the Katy and the Richmond, like the Pearland area and like North Houston, where we're seeing nice happy 3.5% organic rate growth. And within Richmond, Katy, what's the employment base of the job growth there? What's driving that? Is it fairly diversified within that submarket? Or is it more energy focused? I would say it's a little bit more energy focused than the other submarkets, specifically Southeast, which would be more port driven. What you have here is the energy corridor that sits just west of Downtown Houston in between our property and Houston City proper. The county makeup in our property about 750,000 residents, 100 and 20,000 or oneseven of them drive to work downtown or in that Houston Energy Corridor or in the Houston Medical District, which is the largest medical district arguably in the world every day. So call it a bedroom community. Specific to Satori, it's a bedroom community of high income, highly educated employees that travel to and from Downtown Houston and the Energy Corridor every day. And when you look at the broader Houston area, what other submarkets would be of interest in terms of acquisitions? The submarkets that we're in that our same store portfolio are in. So North Houston, North of The Woodlands, where we're seeing job relocations and economic growth, We like really depending on the price point, we like B minus, B plus properties down near the port, where we're seeing substantial year over year growth despite the Chinese trade war issues, and exactly right where we acquired, which is West Houston and the Katy and Richmond submarkets. Those 3 submarkets we really love right now. And our effective average effective rent in the Q3 year over year is up over 3.5% in those submarkets. Your next question comes from Dean Wilkinson with CIBC. I'll say good afternoon, guys. You're incredibly popular today. There's a ton of granularity on this call. But as Blake knows, I'm a pretty simple guy. So I'm going to try and simplify my understanding of what you're doing, and perhaps you can either correct me or verify that. So I'm looking at the dispositions and the net acquisitions. Is the end goal here for you to be looking at a portfolio that is, 1, newer 2, from a cash flow or NOI perspective, perhaps flat to slightly lower than what you had. However, as we look forward to that cap rate in your IFRS valuation and certainly in analyst NAVs, that, that number come in. So we are sort of flat on a cash flow perspective, but now accretive in terms of what you've done with the portfolio. You got most of that right, Dean. This is John. The strategy in and of itself is to lower the age of the portfolio is to be situated and located in the high growth areas within the primary and the core targeted markets that we have identified and we've spoken about on this call. And for the longer term, to know that there's going to be some, I don't want to call it, noise, but you're going to have some hiccups along the way just because we're going to get out in front of these acquisitions with acquisitions and then come back in to fill it in on the sales. And we're going to continue this process along with trying to grow our company. So we're this management team is looking to grow while we're executing on this plan. And the cash flow expectations, we're looking to grow our cash flow. But I wouldn't say it's going to be exponential while we're going through this transformation. That's fair. That's clear. Perfect. Hopefully, that's it. Thanks, guys. Thank you. But can I add something, Dean? What we need to understand is that we certainly hope that our analyst community as well as all of our investors would understand that we're located now and being more located in the primary markets where the higher growth is, the higher economic growth is. So population economic And we certainly would anticipate and see that the cap rate that one would look at from a standpoint of the turns on our different non IFRS metrics, we certainly see some momentum or acceleration. But maybe that just comes in time with proving up of what this platform's capabilities are. So in either case, we hope to see that over time. And we sure appreciate everyone's support. All right. And there are no further questions at this time. Please proceed. Well, first of all, I want to say thank you to everyone being on the call. And that concludes our call this morning. And thank you for your interest in BSR REIT. And we look forward to speaking with you again following Q4. And God bless. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.