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 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 1 on your telephone keypad. If you would like to withdraw your question, please press star, then the number 2. Thank you. Mr. Bailey, you may begin your conference.
Thank you, Jessica, good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the third quarter and nine months ended September 30, 2019. I am John Bailey, BSR's Chief Executive Officer. I'm joined today by Susie Koehn, our Chief Financial Officer. Also with us are Blake Brazeal, President and Chief Operating Officer, and Dan 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 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 in MD&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&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 second quarter of 2018.
The REIT had no operations prior to that date. As a result, the year-over-year comparisons for the third quarter 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 nine-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 third quarter 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 $849 per apartment unit, compared to $827 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 8.8% compared to Q3 last year, while total NOI increased 7.9%. On a same-community basis, revenue increased 3.1% year-over-year, 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. We continue to generate stronger topline 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 US Sunbelt is at historical low levels. We are transforming our portfolio by recycling capital from nine core assets on a tax-deferred basis into suburban communities located in high-growth markets. Post Q2, we made nine strategic property dispositions on a tax-deferred basis. Specifically, during Q3, we sold Dove Creek Apartments and Longridge Apartments in Baton Rouge, Louisiana, and Summer Pointe Apartments in Shreveport, Louisiana.
Subsequent to Q3, BSR sold 93 Twenty 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 million and is in line with the IPO appraised values. We also recycled capital into three targeted suburban high-growth markets. During Q3, we acquired two adjacent 2014 and 2015 constructed apartment communities, Cielo and Madrone, located in Austin, Texas, totaling 554 apartment units for an aggregate purchase price of $104.4 million. Post Q3, we acquired a newly constructed 2019 community, Satori at Long Meadow Apartments in Richmond, Texas, totaling 300 apartment units, and a 2004 constructed apartment community, Auberry at Twin Creeks in Allen, Texas, totaling 216 apartment units for a combined purchase price of $92.8 million.
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 third quarter and nine-month results in more detail. Susie?
Thanks, John. Same community revenue in Q3 2019 was $22.2 million, up 3.1% from last year as a result of increased rental rates attributable to the capital redevelopment program. Total revenue for the quarter increased 8.8% to $27.8 million, which was primarily attributable to property acquisitions, net of dispositions, as well as higher rental rates across the portfolio. Same-community NOI was $11.9 million, an increase of 3.2% from Q3 2018. The increase was due to higher rental rates attributable to the REIT's 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 $14.5 million for the third quarter of 2019, an increase of 7.9% over the third 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 rotation strategy. FFO for the third quarter of 2019 was $7.1 million, or $0.18 per unit, compared with $7.6 million or $0.19 per unit last year. The solid increase in NOI was offset by an increase in finance costs resulting from the following. Property acquisitions, the timings related to the rotation of equity from dispositions 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 Cielo and Madrone in August, and the improvement of deferred loan costs.
Furthermore, G&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 third quarter of 2019 was $6.5 million or $0.16 per unit, compared to $6.3 million 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 third quarter 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 nine-month period ending September 30th, 2019.
As John indicated, the revenue, NOI, and same community metrics for 2018 comprise the entire nine-month period for the properties that were acquired by the REIT upon completion of the IPO. Revenue was $83.5 million, which was 12% higher than last year due to the impact of acquisitions and organic rent growth, partially offset by dispositions. Same-community revenue for the full year-to-date period was $65.8 million, 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 $44.8 million, 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 $22.6 million in the nine-month period, or $0.56 per unit.
AFFO was $20.1 million, or $0.50 per unit. The REIT paid cash distributions of $0.375 per unit for the nine-month period, representing an AFFO payout ratio of 75.2%. Turning to our balance sheet. As of September 30th, our debt-to-gross-book value ratio was 46.2%. Pro forma the other transactions that we have engaged in since the end of Q3, our debt to GBV now stands at 46.6%. As a reminder, our long-term target is 50%-55%. Total liquidity at quarter end was $111.6 million, including cash and equivalent of $20.7 million, $55.9 million of borrowing capacity under our credit facility, and $35 million available under our revolving line of credit. We've had total mortgage notes payable of $389.3 million, 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 30th, 2019, total loans and borrowings were $500 million. During Q3, we completed the initial hedging of our credit facility with $100 million effectively hedged at a fixed rate of 3.6%. Pro forma the other transactions we have engaged in since the end of Q3, we have total liquidity of $105 million. On September 17th, the REIT completed a follow-on offering and private placement of 5.2 million units for total gross proceeds of $55.3 million, or $53.1 million net of issues 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 continue 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 six years to 23 years old, directly as a result of these acquisitions and dispositions. The REIT's eight 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 third quarter of 2018 on a pro forma 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. 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. 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. Your questions will be pulled in the order they are received. Should you wish to decline from the polling process, please press the star followed by the two. If you're using a speakerphone, please lift the handset before pressing any keys. Your first question comes from Fred Blondeau of Echelon Wealth Partners. Please go ahead.
Thank you, and good morning. Susie, you mentioned your target debt to GBV of 50%-55%. What would be your timeline to get back to these levels, and what should we expect for next year on that front?
Fred, obviously that's the target we have that we won't go over. All of that depends on the timing of acquisitions and dispositions because it's a lumpy process.
Until we finish our dispositions cycle and then continue to acquire properties, I can't really tell you at this point.
Mm-hmm. Yep.
Dan can say more as to timing of what generally takes to dispose of dispositions.
Yeah, Fred, this is John. We're currently at 46.6% debt to GBV. 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. 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. 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. We may bring it right back down because we'll end up buying or selling properties right behind it.
If you want to look at We have at least $150 million of runway to buy properties in order to get up to around 51%, 52%. If we want to just do nothing but continue using our equity that's available on our balance sheet. That's somewhat more of our plan than to continue selling, as we want to be ahead of the game by continuing to target acquisitions first on those properties that we want to buy. 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. Thank you. 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, Blake, Dan.
Yeah, Fred, this is Dan Oberste. I think in a vacuum, and ideally, we would slate the rotation process to take anywhere between two and three 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%-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 12-15 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.
Mm-hmm. Well, that makes sense. Susie, you mentioned the R&M expense in the G&A. What are your views on the repair and maintenance expense at this point? I guess in parallel, what should we expect in terms of redevelopment projects, expected IRR in the light of rising costs? Should we expect any major changes on that front in the coming year?
Fred, 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. 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%. 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&M costs having gone up tremendously as we had put over $52 million into our portfolio prior to going public.
It really has helped mitigate the expenses, as you've seen and heard from our expenses have really relatively been flat year-over-year. 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 have already put so much money back into our assets over the last three and four years, when I'm talking about same store.
That's fair. Susie, do you have any comments on the R&M expense at this point?
Sure. With the repair and maintenance expense, I think we had said that they were just lumpy this quarter, right? Because on a year-to-date basis, they've gone down roughly 2.5%. Going forward, we would expect them to be close to what we have last year. Blake, you want to add to that?
Sure. This is Blake Brazeal. Actually, when you look at the third quarter, we were below what our internal analysis and expectations were for the third quarter. If you look at year to date, Susie stated before, we're actually down 2.5%. We expect, in the fourth quarter, to be in line with our internal expectations. We don't see a dramatic increase coming. A lot of that has to do what John alluded to earlier. I'll reference back to what we referenced in the first quarter. We were saying 3%-5% increase in NOI for year to date, and we're sitting at 6.1%. Overall, for expenses for the third quarter, we couldn't have been happier where they fell internally. For our internal guidance, we
Absolutely expected everything that happened, and it fell like we thought it would.
That's great. Last one from me, maybe, John, would you consider more ambitious development projects at this point in the cycle? What would be the winning conditions, if I may, to see you guys consider more ambitious development projects?
Well, sure. 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's a real gap in what we're building to compare to what the cap rate would be on the otherwise. 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.
In regard to what we do, we are very efficient and capable and 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. Those are two areas that we're going to stay right in the middle of the pipeline of what we do and what we've 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've bought. Dan, would you mind commenting about Satori and how we came about that project?
Yeah, sure. Houston, we think, has been a bit overlooked in the last 12 months from a market depth perspective. To us, the Satori acquisition was, I'll say, just a nice double or potential for a triple. There's four main reasons. Number one, 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. That to me is just a simple fundamental supply and demand argument on Satori. Number two, we're rotating out of some assets, let's call it in Baton Rouge. 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.
If you put that in perspective, that singular transaction, you're youth-ening your equity, you're youth-ening your property ownership, and you can do it at almost a par cap rate. That to us seems like fantastic execution. 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. Its comp set's 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 grow, but in a sub-market of that city that'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%-13% over the last 10 years.
We're seeing 34% population growth in the sub-market over that same time period. That Satori execution, for all those reasons, to us, seems like just a no-brainer. Youth-ening up our portfolio, rotating out of a market in Baton Rouge into an improved market in Houston, an improved sub-market in that Houston area.
Thank you very much. Go ahead, sorry.
Sorry, we had a hiccup here. 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. We were able to buy the property at a discount to appraised value and mitigate our lease-up risk at the same time. It's a win-win-win-win.
That's great color. Thanks. I'll leave it there.
Your next question comes from Kyle Stanley of Desjardins. Please go ahead.
Thanks. Good morning, everyone.
Hello, Kyle.
Hey, good morning, Kyle.
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 got a bump in the 18% range, and that had nothing to do with our performance or our portfolio. That was more of a market-driven execution. What we're seeing for the next renewal, we're expecting that to be a lower double-digit number. We're expecting to not see it quite as much, but it was more of a market situation than anything else. Now, from the tax standpoint, I'll let Dan discuss that.
Sure. Thanks. Just to follow up on what Blake said. Mid double digits growth, we anticipated that rate increase. It's a little bit of guilt by association. I think our competitors and colleagues in Camden and MAA are seeing similar increases. It's not any one market in particular. It's more like the multifamily habitual space. 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 the fourth quarter. This year, it just happened to come in the third quarter. It caused us to readjust some of our accruals. With that said, we still have a couple lingering appeals coming back. We expect some positive news on that, really shouldn't be as impactful as the third quarter numbers from a year-over-year sampling.
I'll add this on, Dan, from the tax standpoint, Kyle. Internally, with our expectations analysis that we had done, we're actually ahead of that number. Dan's group did a fabulous job on that. Once again, kind of on the R&M that I discussed earlier, this was exactly what we thought it would be. It just, as Dan said, it came a little earlier, but frankly, it's a little better than we thought it would be.
Yeah, 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 appeal cycle. We also think that's fundamentally positive for a multifamily owner in Texas on a look-forward basis relative to the year-over-year increases that we received in the past decade in Texas.
Okay, great. Thanks. 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.
Hey, Kyle. It's Susie. I'll take this one. Yeah, 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. 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 had lower margins in general. 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. That causes the margins to look odd as well.
Okay, great. That makes sense. Then just one more for me. How much was spent on the RevGen Program this quarter? I'm wondering, as you start to focus more on the new acquisitions, how you expect that to trend.
Yeah, this is Dan. We spent about $2.7 million in the third quarter on our RevGen and redevelopment CapEx. That turns into, I'd say we're carrying about 70 to 75 units a month of units taken down. Over the quarter, that's about 210 units at an average investment of about $8,400 a unit. About two-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. 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 than we're experienced on some of our same store that really we've already invested a significant amount.
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.
Yeah.
Okay.
Kyle, on our tour, the properties that you all saw, and the discussion that we had about the upticks in rent and how many we were doing and continue to do, and then on our pro forma as for Auberry and our newer properties, we've got some good upgrades planned in the next year. Based on the upticks we were getting, and I was talking to you guys about that, obviously, that's where our money's gonna be flowing more often.
Okay, perfect. That's great color. I'll turn it back.
Thank you, Kyle.
Next question comes from Johann Rodrigues of Raymond James. Please go ahead.
Hi, everyone. Can you maybe talk about what you'd expect same-property NOI growth to be in the assets that you've 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 your same-property NOI expectation?
Well, good morning, Johann. This is Dan. I think the way I'd hit it is organic increases that we see in NOI on what we bought are going to be in excess of what we sold, otherwise, we wouldn't have made the trade.
Right.
From a look back, specifically on some of our Tulsa assets, the timing for us was pretty impeccable. I think we saw a flattening Tulsa market. 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%-2% NOI increase. We'll just say, using those same dollars and numbers, CoStar's seeing an 8% organic rent increase in our Austin acquisition sub-market. CoStar's seeing a 2.5%-4% increase in Richmond, and the same type of numbers we're seeing in our Dallas acquisition. We would expect that organic growth to, I'd say, rapidly increase, especially with the fuel of redevelopment CapEx and RevGen that we're putting into those acquisitions relative to what we sold out of.
Yeah, I would agree with that.
Johann?
Go ahead.
Quickly, I was going to say, remember though, that the acquisitions are not going to roll into the same community grouping for another year. Right? Anything we've acquired this year won't be same community until 2021.
Yeah. No, I'm just theoretically trying to get a sense for the difference in kind of growth prospects. Okay. What would be the spread between 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. Maybe what would be the spread today on average versus, I don't know, two years ago, I ask?
Well, Johann, this is John. We are at a historical low in terms 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. 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 basis points for same B-class product that you might be selling or buying in a secondary market versus one 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 one full percentage point difference that we're coming out of in terms of our secondary markets on the sell side of that cap rate spread.
What would it have been historically?
It's been as high as, I want to say, it's around 2.5% is what I remember seeing in terms of these two. It has been lower. I had some data that came back, I believe it was in one quarter in 2011, that it was 0.4%. Today, it's at 0.8%. 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 product with the capability of adding value with our continued capital redevelopment program, starting all over again.
Okay. 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 and the addition of Longview this quarter, I think that's probably another 2,000 units, given the same time parameters that we discussed earlier on in the call. 2,000 units over another, call it, 12-24 months.
Okay. Just last question. Could you maybe reconcile what you just talked 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 nine assets, it said that the sale price was essentially in line with the IPO appraised values. Shouldn't there have been a gain there if spreads had compressed over the last 18 months or so?
You know what, that's a great question. We discuss that a lot. I think we've sold 15 assets so far this year. We're seeing those gains on the vast majority of the assets. I think that comment about right in line with appraisals was probably driven by our Baton Rouge assets that were sold for a little bit less than appraisals.
I want to point out and highlight two 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. We were somewhat selling a falling knock 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's sake, into Dallas and into Houston. The majority of that lag behind appraised 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. 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 any new markets?
Johann, this is John. We've identified five 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 J.B. Hunt. You have about three or four different Fortune 500 companies that rest there. In addition, Walmart stores requires their vendors to all have presence in Northwest Arkansas, as well as University of Arkansas is there. We'd like to have a presence using our clustering strategy to build a portfolio of about 1,200 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 for over the last 10 years.
We know the market well and have created a number of great, excellent relationships, great reputation for BSR. We've named the other three markets are the ones that we've been primarily growing. Our massive part of our equity exposure has been in Houston, Dallas-Fort Worth, and Austin. 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 two or the last three years. It was the number one state noted by CNBC to be a business-friendly state. It also has a huge amount of population and economic growth that's been a tremendous driver for the state. 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 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. We're very pleased with those five markets. That's where we're going to grow, and that's where we're targeted to grow for the foreseeable future.
Perfect. Okay, I'll turn it back. Thanks, everyone.
Thank you.
Your next question comes from Matt Kornack of National Bank Financial. Please go ahead.
Hi, guys.
Matt.
Most of my questions have been answered in some way, just to 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? Do you expect the overall NOI margin to get better or worse, or stay roughly the same?
Hey, Matt. This is Susie. Yeah. 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 higher margins, so you would expect it to increase a little bit. Yeah, I'm comfortable with 53.5% or 54%.
Okay. No, that makes sense. With regards to the dispositions that took place in the quarter, you gave the months in which they took place, 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, then also for the ones that took place subsequent to quarter end.
Yes. I'll speak to the timing.
Yep.
Sure. The Baton Rouge assets were disposed of, I believe, on August 28th. Summer Pointe was the end of October. The ones we just recently announced all were on Friday, November 8th.
Okay, perfect. 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?
Yeah, that's the property intensification at Wimbledon Green, phase two.
Okay.
That's the land that we already owned that we're building a phase two on.
What would be the total expected cost of that project?
Dan?
Yeah. This is Dan. Matt, I'd say the total expected cost is about $16 million. As of last week, we're about 81% complete with the project. Expect to begin leasing up units in January, with a 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 occupants of phase 1 move over into phase 2. Affording us the ability to renovate some units in phase 1 and generate some additional returns on phase 1 as well.
Okay, makes sense. 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 million?
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%.
Okay, perfect. Last question with regards to the spreads. 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 add those more challenged assets in that grouping?
You mean in that grouping on a look forward, or are you referencing the assets we sold in November?
The ones basically in Q3 and subsequent, if you could meld them together. I know you don't like to disclose specific cap rates.
Oh, no, sure. A couple 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+ assets in our market. That 100 spread is going to remain on our foregone to our going-in cap rates.
That's awesome. Thanks, guys.
Thank you.
Your next question comes from Matt Logan with RBC Capital Markets. Go ahead.
Thank you, and good morning.
Hello, Matt.
Hey, good morning, Matt.
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 five target markets?
Not necessarily. I think we haven't discussed Little Rock. That would probably include everything else, and there's one property in Shreveport. There's 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 gardening 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. 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. 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 add that to the IFRS cap rate of 6 and say maybe it's a range of 6.5-7.5, 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. With that said, sure, our foregone caps in our markets that we're seeing for our type of product ranges from anywhere between, I'll say 575 and 675. For products that we're buying, that range on the buy side looks to be five to five and a quarter.
Okay. That's great color here. 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 six-month or the nine-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.
In terms of the expense side of the equation, I know we've seen some pressure on the insurance. For the overall expense rate, do you think that's maybe just low single digits and say that 2%-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. You look at our overall expenses this year, from a non-controllable standpoint, we're actually less. 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 only 2.76 in employee costs, payroll costs.
Our R&M is actually down. I feel like a 2%-4% increase is a good way to look at it, with the caveat, I'm right in the middle of budgets right now, so we've had our first review and we'll be getting a better look at it. From what I'm seeing, that's a good way to look at it.
Of course. 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 maybe just some color on what that means for mill rates? Can the mill rates move higher even though the asset values are capped?
Yeah, sure. This is Dan. It depends on the county. In some counties, millage rates can be increased without a referendum of the people. In some counties, that's not the case. The specifics of the bill I'm referencing, it was passed in, I want to say, late May. I would say capped at 3.5% increase is a total asset value increase on a year-over-year basis. What that means is it doesn't cap each individual's millage or value at 3.5%. 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?
Um-
An individual property can take up a larger share of that 3.5% increase if the taxing authority wants it.
Got you. 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.
That's it.
What I want to reference here is, you can go to the Texas Comptroller's office and look at three-year average, year-over-year asset value increases. From a look back, we've seen 14, 15, 11.5, 12% year-over-year asset value increases. If you're going to compare that apples to apples on a look forward, that should be 3.5%. That's very fundamentally positive for a multi-family owner in Texas.
Oh, 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 is?
Yeah, sure. I'll hit the first end. I want to remind the group that Blake lives about three miles from Auberry, so he'll correct me if I'm wrong here. Auberry is 2014 construction, 216 suites.
2004, I think.
2004. My apologies. I think our redevelopment plan for that project would be what we consider to be a traditional three-year suite redevelopment. We're seeing potential for 12%-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. 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 from a timing standpoint. It would really technically mark the fifth 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.
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 Blake hit on a little bit, but we're projecting, call it $4,000-$6,000 a suite on renovations, and we like to see a 12%-13% cash-on-cash return for the suite renovations outside of organic. 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 need to do to start out. In this property, it's basically put in a couple of grill stations and a package pickup. 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 a $110-$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 three, River Hill, Wimberley, the same thing. It's a good problem, the occupancies are up at 95%, 96%.
You're looking at a situation where to get a hold of units, 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 in that 42 of the units have lived at the property three years or more. 25% have lived at the property five years or more. It's a very stable property from that standpoint. We've got a good staff there. We've put three out of the five transfers from other BSR properties.
One thing that I want to stress that I think is an important thing about the capabilities, 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 Auberry, there's 22 positions we had to fill, and 12 of them came internally. That has a big impact on the P&L. We've been able to do that at this property. 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.
Yeah, to finish up on that, when you take Auberry 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 sub-market is about a 4.25% effective rate increase while holding serve on occupancy for the next 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 call of 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 two to three years we originally anticipated.
When we look at that, call it two- and three-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 evening out the spread over about a 24-month to 36-month period. 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. Less CapEx.
Makes for a pretty impressive acquisition or transaction when you roll it all up.
Exactly, Matt. 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 call, and I'll turn the call back.
Thank you.
Your next question comes from Brendon Abrams of Canaccord Genuity. Please go ahead.
Hi, everybody.
Brendon.
How are you?
Just focusing on the recent acquisitions, I guess the two in Austin and one each in Houston and Dallas. It looks like purchase price translates to about $185,000 per suite. 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 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 were to acquire that land today and anticipate the average construction costs for building a property, I think the math turns out the replacement cost on that asset was probably anywhere from $205,000-$225,000 a unit, depending on how aggressive you want to be on replacement costs against the $186,000 we paid for it. We're seeing similar numbers on the Satori acquisition, and I would say similar numbers, a little bit lighter on the Auberry acquisition. All three of those were acquired for below replacement costs.
I'll add this. Living in Dallas, being in Dallas for all these years, the land cost on these properties just make it prohibited to replace them. I echo Dan's comments. It's hard to put a dollar figure on it, but these land prices of where we're buying would just be astronomical.
Right. Okay. That's helpful. 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 its sizable population and various larger rental markets as there's really no limit for you guys?
Brendon, 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 would consider our exposure to getting past the thresholds 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.
If it's going to be somewhere in Oklahoma City, they have a population of almost 1.1 million people, that is a widely diverse economy and still growing. We like the market, but it's a little bit more of a yield play, but we would still like to have 1,500 or so units there, as we know the market. We also would like to be in Northwest Arkansas, have an exposure of maybe 1,200 units, because that population base is also around 700,000, but it's growing. As I said before, it's the 14th fastest-growing market in the U.S.
Right. Okay. Just last question from me, maybe just following up on that, or in that context, if you were to enter a new market, what type of scale or how many suites 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 roadmap to get to 1,200 suites in any individual market before we would decide to enter into it. 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 1,200 units. We've said before, we're going to continue to do ones and twos acquisitions. 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 unit holder return in excess of what we're currently finding in Austin and in Dallas and in Houston. Right now, we don't see markets that we love, where total unit holder returns are north of what we're seeing in Texas.
In our target core markets there, Brendon, 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. We're excited to be able for our unit holders to create value and be able to play along and grow with these markets as we continue to go in the future.
Okay. That's great. I'll turn it over. Thank you.
Thank you.
Your next question comes from Brad Sturges of iA Securities. Please go ahead.
Hi there.
Hey, Brad.
Hey, Brad.
To maybe circle back to the Satori acquisition. I know there's a rental guarantee. I'm curious to know, I apologize if I missed it, is there any concessions being provided to help with the lease-up?
This is Dan. I think the prior owner was using a one-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%-0.6%. With all that said, the rent and guaranteed lease-up does not take into account any concessions. It's a pure 94% physical, 94% economic occupancy guarantee against our asking rents.
Okay.
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. I don't expect to see concessions going forward, Brad.
Within that sub-market, 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%-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%-3.5% effective. That's just a factor of inside Houston end-user migration. We're seeing some sub-markets of pancake growth year-over-year, and some sub-markets like the Katy and the Richmond, like the Pearland area, and North Houston, where we're seeing nice, happy 3.5% organic rent growth.
Within Richmond-Katy, what's the employment base or the job growth there, what's driving that? Is it fairly diversified within that sub-market, or is it more energy-focused?
I would say it's a little bit more energy-focused than the other sub-markets, 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, 120,000 or one-seventh of them drive to work downtown or in that Houston energy corridor or in the Texas Medical Center, which is the largest medical district, arguably in the world, every day. 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.
When you look at the broader Houston area, what other sub-markets would be of interest in terms of acquisitions?
The submarkets that we're in, that our same-store portfolio are in. North Houston, north of The Woodlands, where we're seeing job relocations and economic growth. 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, exactly right where we acquired, which is West Houston and the Katy and Richmond submarkets. Those three submarkets we really love right now.
Our average effective rent in the third quarter year-over-year is up over 3.5%.
In those submarkets.
In those submarkets.
Great. That's great color. I'll turn it back. Thank you.
Your next question comes from Dean Wilkinson with CIBC. Please go ahead.
Thanks. I'll say good afternoon, guys. You're incredibly popular today.
Hey, Dean.
Hey, Dean.
There's been 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. When 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 one, newer, two, from a cash flow or NOI perspective, perhaps flat to slightly lower than what you had, as we look forward to that cap rate in your IFRS valuation and certainly in analyst NAVs, that number come in, so we are sort of flat on a cash flow perspective, but NAV 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. 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. We're going to continue this process along with trying to grow our company. This management team is looking to grow while we're executing on this plan.
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.
Dean.
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. Population economics, and we certainly would anticipate and see that the cap rate that one would look at from a standpoint of the terms on our different non-IFRS metrics, we certainly see some momentum or acceleration. Maybe that just comes in time with the proving up of what this platform's capabilities are. In either case, we hope to see that over time, and we sure appreciate everyone's support.
Great. That's good. Thanks, guys.
Thank you.
All right, there are no further questions at this time. Please proceed.
Well, first of all, I want to say thank you to everyone for being on the call. That concludes our call this morning. Thank you for your interest in BSR REIT. We look forward to speaking with you again following Q4. God bless.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your line.