My name is Joanna. I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q2 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, Joanna. Good morning, everyone. Welcome to BSR's conference call to discuss our financial results for Q2 and the six months ended June 30, 2019. I am John Bailey, BSR's Chief Executive Officer. I am joined by Suzie Koehn, our Chief Financial Officer. Also with us today are Blake Brazell, our President and Chief Operating Officer, and Dan Oberste, our 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 Q2 and some commentary on the performance drivers. Suzy will then review the financials. 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 we begin, I need to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on the forward-looking information in our news release and MD&A dated August 6, 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 the MD&A for further information regarding any non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Please note that all dollar amounts are denominated in US currency. Let me begin with a quick clarification of what we'll be discussing today.
As you know, we completed our initial public offering and commenced trading on the Toronto Stock Exchange on May 18, 2018, and was partway through the second quarter in 2018. The REIT had no operations prior to that date. Accordingly, in order to provide investors with a full understanding of our year-over-year performance in 2019, we will discuss revenue, NOI, and same community metrics for the entire comparable three months and six-month periods in 2018 for the properties acquired in the IPO rather than the 44-day period in which we were actually a public company. We have established a track record of strong operating performance since our IPO, and I'm pleased to say that it continued in the second quarter as we delivered strong financial results.
We generated solid growth from organic rent increases and acquisitions. We continued to deliver on our rotation strategy as we made six strategic property dispositions that allow us to recycle capital in our target markets in suburban areas of higher rental migration and economic growth. Let me quickly recap our Q2 performance. Our average monthly rent at the end of the second quarter was $858 per apartment unit, or $837 on a same community basis, compared to $815 on a same community basis a year earlier. Our revenue for Q2 2019 increased 12.3% compared to Q2 last year, while total NOI increased 12%. On a same community basis, revenue increased 3.3% year-over-year. NOI was up 3.5%. Those same community numbers prove that our capital redevelopment program has driven stronger top-line and bottom-line performance. Another important operating metric we want to highlight is occupancy.
We had a weighted average occupancy of 95% as of June 30, compared to 94% on the same day last year. Given that we always have some suites under renovation, this is close to maximum occupancy, and this is a very strong result. Moving on to our external growth strategy. In our first few quarters as a public REIT, we did as we said we would do. We acquired four attractive properties in our target markets, but our goal is not just to get bigger. We want to modernize our portfolio through acquisitions, property intensification, and capital redevelopment. In the second quarter, we announced the development of phase 2 at Wimbledon Green Apartments and the sale of six non-core properties for $53.8 million. The combined selling price of the properties was 5.7% above the appraised values at the time of the IPO.
Currently, the spread in capitalization rates between primary and secondary markets in the U.S. Sun Belt is at historical low levels. It makes sense for us to take the full advantage of this opportunity to recycle capital from our nine core assets on a tax-deferred basis with a risk-adjusted return into suburban areas of high-growth markets. This is precisely what we said we would do, and we are executing on our rotation strategy. In addition, we announced yesterday, so long as conditions remain favorable, we will exit Baton Rouge, Beaumont, Louisville, Hot Springs, Pascagoula, Shreveport, and Tulsa markets in order to focus on higher growth primary markets. We believe this is a tremendous opportunity to upgrade our portfolio and position it for stronger growth. The tax implications are a critical element of this strategy.
Under the IRS's 1031 exchange program, capital gains taxes can be deferred if the funds are reinvested into "like-kind" properties. It is in our unit holders' best interest to recycle capital when the opportunity arises. Overall, we are very happy with BSR's competitive position. We are delivering on our internal and external growth strategies, and we expect more positive developments for unit holders in the months ahead. I'll now invite Suzy to review our second quarter and six-month results in more detail. Suzy?
Thanks, John. Same-community revenue was $23.3 million, up 3.3% from Q2 last year, and up 1.3% over the first quarter of 2019 due to increased rental rates and occupancy. Same-community NOI was $12.7 million, an increase of 3.5% from Q2 2018 due to higher revenue, partially offset by higher property taxes, insurance costs, and the timing of repair and maintenance expenses incurred during the second quarter. Same-community NOI was flat to the first quarter of 2019, related to the previously described increase in revenue, offset by the timing of repair and maintenance expenses. Please note that repair and maintenance expenses were flat for the six months ended June 30, 2019 when compared to the prior year. NOI for the full portfolio was $15.2 million for the second quarter of 2019, increasing 12% over the second quarter of 2018. This increase is primarily related to acquisitions, partially offset by dispositions.
NOI for the full portfolio was flat compared to the first quarter of 2019, despite disposition of six properties and an increase in real estate taxes during the second quarter of 2019. FFO for the second quarter of 2019 was $7.4 million, or $0.19 per unit, which was 8.5% below the first quarter of 2019. This decrease is related to additional G&A expenses incurred during Q2, primarily associated with share-based compensation. AFFO for the second quarter of 2019 was $6.2 million or $0.16 per unit compared to the first quarter of 2019 of $7.5 million or $0.19 per unit. The change due to the decrease in FFO are discussed above, as well as the timing of maintenance capital expenditures, which are incurred unevenly throughout the year. I'll now briefly review our results for the six-month period ended June 30th, 2019.
Revenue was $55.7 million, which was 13.7% higher than last year due to the impact of acquisitions and organic rent growth, partially offset by dispositions. Same-community revenue was $46.2 million, an increase of 4% from the period a year ago, reflecting higher rental rates and occupancy. NOI for the full portfolio was $30.3 million, representing a year-over-year increase of 17.4%, which was driven primarily by property acquisitions, partially offset by dispositions. Same-community NOI of $25.4 million exceeded last year's total by 7.2%, reflecting higher revenue and flat operating expenses. FFO was $15.4 million in the six-month period, or $0.39 per unit. AFFO was $13.7 million, or $0.34 per unit. The REIT paid cash distributions of $0.25 per unit for the six-month period, representing an AFFO payout ratio of 72.7%. Now to turn to our balance sheet.
At June 30th, 2019, our debt to gross book value ratio was 47.8%. As a reminder, our conservative long-term target is 50%-55%. Total liquidity at quarter end was $74.8 million, including cash and cash equivalents of $7.9 million, $31.9 million of borrowing capacity under our credit facility, and $35 million available under our revolving line of credit. We had total mortgage notes payable of $406 million, excluding the credit facility, with a weighted average contractual interest rate of 3.9% and a weighted average term to maturity of 10.1 years. As of June 30th, 2019, total loans and borrowings were $476 million. In June of 2019, we entered into an interest rate swap on a notional value of $80 million at a fixed rate of 1.84%. With the addition of this interest rate swap, as of June 30th, 2019, 96% of our debt is fixed.
I will now turn it back over to John for some closing comments. John?
All right. Thanks, Suzy. We think the outlook for our business is outstanding. The economic fundamentals of our target markets are strong, supporting higher rents. We expect to continue generating accretive growth through innovations and strategic acquisitions. With regards to our external growth strategy, market conditions are currently very supportive of our capital recycling program, enabling us to expand our investments in high growth markets on a tax-deferred basis. We will continue to take full advantage of that opportunity. I am pleased that investors are taking note of our achievements. Our units have performed well recently, and the valuation gap with our peers is shrinking. It has taken some time to get the Canadian investment community familiar with our company, but we are clearly gaining traction. We also launched a Canadian dollar listing in June, which is providing a substantial increase in trading liquidity.
Finally, I am proud to say that we have recently been named as one of the Best Places to Work in the state of Arkansas by Arkansas Business and the Best Companies Group. This is the third straight year in which we received this recognition. It highlights our strong corporate culture. Our employees are fully engaged and committed to BSR's long-term success. That concludes our remarks this morning. Suzy, Dan, Blake, and I would be now pleased to answer any questions you may have. Operator, if you wouldn't mind, please open the lines for questions.
Thank you. Ladies and gentlemen, as a reminder, should you have any questions, please press star followed by one. Your first question is from Matthew Logan from RBC. Matt, please go ahead.
Good morning.
Morning, Matt.
Hi, good morning.
Glad to see you guys are focused on making BSR better and not bigger. With that context, maybe you could give us a little bit of color on your disposition program. In terms of the dollars for the assets in the small markets you mentioned, that looks like about $180 million based on the IPO appraised values. Could you tell us the associated NOI or maybe a general range for market cap rates in those markets?
Dan, why don't you go with that?
Yeah, sure. The associated NOI is going to be about 12 to call it $12 million is a good round number of associated NOI. As far as cap rates are concerned in the specific markets, there is a little bit of disparity between the markets that John mentioned that we're exiting. I think that what we're seeing is some historic cap rate compression, particularly for Class B, Class C suburban properties located in our markets. To give a good comparison, Houston would be a good comparison. If I'm looking at 2016 average suburban Class B cap rates, we're sitting at about a 6.25 to 6.30 number. For the first half of 2019, that average cap rate's 4.96%. What we're seeing is these cap rates compress for our particular type of product relative to Class A suburban cap rates in some of these same markets.
It's a good time to rotate and recycle.
Agreed, maybe looking out for timing. Are you in active negotiations for any part of that portfolio, or how should we think about the cadence of asset sales?
I think overall, we can't really discuss timing of those sales, Matt, but we have a very fulsome pipeline of dispositions and acquisitions that we are looking to execute upon, and we certainly will be giving that information out over the days, weeks, and short months ahead.
Appreciate the color. Maybe just changing gears a little bit, could you talk a little bit about the severance costs associated with the dispositions in the quarter, and if that's something that we should expect to see going forward with more dispositions in the pipeline?
Yeah. Suzy, why don't you talk to that?
Sure. Yeah. Right, the severance is related to payments that we make to our employees who work at properties that we're selling, to stay through the end of the sale. Once the property is sold, obviously we make the payment, and then it's non-recurring. You will see future severance payments related to other properties that we may be selling in the next few months.
Maybe just looking forward in terms of the existing portfolio or the same property portfolio, how should we be thinking about organic growth? It seems like growth for the sector is picking up a little bit, and wage growth is starting to accelerate. Maybe just talk about what you're seeing in your markets.
Blake?
Yeah. Hey, Matt. I think going forward, if you look at our overall numbers right now, which I think is a good thing to talk about, giving some color to what I'm thinking forward. We've been showing anywhere from 3%-4% income growth, which I can see that continuing. Our NOI growth is at 7.2% year-to-date. We've been giving guidance of 3%-5%. Guidance may not be the right word, 3%-5% that I'm looking at in terms of NOI growth going forward. I don't see anything that's going to, at this point right now, change my feeling on that. I think 3%-5% NOI growth. I can give color on each region, just depending on what you want me to give you.
No, just aggregate for the portfolio is great, Blake. Appreciate the color, everyone. That's all from me. I'll turn it back.
Thank you, Matt.
Thank you. Your next question is from Brendon Abrams from Canaccord Genuity. Brendon, please go ahead.
Just sticking on the capital recycling and the disposition program, I guess Matt referred to the timing, and perhaps you could just speak to perhaps or elaborate on the cap rate spreads that you're seeing between the primary and secondary markets you referenced that are historically low. Perhaps you could just provide a little more context or color on this.
Yeah, sure, Brendon, this is Dan. If we're looking at the Texas primary market, so our acquisition markets of Dallas, Austin, and Houston, we're seeing cap rates trade anywhere between 4.14 to five and a quarter on assets across the gamut, so A to C. We're seeing compression between Cs and Bs and As, driven by a drop in the C cap rates in our acquisition markets. The As and Bs have stayed the same cap, more or less, for the last 12 to 18 months, and the Cs are compressing. When we go into some of the markets we're rotating out of, I think you can assume safely within 100 basis points that average cap rates are anywhere between five and six and a quarter, five and six, somewhere around there.
Okay. That's helpful. Just given the magnitude of the potential disposition, looks to be about 2,200 suites or almost a quarter of your portfolio. Just how are you thinking about perhaps the balance between any potential near-term cash flow per unit dilution and obviously the longer-term benefits of being in some of these higher growth markets?
Brendon, this is John. We know the timing of these particular opportunities for us is not always a stairstep opportunity, but we have in our pipeline a pretty, like I was saying before, a fulsome pipeline of, I'll say, of acquisitions that will more or less coincide with dispositions, and it shouldn't be too much of a staggered lag on either side of that equation, when you're looking at the dollar number of sales against the dollar number of buys. I will just emphasize again that we're looking at risk-adjusted returns when we're leaving, as Dan just mentioned, a little bit higher cap market going into a lower cap market.
Overall, given that we are buying less units with that capital, it will not have that same effect from a negative aspect of an NOI because we will not be spending the same amount of CapEx, dollar-wise, as we would be rotating and modernizing our portfolio.
Okay, that's helpful. Just last question from me before I turn it over. Just on the, I guess, financing environment, obviously the decline in bond yields over, I guess, many months now. What kind of rates are you seeing, and how does this play out in terms of your overall strategy?
Sure. The first thing we'd speak to, Brendon, is the type of rates that we are seeing for our assets. Susan mentioned that we executed an $80 million swap in the second quarter. I want to say the trade-off, the five-year swap on that was 184, replacing LIBOR of 242 or 250 at the time. What we're seeing is spreads are, for fixing debt in three-, five- and seven-year laddered ranges, are compressed. Ten-year's low, but we're not seeing a lot of our competitors in the private sector finance off the 10-year. The reason for that has to do with specifics related to the conservator and kind of cutting off loan limits for Fannie Mae and Freddie Mac. The impact of that is widening spreads, which have widened, call it 25 to 50 basis points on a year-over-year basis for fixing up the 10-year.
In other words, our competitors in the private space haven't been able to really enjoy any of the drop or much of the drop in the 10-year that has occurred in the last six months. Our financing tactics, as we discussed in the last quarters, are a little bit different, in that we'll borrow off 30-day money and then swap it out. That's kind of enabled us to have a little bit of a competitive advantage on the buy side.
Okay. That's very helpful. That's it for me. I'll turn it over. Thanks.
Thank you. Your next question is from Brad Sturges from IA Securities. Please go ahead, Brad.
Hi there.
Just in terms of the fulsome pipeline you're speaking to on the acquisition side, would that include portfolio opportunities, or is it still more of the one-off transactions that you're seeing more opportunities with right now?
Dan?
Brad, when you say portfolio, are you talking about a company or a grouping of two or three properties?
Either or.
Okay. What we've found is this management team has excelled at buying real estate in the past. We see a deep market for individual, and I'll say onesies and twosies, in our acquisition target markets, and we feel like we're pretty good at valuing and negotiating individual and multi-property asset sales. As it relates to a portfolio or an enterprise, so long as we're successful hitting our singles and doubles, we really don't want to swing for the fences, I'll say, in the next six months.
Okay. As it relates to the capital recycling program and with the deep pipeline, I guess, of ones and twos, is there a thought process in terms of which markets you would theoretically exit first? Or is it really asset specific, depending on whether the assets are stabilized or not from an NOI perspective? How should we think about, I guess, the process from that perspective?
From the standpoint, Brad, this is John. We have these properties in a pipeline. I can tell you that we will be back with the market in a matter of days, weeks, and months in the near term. You can look at most of these markets being announced in regard to some type of outcome here in the not-too-distant future. We don't have a specific timeline of which one's going to close first. We have been working with a number of different, we'll just say, buyers in this market, and they're going to be working on a timely basis against the acquisitions that we have already been looking to employ as we would pair these up.
I guess from the renovation program or the RevGen program, has both these assets been fully gone through that process and are closer to stabilization or not?
Well, I'll just say this from a standpoint of all the monies. We spent over $64 million going back into our properties beginning in 2015, but accelerating in 2017. We continued in 2018. There are a number of the properties that are older that have had at least 60% of renovation done to them. We're at 95% occupied. It's very hard to get access to the inventory to continue working the RevGen program in those particular properties. These are the older assets in the smaller markets.
Even though they're good markets and they've been great for us, it's a good time to allow someone else to finish the program and for us to recycle the capital for all the reasons that Dan spoke to before, because we are at historical low periods of time between the capitalization rates between our secondary markets to the primary markets. We're going to do what's best for our shareholder and our unitholder today and look for that opportunity to be very agile and flexible in terms of looking into our portfolio and looking for those properties that are non-core to move out of and to rotate and recycle that capital.
Okay, great. I'll turn it back. Thank you.
Thank you.
Thank you. Your next question is from Kyle Stanley from Desjardins. Please go ahead, Kyle.
Morning, everyone.
Hey, Kyle.
Good morning, Kyle.
I'm just wondering, could you elaborate a bit on the sequential increase in G&A? I know you mentioned it was related to unit-based comp, but I'm just wondering maybe how much was attributed to the unit-based comp, and then how you see overall G&A trending into the back half of the year.
Sure. I'll take this one. It's Suzie. Overall, our unit-based comp was around $400,000 for the quarter, $300,000 of that was an increase over the prior quarter. Some of it was a catch-up related to the first quarter after our Board issued additional stock-based comp in May of this year. Going forward, I would say it would probably be around maybe $320,000 a quarter.
Okay, great. That's helpful. Then I guess, I know, John, you just kind of mentioned how much you've spent so far on your RevGen program, I'm just wondering, could you highlight how much was spent this quarter?
Dan, do you happen to have that number for Kyle?
I do. Let me pull up that data point, Kyle.
Kyle, I can say in regard to our RevGen program, as I said before, at 95% in our initial portfolio, it is harder to get a lot of those units that had not been touched as they're turned to get them back, to get them turned into the RevGen program. Where Blake has found the biggest opportunity, and Blake, you might want to speak a little bit more to this, has been in the newer assets that we've purchased. Why don't you talk just a little bit about that, Blake, if you don't mind?
Yeah, that's correct. We've strategically made the decision of.
Reallocating some of the RevGen that we've been using on some of the older properties and using them on our new acquisitions. Just to give two examples, the Riverhill property in Grand Prairie, Texas, got about 40 units, and since we took over that property, we're averaging about $166 a unit uptick, which is tremendous return, and we're seeing that by crafting and working with each turn and seeing what the market is paying for, far more returns than we would on existing inventory. Wimberly, that we bought in Dallas, we've done about 30 units, and we're getting $122 on that. We're using our expertise from the RevGen standpoint.
It's really paying off on our newer assets, which was the game plan all along, and we're right on track, and it's working exactly the way we thought it would and feel like it'll continue to.
Okay, great. That's really helpful, and it kind of leads into my next question. There was some mention in the outlook section, I think, that you're potentially targeting newer assets as part of your external growth strategy. This compares, I guess, to previously targeting slightly older assets that required some work. Is that kind of the reason that you're seeing more opportunity in some of the newer assets?
Yeah, Kyle, what we're seeing right now is cap rate compression in some of the older assets that we're looking to rotate out of. We're not seeing that same compression on some of the newer assets that we've acquired in the last six months, and the 90s and mid-2000s, the assets in some of those suburban locations. We're not seeing the bulk of capital in our markets rolling into those properties right now. I think when we're renovating 90s vintage assets like Riverhill and Wimberly that Blake was referring to, we kind of see an opportunity for a double. Rotating out of an asset where the exit cap rate is compressed relative to prior periods and into a Wimberly or a Riverhill, the two Dallas acquisitions, where we're getting a much higher return and a higher rent bump for the result of our acquisition re-deb CapEx.
No question. We're kind of letting the main strategy, and we've talked to you all in the past about this is on our existing portfolio. We kind of let the market tell us what we can and cannot get. It speaks. We're on LRO, and that I've talked about in the past, but I can't stress it enough, that is really a tool that we use in gauging our rents. Dan has done a wonderful job with his group of finding just the right seam as far as these new acquisitions that we can see. We have a good feeling when we're buying them, that we can get rent bumps. We know how to renovate.
These first two that I'm talking about, these have been even better than we thought. I'm real optimistic as we head into these growth markets even more, that we're gonna see returns that far exceed the existing markets that we're exiting.
Kyle, this is John. I'd just like to add that when we all talk about NAV and we talk about the value of BSR, that I want the market to remember and know that we are an internalized REIT. We went public with internalizing a very capable, strong, professional management platform. You've heard about our debt, locking in debt that was about, at the beginning, close to 60 basis points below the market. If we didn't have an internalized platform that had this type of capability and expertise, no way. You hear Blake talking about the renovations that we're doing on these new assets that we were able to underwrite and exploit and find and source with Dan overseeing our investments area and asset management group.
You don't just go around with a one-shop pony and find assets like these guys do and then be able to understand what we can exploit by going into these properties and doing what we're gonna do. You start thinking about what we have in our accounting team. Everyone in that whole division is phenomenal, incredible. We don't have to add as we scale up, or at least so incrementally it's nothing worth talking about. You've got our investments area that Dan is working with, HR, IT, our marketing group. We have an outstanding trainer who heads all of the training for BSR. We have such an incredible platform to build and scale off of that I just don't want the market to lose sight of what we own when we talk about what is the NAV of this company.
It's not just rotating and doing just what we know is the right thing and the right timing today, but it's about building value for tomorrow.
Okay, great. Thanks for all the color there. It was really helpful. I'll turn it back.
Thank you. Your next question is from Johann Rodriguez from Raymond James. Please go ahead.
Morning, everyone. I was hoping you guys could tell us what the difference is between, I guess, expected same property NOI growth between the primary markets that you guys are either in or looking to get into, and then some of those secondary, tertiary markets that you're looking to get out of?
Rent growth. Would you be talking about rent growth?
Rent or same property NOI.
Okay. From the standpoint, I think we need to start with rent growth. I think in the areas that we're going to, there's gonna be more opportunity for rent growth, obviously, than some of the smaller markets that we're in right now. When you look at our year-over-year rent growth, we've been at about 3%. If you look at Houston and Dallas, they're both a little north of 3%. Some of our smaller, and by the way, Oklahoma City is gonna be another target. We're about 3.5%. Those show sequential growth from Q1 to Q2 also. The smaller markets that we are exiting don't show that much rent growth as we've talked about. Longview has been good over the last year. That's been, I think, an unusual bonus for us. We don't see that continuing to the extent that probably has been over the last year.
We do see some growth in Longview. The basic premise of what we're seeing is that the bigger metropolitan areas are showing more growth than our smaller areas. It's gonna show more growth in the future, which kind of ties into the RevGen conversation we just had, and that's why we're making that move. From an NOI basis, I think we'll see the same thing. We're gonna see more growth from an NOI basis moving into markets as opposed to areas that we're moving out of. There's so many factors that are involved in it, but growth patterns, people moving to the markets that we're in, more income, more jobs.
Most of you guys know, and have been around to some of these markets that we're in, there is limited growth in those markets in terms of migration, things that we really look at. The strategy we're using, the strategy that we've used in the past, they all tie together. That's why we're doing what we're doing.
Right. No, I get it. Would you say that maybe the primary markets are growing at NOI at maybe 3.5%, 4%, and those secondary markets are closer to 2%, 2.5%, or?
That would be right. Some of them Now, that's gonna depend a lot, and it can go quarter to quarter, but it's gonna depend a lot on the rental growth. What we've seen in the past is the rental growth in some of those smaller markets that we're talking about can spike up, and then it can spike down. There's more of a lot of ways, there's been more of a volatility because you don't have as many prime large employers. If one of the bigger employers in the area lays off, you don't have the ability to replace those jobs. What we've seen in the past is there has been more volatility.
Okay. Yeah, that's helpful. The 1031 tax rule that lets you defer the capital gains, is there a time limit that you guys have to kind of get the capital back out into assets?
Johann, I'd just start this and defer any specifics to the attorneys. I played an attorney in the TV about 10 years ago, but I'm not an attorney. With that being said, we generally like to rotate within a six-month period of selling or acquiring an asset on a forward or reverse 1031.
Okay.
Yeah, staying within the rules.
Thanks. I'll turn it back.
Thank you.
Thank you. Your next question is from Dean Wilkinson of CIBC. Dean, please go ahead.
Thanks. Morning, everybody.
Hey, good morning.
Hey. Hello, Dean.
Most, if not all of my questions have been answered. John, I'm glad you brought up that issue on the net asset value and how that's looked at. Just taking some of the conversation around where you've seen cap rates, where you've seen cap rates converge in the secondary markets, and looking at sort of your book value and the 6 cap that's applied to that, can we read into that's perhaps quite a conservative estimate, and post the divestiture of these, what is it, 8 or so assets, that perhaps that's something that is more down into the fives?
Dean, I'll go into the latter part and say post-divestiture, because as Dan has already talked about the favorable pricing.
The market, in general, is looking for yield, and those Bs and Cs in the smaller markets where we've been, and they've been good markets. Overall, there is a tremendous amount of capital that would like to have the higher yield and has compressed the cap rates or increased the prices relative to the large markets, which is why we are in the midst of executing this opportunity of recycling the capital. Certainly, as we would continue buying, and you'll see some of these results as we continue going through our acquisition schedule. Absolutely, as Dan outlined earlier, the cap rates in the markets, in our target markets, are anywhere between 4.14%-5.25%.
Yeah.
When you start thinking about what we're buying, whereas what we're leaving, it certainly better be in the fives and trending downward.
Yeah, no, I think so.
As we're modernizing our portfolio, and that's definitely one of the things that we're doing. I would hope to think that using the risk-adjusted returns that we know that we're undertaking today, that the market would realize that and give us credit for it.
No, I think in time that that's something that we are seeing large transactions that are happening in the fours, not too far away from some of your core markets. When you look at Oklahoma, that's an interesting state. Maybe a little lower than average on rents, but the margins seem really, really strong there. You've identified Tulsa as maybe one that you don't want to be in, but could we think a growing presence in Oklahoma City, or should we be thinking a little more Texas and Arkansas in the near term?
Dean, first, one quick shout-out to our team members. The margin improvement and/or the margins that you're seeing in Oklahoma are the result of the effective asset management by our Operations team. I want to say our Vice President of Operations based out of Oklahoma City, Davi Miesner, and her teams have done an excellent job running those properties under Blake's guidance. To answer the second part of your question, yeah. I think right now we're seeing active growth opportunities in Dallas, Austin, Houston. I see a lot of properties trading hands in Oklahoma City supported by rent growth in that market. I continue to see Oklahoma City and Northwest Arkansas as long-term growth opportunities for the REIT. We're going to be selective in those two markets and make sure that we buy the right deals at the right time.
Okay. No, that's clear. I got it. That's it.
Hey, Dean?
Yes.
Just to color to Dan's comment. Year-over-year, our rent growth in Oklahoma City has been 3.6%.
Got you.
We've been very pleased with that, and I think that ties into what Dan had talked about.
Absolutely. It's got you singing Oklahoma. That's it for me, guys, thanks. I'll hand it back.
Thank you, Dean.
Thank you. Your next question is from Matt Kornack of National Bank. Please go ahead, Matt.
Hi, guys.
Hi, Matt.
Hi, Matt.
Suzie, just wanted to quickly follow up on Kyle's earlier question with regards to G&A. Do you have a sense as to where that should be or where you'd like it to be as a percentage of revenue? Also, I think there was a mention of the scalability of the platform. Would you anticipate that there's limited incremental G&A that you'd have to add as you add in additional assets?
That's right. Yeah. I'm thinking that our G&A will trend around $7 million, probably over the next 12 months. That's roughly what, 7% of revenue. As far as being able to, yes, buy more properties and keep G&A intact, that's something we're very excited about. Obviously, the more scale we have, the better it looks. Yeah, does that answer your question?
That's perfect. That's very clear.
Yeah.
With regards to acquisitions, are you going to be a net acquirer of assets at this point for the subsequent quarters? I know you sold some properties, you intend to sell more, but obviously, you're trying to tie that with new acquisitions. Should we expect the portfolio to grow from this point onwards?
Matt, this is John, and the answer to that is yes. When we went public on May 18th of last year, we basically had about $140 million of dry powder to grow the company. We immediately came out of the gate, we bought four assets, and then we started to recycle the assets. At the end of the day, we will be a net acquirer after we have recycled and completed the program, and we'll continue with our program for as long as we continue to have the opportunity of what's been going on in our markets. That's certainly at the betterment of our unit holders. Yes, we'll be a net acquirer, and I'd have to think it'd be north of $100 million.
Okay. That's what we were modeling, so that's good to know. Final question from me with regards to CapEx. It sounds like you're having trouble getting at some of the Sorry, the opportunities to upgrade suites, but there was an incremental sequential increase in CapEx. Is that just building improvements or what would drive that? I assume there's maybe some seasonality in those figures as well.
Yeah. That's correct. If you'll notice, the incremental roughly, what, $800,000. A lot of that was timing also. We're back now on track of what we expect to spend in the quarters, and if you look at the quarters in the past, that's probably where we're going to be falling. I do want to amplify something when it comes to CapEx that I think all of you all are probably modeling or thinking about. One of the big strategies that comes with this is sell these older assets, and what we deem decrease our CapEx going forward with our newer assets that we're doing. That's another big play in this that I think you'll see in the future, the decrease in CapEx.
That's both maintenance and sort of aggregate property improvement CapEx?
Yes, we're still gonna have that arrow in our quiver for RevGen CapEx, property improvement CapEx, because I think that's what we're good at. Every property that we buy, we pretty much scour it to figure out if there's something we can do to it to pick up income. At this point, we haven't bought one yet that we haven't been able to figure it out. There's always gonna be that component in.
Fair enough. I said that was my last question, but I actually have one quick one. On the cap rate side and the Class A assets, I think a component of the valuation discrepancy there is supply in some of that Class A product. Do you see that as a transitory issue, or do you think supply remains pretty hefty in the markets you're in for the foreseeable future?
I wouldn't say hefty. I would say that in the first half of 2019, we saw deliveries across the board in some of these markets in Texas drop down a bit.
Okay.
We expect those orders to be filled in the second half of the year. There are two or three items that are gonna slow down the pace of new construction and deliveries. Number one, identifying or wading through the metrics, the political concerns in individual cities permitting the construction of new apartments. Number two, jobs and wage availability. Number three, the cost of materials and supplies. I think in this environment, you should see a significant amount of deliveries in these three markets of Dallas, Houston and Austin. We're not seeing deliveries outpace absorptions in those markets anytime soon. The reason behind that is you just can't pencil in a deal for new construction for the three reasons that I provided.
Okay, that gives you some confidence in terms of targeting maybe a newer, closer to Class A-type assets.
No question.
Great. Thanks, Blake.
Thank you. Your next question is from Troy MacLean of BMO Capital Markets. Please go ahead, Troy.
Good morning. Just wanted to circle back on Longview, Texas. With the strength in that market, I know that wasn't listed as one of the markets that you would look to exit, but once you get past the current dispositions, is that a market you'd look to maybe surface some value, or is it more of a long-term hold for you guys?
Well, we're gonna remain nimble, Troy. We're gonna go through exactly what we've said that we're gonna do here. As we've said time and time again, actually, that as long as we have this opportunity to have the cap rate spreads be between the secondary markets to the primary markets, we'll look for opportunity. We're not necessarily saying that we're gonna exit Little Rock or Longview. If that were the case down the road, it's nothing that we're planning today.
Just for Fayetteville, that was really the only market where it looked like same property rents came down year-over-year. I was kind of wondering what drove that, and do you expect that to kind of reverse over the next 6-12 months?
Troy, we think that's more of a seasonal issue in the Northwest Arkansas market, and I wouldn't expect it to reverse in the next 6 to 12 months. It's probably just gonna taper off and continue to grow. It's an acute supply issue particular to Fayetteville and to the Bentonville submarkets. Northwest Arkansas is having the same problem that Dallas, Austin, and Houston is. Developers just are having a tough time penciling out future deals. We see occupancy and rates pop back up in that market in the near.
Just, you kind of addressed this with some earlier comments, but with occupancy at 95% at the end of Q2, would it be fair to say that the next 12 months, it's a time to be more aggressive on rents than in the last 12 months?
The past on these calls. That's exactly what we're anticipating, and if you look at our year-over-year growth and our sequential growth and every way you slice and dice this deal, our rents have been going up on every metric you look at. That is true. That's also where LRO plays into this and provides our site teams and all of us great guidance. We have two calls a week with them going over every property. Our rents can literally change. They change daily based on the supply and demand and the sub-markets that we're looking at. Yes, I think there's no question because when you really dissect our occupancy rates, I'm sure you guys have in the MD&A, we're sitting at 96.7% in Texas, 95% in Houston. Oklahoma's at 96%.
Arkansas is at 90%, and Little Rock's at 92%, which by the way, is above the average there. I think our strategy in using LRO and how we're on top of this daily, I do expect some uptick in the rents to continue as we've been doing.
Perfect. That's really good color, Blake. I appreciate that. I'll turn it back now.
Thank you. There are no further questions. You may proceed.
Okay. Thank you very much. That concludes our call this morning, and thank you for your interest in BSR REIT. We look forward to speaking to you again following the Q3 reporting. Enjoy the rest of your summer, and God bless. Thank you, everybody.
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