Earnings Call: Q2 2019

Aug 7, 2019

Earnings release

Name is Joanna, and 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 speakers' remarks, there will be a question and answer session. Thank you. Mr. Bailey, you may begin your conference. Thank you, Joanna, and good morning, everyone. Welcome to BSR's conference call to discuss our financial results for Q2 the 6 months ended June 30, 2019. I am John Bailey, BSR's Chief Executive Officer. I am joined by Susie Kane, our Chief Financial Officer and also with us today are Blake Brazil, our President and Chief Operating Officer and Dan Oberstee, 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. 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 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 and 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 and A for further information regarding any non IFRS financial measures, including for reconciliations to the nearest IFRS measures. Also, please note that all dollar amounts are denominated in U. S. Currency. 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 Q2 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 3 months 6 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 Q2 as we delivered strong financial results. We generated solid growth from organic rent increases and acquisitions, and we continued to deliver on our rotation strategy as we made 6 strategic property dispositions that allow us to recycle capital in our target markets and 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 2nd quarter was $8.58 per apartment unit or $8.37 on a same community basis compared to $8.15 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 and NOI was up 3.5%. Those same community numbers that are proved 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 1st few quarters as a public REIT, we did as we said we would do. We acquired 4 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 Q2, we announced the development of Phase 2 at Wimbledon Green Apartments and the sale of 6 non core properties for $53,800,000 The combined selling price of the properties was 5.7% above the appraised values at the time of the IPO. Currently, the spread and capitalization rates between primary and secondary markets in the U. S. Sunbelt is at historical low levels. So it makes sense for us to take the full advantage of this opportunity to recycle capital from our non 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, Blytheville, 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. So it is in our unitholders' 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 unitholders in the months ahead. I'll now invite Susie to review our 2nd quarter and 6 month results in more detail. Susie? Thanks, John. Same community revenue was $23,300,000 up 3.3 percent from Q2 last year and up 1.3% over the Q1 of 2019 due to increased rental rates and occupancy. Same community NOI was $12,700,000 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 Q2. Same community NOI was flat to the Q1 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 6 months ended June 30, 2019, when compared to the prior year. NOI for the full portfolio was $15,200,000 for the Q2 of 2019, increasing 12% over the Q2 of 2018. This increase is primarily related to acquisitions partially offset by dispositions. NOI for the full portfolio was flat compared to the Q1 of 2019 despite disposition of 6 properties and an increase in real estate taxes during the Q2 of 2019. FFO for the Q2 of 2019 was $7,400,000 or $0.19 per unit, which was 8.5% below the Q1 of 2019. This decrease is related to additional G and A expenses incurred during Q2, primarily associated with share based compensation. AFFO for the Q2 of 2019 was $6,200,000 or $0.16 per unit compared to the Q1 of 2019 of $7,500,000 or $0.19 per unit. The change is due to the decrease in FFO, as 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 6 month period ended June 30, 2019. Revenue was $55,700,000 which was 13.7 percent higher than last year due to the impact of acquisitions and organic rent growth, partially offset by dispositions. Same community revenue was $46,200,000 an increase of 4% from the period a year ago, reflecting higher rental rates and occupancy. NOI for the full portfolio was 30,300,000 dollars representing a year over year increase of 17.4%, which was driven primarily by property acquisitions, partially offset by dispositions. Same community NOI of $25,400,000 exceeded last year's total by 7.2%, reflecting higher revenue and flat operating expenses. FFO was $15,400,000 in the 6 month period or $0.39 per unit. AFFO was $13,700,000 or $0.34 per unit. The REIT paid cash distributions of $0.25 per unit for the 6 month period, representing an AFFO payout ratio of 72.7%. Now to turn to our balance sheet. At June 30, 2019, our debt to gross book value ratio was 47.8%. As a reminder, our conservative long term target is 50% to 55%. Total liquidity at quarter end was $74,800,000 including cash and cash equivalents of 7,900,000 dollars 31,900,000 of borrowing capacity under our credit facility and $35,000,000 available under our revolving line of credit. We had total mortgage notes payable of $406,000,000 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 30, 2019, total loans and borrowings were $476,000,000 Also in June of 2019, we entered into an interest rate swap on a notional value of $80,000,000 at a fixed rate of 1.84%. With the addition of this interest rate swap, as of June 30, 2019, 96% of our debt is fixed. I will now turn it back over to John for some closing comments. John? All right. Thanks, Susie. 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. And 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 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 3rd 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. Susie, Dan, Blake and I would be now pleased to answer any questions you may have. So operator, if you wouldn't mind, please open the lines for questions. Thank you. Your first question is from Matt Logan from RBC. Matt, please go ahead. Good morning. Good morning. Good morning. Good morning. Good morning. Glad to see you guys are focused on making BSR better and not bigger. And 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 $180,000,000 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? Yes, sure. So the associated NOI is going to be about $12,000,000 to call it $12,000,000 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. So 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. So whatever to give a good comparison, Houston would give me a good comparison. So if I'm looking at 2016 average suburban Class B cap rates, you're sitting at about a 6.25% to 6.30% number. For the first half of twenty nineteen, that average cap rate is 4.96%. So 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. So it's a good time to rotate and recycle. Agreed. And 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. And maybe just changing gears a little bit. Can 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? Yes. Susie, why don't you talk to this? Sure. Yes. So 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. So once the property is sold, obviously, we make the payment and then it's nonrecurring. You will see future severance payments related to other properties that we may be selling in the next few months. Okay. And 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? Yes. 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% to 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% to 5%. Guidance may not be the right word, but 3% to 5% that I'm looking at in terms of NOI growth going forward. And I don't see anything that's going to at this point right now change my feeling on that. I think 3% to 5% NOI growth. And 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 for me. I'll turn it back. Thank you, Matt. Thank you. Your next question is from Brandon Abrams from Canaccord Genuity. Brandon, 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 you're seeing between the primary and secondary markets you referenced. They're historically low. Perhaps you could just provide a little more context or color on this? Yes. Sure, Brandon. This is Dan. If we're looking at Southern or the Texas primary markets, so our acquisition markets of Dallas, Austin and Houston, we're seeing cap rates trade anywhere between 4.14 to 5.25 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, right? So the As and Bs have stayed the same cap more or less for the last 12 to 18 months and the Cs are compressing. Now 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 5% and 6.25%, 5% and 6%, somewhere in there. Okay. That's helpful. And just given the magnitude of the potential disposition, it 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? Brandon, this is John. We know the timing of these particular opportunities for us is not always a stair step 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. But 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. But 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 don't we will not be spending the same amount of CapEx dollar wise as we will be rotating and modernizing our portfolio. Okay. That's helpful. And 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. So the first thing we'd speak to, Brandon, is the type of rates that we are seeing for our assets. So as Susie mentioned that we executed an $80,000,000 swap in the Q2. I want to say the trade off, the 5 year swap on that was 184, replacing LIBOR of 2.42 or 2.50 at the time. So what we're seeing is spreads are for fixing debt in 3, 5 7 year laddered ranges are compressed. 10 years 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 and Freddie. 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. So 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 6 months. Our financing tactics, as we discussed in the last quarters, are a little bit different. And then we'll borrow off 30 day money and then swap it out. And 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. Hey Brad. Hi Brad. Just in terms of the Folsom 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? So Brad, when you say portfolio, are you talking about a company or a grouping of 2 or 3 properties? Either or. Okay. So what we found is this management team has excelled at buying real estate in the past. We see a deep market for individual and I'd 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 expenses, I'll say in the next 6 months. Okay. So as it relates to the capital recycling program and with the deep pipeline, I guess, of 1s and 2s, is there a thought process in terms of which markets you would theoretically exit first? Is it 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 a standpoint, Brad, this is John. We have these properties in a pipeline, and I can tell you that we will be back with the market in a matter of days, weeks and months in the near term. And 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 time line of which one is 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 rev gen program, as most of these assets have been fully gone through that process and are closer to stabilization than not? Well, I'll just say this from a standpoint of all the monies we spent over $64,000,000 going back into our properties over the last beginning in 2015, but accelerating in 2017. We continued in 2018. And there are a number of the properties that are older that have had at least 60% renovation done to them. We're at 95% occupied. It's very hard to get to the to access to the inventory to continue working the rev gen program in those particular properties. And 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, and 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 we are going to 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. Good morning, everyone. Hey, good morning. Hi, Kyle. So I was just wondering, could you elaborate a bit on the sequential increase in G and 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 and A trending into the back half of the year? Sure. This is I'll take this one. It's Susie. So overall, our unit base comp was around $400,000 for the quarter, dollars 300,000 of that was an increase over the prior quarter. Some of it was a catch up related to the Q1 after our Board issued additional stock based comp in May of this year. So going forward, I would say it would probably be around maybe $320,000 a quarter. Okay, great. That's helpful. And then I guess, I know, John, you just kind of mentioned how much you've spent so far on your rev gem program. But I'm just wondering, could you highlight how much was spent this quarter? Dan, do you happen to have that number, Kyle? I do. Let me pull up that data point, Kyle. Kyle, I can say in regard to our rev gen program, we 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 rev gen program. But 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 purchased. So why don't you talk just a little bit about that, Blake, if you don't mind? Yes, that's correct. We've strategically made the decision of reallocating some of the rev gen that we've been using on some of the older properties and using them on our new acquisitions. And just to give two examples, the River Hill property in Grand Prairie, Texas, we've done about 40 units 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. Also, Wimberley that we bought in Dallas, we've done about 30 units and we're getting $122 on that. So we're using our expertise from the rev gen 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 will 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. And this compares, I guess, to previously targeting slightly older assets that required some work. So is that kind of the reason that you're seeing more opportunity in some of the newer assets? Yes, 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 6 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. So I think when we're renovating 90s vintage assets like River Hill and Wimberley 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 Wimberley or River Hill, the 2 Dallas acquisitions where we're getting much higher return and a higher rev bump for the result of our acquisition redev CapEx? No question. We're kind of letting the main strategy and we've talked to you all in the past about this. 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. And we know how to renovate. Now, the first two that I'm talking about, these have been even better than we thought. So I'm real optimistic as we head into these growth markets even more that we're going to see returns that far exceed the existing markets that we're exiting. Kyle, this is John. And 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 and 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 bps 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 shot 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 going to do. And then 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 not even worth talking about. Then 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 this 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's really helpful. I'll turn it back. Thank you. Your next question is from Johan Rodrigues from Raymond James. Please go ahead. Good 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 the secondary tertiary markets that you're looking to get out of? Are you talking about would you be talking about rent growth? Rent or same property NOI? Okay. From the standpoint, I think we need to start with our rent growth. I think in the areas that we're going to, I think we have there's going to 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%. And 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 going to be another target. We're about 3.5%. Those show sequential growth from Q1 to Q2 also. The smaller markets that we're exiting don't show that much rent growth as we've talked about. Long term 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, but we do see some growth in Longview. But the basic premise of what we're seeing is that the bigger crop and the bigger metropolitan areas are showing more growth in our smaller areas. And it's going to show more growth in the future, which is kind of ties into the rev gen 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 going to see more growth from an NOI basis moving into markets as opposed to areas that we're moving out of. And it's just a pure 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 in terms of migration, things that we really look at. So the strategy we're using, strategy that we've used in the past, they all tie together and that's why we're doing what we're doing. Right. No, I get it. So would you say that maybe the primary markets are growing at NOI 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 going to depend a lot and it can go quarter to quarter, but it's going to depend a lot on the rental growth. And what we've seen in the past is the rental growth in some of those smaller markets that we're talking about and back up and then it can spike down. So there's more of a lot of ways there's more of a bit of more volatility because you don't have as many prime large employers. So if one of the bigger employers in the area plays off, you don't have the ability to replace those jobs. So what we've seen in the past is there has been more volatility. Okay. Yes, 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 like assets? Well, Johan, I'll just start this and defer any specifics to the attorneys. I'm not an I played an attorney in the TV about 10 years ago, but I'm not an attorney. So with that being said, we generally like to rotate within a 6 month period of selling or acquiring an asset on a forward or reverse 1031. Okay. Yes, it stands 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. Good morning, everybody. Hey, good morning. Hello, Dean. Most, if not all of my questions have been answered. But John, I'm glad you brought up that issue on the net asset value and how that's looked at. And 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 when the 6% cap that's applied to that, can we read into that that's perhaps a 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 5s? 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. But 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. And certainly, as we would continue buying and you'll see some of these results as we continue going through our acquisition schedule, but absolutely, as Dan outlined earlier, the cap rates in the markets, in our target markets, are anywhere between 4.14% to 5.25%. And when you start thinking about what we're buying, whereas what we're leaving, it's certainly better be in the 5s than trending downward. Yes. We're modernizing our portfolio and that's definitely one of the things that we're doing. So 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 4s, not too far away from some of your core markets. When you look at Oklahoma, I mean 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? Well, Dane, 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, Davie Meissner, and her teams have done an excellent job running those properties under Blake's guidance. Now to answer the second part of your question, yes, I think right now we're seeing active growth opportunities in Dallas, Austin, Houston. But I see a lot of properties trading hands in Oklahoma City supported by rent growth in that market. So I think 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. Dean, just to color to Dan's comment, year over year, our rent growth in Oklahoma City has been 3.6%. So we've been very pleased with that, and I think that ties into Dan talked about. Absolutely. Scott, you're seeing in 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. Susie, just wanted to quickly follow-up on Kyle's earlier question with regards to G and 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? And also, I think there is a mention of the scalability of the platform. So would you anticipate that there's limited incremental G and A that you'd have to add as you add in additional assets? That's right. Yes, I mean, I'm thinking that our G and A will trend around $7,000,000 probably over the next 12 months. So that's roughly, what, 7% of revenue. As far as being able to, yes, buy more properties and keep G and A intact, that's something we're very excited about. Obviously, the more scale we have, the better it looks. So yes, does that answer your question? That's perfect. That's very clear. And then 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 Matt, this Matt, this is John. And the answer to that is yes. We when we came when we went public on May 18 last year, we basically had about $140,000,000 of dry powder to grow the company. And we immediately came out of the gate, we bought 4 assets and then we started to recycle the assets. And 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 unitholders. So yes, we'll be a net acquirer and I'd have to think it would be north of $100,000,000 Okay. That's what we were modeling, so that's good to know. And then final question for me with regards to CapEx. It sounds like you're having trouble getting at some of the acquisition 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? And I assume there's maybe some seasonality in those figures as well. Yes. That's correct. We if you'll notice the incremental roughly, what, dollars 800,000 that was 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. But I do want to amplify something when it comes to CapEx that I think all of you are probably modeling or thinking about. But one of the big strategies that comes with this is sell of these older assets and what we deem decrease our CapEx going forward with our newer assets that we're doing. So that's another big play in that I think you'll see in the future, the decrease in CapEx. And that's both maintenance and sort of aggregate property improvement CapEx? Yes. But we're still going to have that error in our quiver for rev gen CapEx, property improvement CapEx because I think that's what we're good at. And every property that we buy, we pretty much scour it to figure out if there's something we do to it to pick up income. And at this point, we haven't bought one yet that we haven't been able to figure it out. So there's always going to be that component. Fair enough. And 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 twenty nineteen, we saw deliveries across the board in some of these markets in Texas dropped down a bit. We expect those orders to be filled in the second half of the year. There are 2 or 3 items that are going to slow down the pace of new construction and deliveries. Number 1, identifying the waiting through the metrics, the political concerns in individual cities permitting the construction of new apartments number 2, jobs and wage availability and number 3, the cost of materials and supplies. So 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. And the reason behind that is you just can't pencil in a deal for new construction for the three reasons that I provided. Okay. So that gives you some confidence in terms of targeting maybe a newer closer to Class A type assets? No question. Great. Thanks, guys. Thank you. And your next question is from Troy MacLean of BMO Capital Markets. Please go ahead, Troy. Good morning. Just want 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 like more of a long term hold for you guys? Well, we're going to remain nimble, Troy. We're going to go through exactly what we've said that we're going to do here. And 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, but we're not necessarily saying that we're going to exit Little Rock or Longview. But if that were the case down the road, it's nothing that we're planning today. And then 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 to 12 months? Yes, Troy, we think that's more of a seasonal issue in the Northwest Arkansas market, and I wouldn't expect that to I wouldn't expect it to reverse in the next 6 to 12 months. It's probably just going to taper off and continue to grow. It's an acute supply issue, particular to the Fayetteville and to the Fayetteville submarkets. And Northwest Arkansas is having the same problem that Dallas, Austin and Houston is. Developers just are having a tough time penciling out future deals. So we see occupancy and rates pop back up in that market in the And then 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? Troy, as we've talked about in 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 in every way you slice and dice this deal, our rents have been going up on every metric you look at. So that is true. But that's also where LRO plays into this and provides our stock teams and all of us great guidance. I mean, we have 2 calls a week with them going over every property. And we have our rents can literally change they change daily based on the supply and demand and the submarkets that we're looking at. But yes, I think there's no question because when you really dissect our occupancy rates, I'm sure you guys have in the MD and A, I mean, we're sitting at 96.7% in Texas, 95% in Houston. Oklahoma is at 96%. Arkansas is at 90% and Little Rock is at 92%, which by the way is above the average there. So 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. Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.