Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q2 2022 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question-and-answer session. If you would like to ask a question during this time, simply press star then the number one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. Thank you. Mr. Oberste, you may begin your conference.
Thanks, Joanna, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the second quarter ended June 30, 2022. I'm joined on the call by Susie Koehn, our Chief Financial Officer. Blake Brazeal, Co-President and Chief Operating Officer, is also with us and will be available to answer questions following our prepared remarks. I'll begin the call with an overview of our second quarter performance. Susie will then review the financials in detail, and I'll conclude by discussing our business outlook. After that, we'll be pleased to take your questions. To begin, I want to remind all 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 9, 2022 for more information. During the call, we will reference certain non-GAAP 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 reconciliations to the nearest IFRS measures. Also, please note that all dollar amounts are denominated in U.S. currency. Our financial performance in recent quarters has been outstanding, and I am pleased to say that this trend continued in Q2. We again generated very strong growth across all of our key financial measures. Same community revenue increased 11.5% compared to the second quarter last year.
Same community NOI increased 16.7%. FFO per unit rose 61.5%. AFFO per unit increased 26.7%, and net asset value per unit rose 51.4%, inclusive of the units issued in the April 2022 offering to $22.35 as of June 30, 2022, compared to $14.77 as of June 30, 2021, and also increased 1.7% sequentially from $21.98 as of March 31st, 2022. Going into 2022, we had high expectations for our financial performance. However, our operating performance in the first half still exceeded those expectations. This reflects very strong rental market conditions in our core Texas markets, Austin, Dallas, and Houston.
Strong population growth and economic performance in these MSAs continues to drive robust demand for rentals in our communities. Weighted average rent for our portfolio as of June 30 was $1,412 per apartment unit, an increase of 17.1% compared to $1,206 a year earlier and accelerating at a faster pace than each of the prior three quarters. We expect these very strong leasing conditions to continue through the second half of 2022. Accordingly, we revised our same property revenue and NOI guidance upward for the year. I'll speak more about that a little later in the call. We also continue to pursue attractive growth opportunities. We did not announce any new acquisitions in the second quarter.
However, subsequent to Q2, we entered into an agreement to jointly develop phase two of Aura 36Hundred in the Austin, Texas MSA with a projected total cost of $60 million. The development will be funded with contributions of $21 million and a $39 million construction loan guaranteed by our development partner. Finally, I'm proud to note that BSR was recently named one of the best places to work in Arkansas by Arkansas Business in the Best Companies Group. This was the sixth consecutive year that we received this honor. I believe it is a testament to the strong corporate culture we have developed at BSR. We have an outstanding team that is fully engaged in making our company successful. They have done a tremendous work amid the challenges created by the pandemic over the last two and a half years.
I'll now invite Susie to review our second quarter financial results in more detail. Susie?
Thanks, Dan. Same community revenue increased 11.5% in the second quarter to $23.2 million, compared to $20.8 million last year. The improvement primarily reflected a 12.6% increase in average rental rates for the same community properties from $1,161 per apartment unit as of June 30th, 2021, to $1,307 as of June 30th, 2022. This underlines the strength in the Texas rental market conditions that Dan outlined. Total portfolio revenue for Q2 2022 increased 38.3% to $38.8 million, compared to $28 million in Q2 last year.
This reflected $2.4 million of organic same community rental growth, as well as contributions from property acquisitions and non-stabilized properties, which added $11.4 million and $0.2 million of revenue respectively. Property dispositions reduced revenue by $3.3 million compared to Q2 2021. As a reminder, non-stabilized refers to properties that were undergoing lease up or significant renovation during at least part of the comparative periods. NOI for the same community properties was $12.7 million, an increase of 16.7% from $10.9 million last year, reflecting higher same community revenue. This was partially offset by an increase in property operating expenses of $0.6 million. NOI for the total portfolio increased 46.1% to $21 million from $14.4 million in Q2 2021.
Same community NOI growth boosted total NOI by $1.8 million, while property acquisitions and non-stabilized properties increased it by $6.3 million. Dispositions reduced NOI by $1.3 million. FFO for Q2 2022 increased 66.2% to $11.6 million or $0.21 per unit, compared to $7 million or $0.13 per unit last year. The increase reflects the higher NOI, partially offset by increases of $0.4 million in G&A expenses and $1.6 million in finance costs. AFFO increased 33.4% to $10.5 million in Q2 2022, or $0.19 per unit from $7.9 million or $0.15 per unit last year.
The increase primarily reflected the higher FFO, partially offset by an escrowed rent guarantee realized in the prior year of $1.5 million, and an increase in maintenance capital expenditures of $0.5 million related mostly to seasonal projects. Net asset value increased 69.1% year-over-year to $1.3 billion from $769 million at the end of Q2 last year. NAV per unit was $22.35 at the end of Q2 2022, an increase of 51.4% from $14.77 a year earlier, driven by the compression in cap rates and higher NOI, and 1.7% sequentially from $21.98 as of Q1 2022, driven by higher NOI. Net income and comprehensive income of Q2 2022 increased to $160.8 million compared to $36 million in Q2 last year.
The positive variance was primarily due to an increase in the fair value adjustment to derivatives and other financial liabilities of $ 178 million, primarily related to the reduction in the liability reported for Class B units, partially offset by a decrease in the fair value gain to investment properties of $ 63.2 million. The REIT paid quarterly cash distributions of $ 0.13 per unit in Q2 this year and $ 0.125 last year, representing an AFFO payout ratio of 71.8% in Q2 2022, compared with 82.6% last year. All distributions were classified as a return of capital. Turning to our balance sheet. The REIT's debt to gross book value as of June 30th, 2022 was 36.2% or 34% excluding the convertible debentures.
Total liquidity was $167.3 million, including cash and cash equivalents of $8.7 million and $158.6 million available on our revolving credit facility. We also have the ability to obtain additional liquidity by adding properties to the current borrowing base. As of June 30th, we had total mortgage notes payable of $488.4 million, excluding the credit facility, with a weighted average contractual interest rate of 3.3% and a weighted average term to maturity of 5.6 years. Total loans and borrowings were $710.9 million, with a weighted average contractual interest rate of 3.3%, excluding the debentures, and 61% of the REIT's debt was fixed or economically hedged to fixed rates.
We also had $41.8 million of convertible debentures outstanding at a contractual interest rate of 5%, maturing on September 30th, 2025, with a conversion price of $14.40 per unit. It's important to note that in July 2022, subsequent to the end of the second quarter, we entered into three interest rate swaps to hedge an additional $280 million of variable rate debt. The first two swaps of $150 million and $65 million are at fixed rates of 2.163% and 2.178% respectively, taking effect on September 1st, 2022 and maturing on August 31st, 2029.
The third swap is $65 million at a fixed rate of 2.087% and takes effect on January 3rd, 2023 and matures on July 27th, 2029. Once these swaps commence, 100% of the REIT's debt will be fixed or economically hedged to fixed rates at a weighted average contractual interest rate of 3.4%. Investment properties were valued at approximately $2.1 billion as of June 30th, 2022, compared to $1.9 billion as of 2021 year-end. We recorded a fair value gain of $139 million in the first half of 2022, driven by a decline in capitalization rates and higher NOI. I will now turn it back over to Dan for some closing comments. Dan?
Thanks, Susie. Our business continues to display momentum. Our focus on high-quality properties in the booming rental markets of Austin, Dallas, and Houston is driving outstanding financial performance. We fully expect that trend to continue through the remainder of 2022 and into 2023. Back in March, we provided earnings guidance for 2022. It was the first time we provided annual guidance forecasting our expected performance for the year. Based on the continued growth we are experiencing in our core markets, we announced yesterday that we're increasing that guidance. We now anticipate same community revenue growth of 10% to 12% compared to our prior guidance of 8% to 10%. Same community NOI growth of 12% to 14% compared to our prior guidance of 11% to 13%.
We're maintaining our guidance for FFO per unit of $0.86-$0.90 and AFFO per unit of $0.80-$0.84. While our NOI expectations have increased, we expect this to be offset by the increase in units outstanding following the April offering. We also continue to anticipate that property operating expenses will increase 4.5%-6.5% year-over-year, which is well below the projected growth in revenue. These numbers are based on our current portfolio and do not take into account any acquisitions or dispositions. As I noted earlier, we're continuing to pursue external growth opportunities in our core markets that would further expand and upgrade our portfolio. Our portfolio is performing extremely well, and we will patiently pursue those opportunities most accretive to our investors.
A notable example of such opportunity is the phase two development discussed earlier in this call. Overall, we're pleased that our strategy is driving strong financial performance. We believe that sticking to it will generate further strong returns for our unit holders in the second half of 2022 and beyond. That concludes our remarks this morning. Susie, Blake, and I would now be pleased to answer any of your questions you may have. Joanna, 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 star followed by the one on your touch tone phone. You will hear a three-tone prompt acknowledging the request. If you are using a speakerphone, please lift the handset before pressing any keys. First question comes from Kyle Stanley at Desjardins. Please go ahead.
Thanks. Morning, everyone.
Hey, good morning.
Just looking for a little bit more information on the development agreement that you were talking about. I'm just wondering, could you talk about the structure of the agreement and maybe, you know, what the mechanism for acquiring the remaining interest would be?
Sure. Kyle, this is Dan, and good morning. I'll try my best here. What the REIT did was acquire 97.5% interest in a development. The remaining 2.5% is owned by our development partner. Our development partner is guaranteeing the debt associated with the development. Right now it's our intention to acquire the remaining 2.5%, when the property is ripe and ready to be bought.
Okay. Makes sense. I wasn't sure if it was a 50/50 JV or. That's very helpful. Could you speak to the, you know, the thoughts on the projected yield on that $21 million contribution you mentioned?
Yeah, sure. I'll back up a bit. You know, we've always said that we like stabilized acquisition yields at somewhere between 100 and 150 basis points north of where we see fixed debt in the market, and that we like development sitting at 100 and 150 basis points north of that. In this situation, you know, we're seeing development opportunities with outsized yield growth relative to stabilized acquisitions. We continue to see compressed cap rates in our markets for stabilized acquisitions, as evidenced by our, among other trade outs of the last quarter, our NAV cap rate of about 3.9%. Where we're seeing the opportunity here is on that 2024 development that we anticipate begin leasing in 2024.
We like that outsized development yield to still sit at, call it, 300 basis points on top of our underwritten weighted average cost of debt.
Okay, thanks. Maybe just one last one with regards to the development agreement. You know, how did this first deal come to be? I mean, you know, given that it's an Aura, you know, you've worked with the developer in the past, I think you own phase one. But just wondering how this is the deal that you chose. You know, do you see other opportunities, whether it be with the same developer or another developer you've worked with?
Yeah, sure. I think that, I mean, when I think about the evolution of this transaction, you know, the relationships that were built in order for us to partner up with the developer started, you know, nearly five or six years ago. Michael Squires, who leads our acquisition and development team, continues to cultivate these relationships, as well as our senior operators who work hand-in-hand with these development partners. Aura phase one provides us a pretty intimate look at what we think the economics of phase II will look like when it's ready. You know, we already own that product. In addition, that development partner has been an upstream seller to us on two or three other properties located in our core Texas markets. We like their product.
We feel pretty comfortable with the economics of the development mitigates any risks. You know, relationships aren't built overnight. Great developer. I mean, prolific, fantastic developer, and a repeat seller of ours. I would say this is precisely what we telegraphed last quarter when we talked about phase II development growth. You can probably look to continue to see BSR in mind for these opportunities on a look forward with these same types of partners.
Okay, great. I will turn it back. That's it for me. Thanks.
Thank you. Next question comes from Sairam Srinivas at Cormark Securities. Please go ahead.
Thank you, operator. Dan, Susie, Blake, congratulations on another strong quarter. Firstly, I just wanna appreciate the disclosure on the spreads that you guys included in this quarter. I really like that. Dan, my first question for you is on the capital allocation opportunity that you see ahead. Considering the environment we are in right now with higher rates, and obviously you guys have kind of fixed that on that, on the financing end. How has that changed your outlook in terms of the opportunities you're seeing in terms of acquisitions versus buybacks?
Sure, Sai, and good morning. Yeah. You know, BSR's priority in external growth since we went public has and always will be acquisitions of stabilized assets, suite renovations, co-development opportunities, or acquisitions of properties taking a little bit of a lease-up risk. Acquisitions of new properties and taking a lease-up risk on improving our returns. We found one or more of those ingredients to the recipe of growth very accretive to our investors over the course of the last five years. On a look-forward, you know, we see. I think we see probably stabilized acquisitions at compressed yields right now.
We see opportunities for suite re-renovations within our portfolio, and we'll continue to mine those throughout the course of this year and next year. Development partnerships like the one we announced yesterday and the one we discussed on the call seem to be an opportunity for an outsized return generated by our management platform and the REIT for our investors on a look-forward, as are acquisition of unstabilized properties on a look-forward. Three of those four ingredients to the recipe of external growth exist in the market today. The opportunities are vast, and we will continue to mine for the highest and best opportunity to deploy and allocate our capital on a look-forward. The one that we don't see, I'll say, a significant outsized opportunity in right now is acquisition of stabilized NOI.
In those scenarios, it seems like cap rates are, I'll say, are aggressively compressed to take into account the level of mark-to-market rental growth that's contained in some of these stabilized acquisitions. Until that scenario plays out a bit, we're gonna call the pitches of co-development, like similar to what we announced yesterday, of acquisition of assets and taking a lease-up risk on them in submarkets that we're intimately familiar with. Deploying some of our investors' capital into some suite renovations as the end of 2022 plays out and into 2023.
That makes sense, Dan. Just probably digging back on acquisitions, are there specific markets where you feel, you know, the impact of higher rates have probably increased the opportunities in terms of acquisitions, in terms of acquisition opportunities?
Yeah, that's a good question. You know, the way I think of it is, are the macro pressures in our markets creating some challenges or creating some opportunities? You know, just to reflect on that again, Sai, I'd say certainly. Macro pressures right now are compressing cap rates for stabilized assets. For good reason. I mean, the mark-to-market in these assets, and especially the ones that are in the right locations in the right side of the street, warrant that premium cap rate, which generates negative leverage, and I'll say can be troubling and a risk for investors. However, we see the opportunities right now in developments in lease ups of new product.
When faced with choosing between a challenge and an opportunity, we'll pick the two opportunities and we'll continue to monitor that challenge to see when it comes into opportunity range. You know, again, I wanna reiterate that. These dynamics are super healthy. I mean, when I think about who's leading the nation in job creation or regrouping since the beginning of the pandemic, I point right to Austin and Dallas. When I look at Dallas, Houston, and Austin, each of the three rank in the top four MSAs for population growth in the MSA. Six of the 15 fastest-growing cities in the U.S. are located in our Texas MSAs. The top two fastest-growing cities in the U.S. are located in Austin and Round Rock.
Vacancies in all of our BSR markets, as you can expect, remain below historical trends. You know? When we look at Houston, units under construction have fallen for consecutive quarters since the second quarter of 2021, you know? When we look at the fastest-growing cities by percent of population, we look at Georgetown and Leander, both cities that are in the Austin MSA. When we look at the fastest-growing cities in the country by numeric increase of population, number three is Fort Worth, number eight is Frisco, number 10 is Georgetown, number 12 is Leander, number 14 is Denton, number 15 is McKinney. Each one of these cities is located in Austin and Dallas. The fastest-growing MSAs in the country right now, number one, DFW, number three, Houston, and number four, Austin.
When we look at those dynamics, I mean, all of those stats are fantastic. We can understand why those stats warrant compressed cap rates for stabilized acquisitions for multifamily apartments in those markets. It makes complete sense to us. We're enjoying the benefits of it as a landlord, and we're mining the opportunities for those acquisitions out in the market right now. Where we see the opportunity for outpaced yield is in a co-development like we announced yesterday, or alternatively, an acquisition of an unstabilized lease-up brand-new construction project in the right submarket of these MSAs.
That's fantastic color , then. Probably just my last question, looking at the acquisition from the other angle and that disposition, are you seeing any opportunities in the portfolio for recycling?
I'm sorry, Sai, you cut off. You cut out there. Could you repeat?
I was just gonna say, looking at the portfolio, are you seeing any opportunities for recycling?
Oh, yeah. External market growth. Is that what you're referring to?
No, in terms of dispositions, like are there markets where you feel you've kind of reached the potential in terms of rent growth and occupancy, and you feel you could probably cycle out of it?
You know, you would think, and Blake is happy to jump in and pile on here. You would think there would be, but our economics that we're seeing in Oklahoma City and Little Rock continue to play in the same playground as those same leasing trends that we're seeing in our Texas markets. They're healthy. With that said, if we see an outsized return generated by cap rate compression in any of our markets or on any of our properties, we'll take advantage of that as it's an opportunity to maximize our investors' returns. We constantly monitor each of our properties, not just our markets, but each of our properties. All five of our markets are extremely healthy.
Dallas, Austin and Houston, which account for, I think, roughly about 94% of our NOI, are among the healthiest, if not the three healthiest, markets for multi-family in the country. Little Rock and Oklahoma City, which accounts for, I want to say, about 6% of NOI, continue to hum along. Our product in those markets is located in the right submarkets of those Little Rock and Oklahoma City markets and continues to exhibit outpaced growth. So long as we see a return generated by owning above that generated by selling, we pick to own. If we think we can sell an asset and maximize our return relative to owning, we'll look to rotate.
That's fantastic, Dan. I'll turn it back.
Yeah.
Thank you. Next question comes from Jenny Ma at BMO Capital Markets. Please go ahead.
Thank you. Good morning.
Good morning.
I want to ask about the ongoing positive trajectory in rents. It's nice to see. Were there any specific markets that really led the pack, or would you say it's broad-based across your different markets?
This is Blake. It is across all markets. Our rental income, when you look at it sequentially, Q1 to Q2, Austin, Dallas and Houston were right in line with each other. It is not one in particular pulling the whole weight. As Dan just alluded to, all of our markets are showing growth.
Okay, great. When you think about rent renewals with your tenants, do you have some sort of self-imposed limit in terms of how much you raise it or do you try to push it as much as possible? You know, how do you measure that? You know, basically, how do you maximize your rental renewal rates with your tenants who choose to stay a little longer?
Well, I think on the last call, I discussed our new system that we have bought and implemented in our whole portfolio, which is called the [AO] Revenue Management Program. This program has really. They're always hard to quantify programs when you buy them. This one over the first quarter-over-quarter. I'm gonna get to the answer, but I want to give you a little background here. Over the first quarter from Q1 to Q2, our sequential growth and rental rate is evident. What it does for us is it balances out. Our groups meet twice a week, our senior portfolio managers and our investment group.
They go over all of these renewals, new rates, and what they do is they balance out, and this program helps us to balance out what we're seeing in the market today, what we think we'll see in the market in the future, and what our new and renewals are gonna be coming up. So it's a very intensive, and I've said this in each of the last calls. It is a very intensive, really. You have to really look at each market, each property, and actually look at each property within. You take a Frisco where we've got multiple properties, you can have a renewal rate that's different than another property in Frisco. So it's almost. It's submarkets and markets within submarkets. So that's how we determine the growth in renewals and the growth in new.
No, we don't put any caps on it.
Do you consider a tenant's income when you're thinking about those or is it does this program just, you know, take a look at the data of all the assets around you and kind of spit out a market number that's agnostic to who the tenant is and what their financial profile is?
Yes, a tenant's income is always looked at in terms of, well, on qualification basis, but also in what we're seeing in each individual market. I mean, one of the things that's really jumping out, and every quarter I give you an update on this, but I'll give it right now, is that what we're seeing in the markets is I'm dovetailing on to what Dan just discussed as far as the move-ins in each of these main markets, people moving into it. You look at our main markets, the migration, second quarter, the first quarter to the second quarter, 20% of our new leases came from 43 states. That's 18% more compared to 18% in the first quarter.
When you look at that, Austin, Dallas and Houston had three to four percent growth in people moving in. Now, what does that mean? Well, these people that are moving into our areas are coming with far higher-income jobs as our median income in all of these Texas markets continues to grow on a sequential basis. We're looking at median incomes right now in Austin, in our portfolio, $99,000, in Dallas $91,000, Houston, and $90,000. All of this plays into the affordability of the houses in the area that people can buy.
When you're looking at the median income for a house in Dallas, for instance, a $400,000 house right now with interest rates the way they are, you're gonna be paying $3,415 bucks, and you'd have a $1,400 payment in an apartment. Where Houston is at $2,504 and a $1,200 rental rate. Austin, you know, $4,200, the median price on a house in Austin is $562,000. I mean, that's a $4,200 payment. Average BSR rental rate is $1,572.
All of this goes into the fact that you're having a lot of people with really, really high median income or incomes that are looking for product in our areas, and thus that factors into the programs that we're using in order to increase rental rates on renewals and new. A lot of people are going to renewal rate right now with the change in everything that's happening in the economy. That's playing in our favor, also.
Great. Thank you for that wholesome color. Just want to switch to discussing a bit about the supply side on development completions in your markets. Are you starting to see any changes in the pace of completions, and how would you compare them across the different markets that you're dominant in?
Sure, Jenny, this is Dan, and I'll see if I can't tackle that one. You know, we pay attention to a couple of things when we talk about supply. It's not just gross supply, it's also net absorption. I'll hit the absorption issue first. You know, we're seeing the pace of absorption in the first six months of the year in Dallas, Austin, and Houston, at around the same pace as we saw in 2021, which was double the supply scenario for 2021. We are seeing some pickup in deliveries this year relative to last year, and that's natural. We anticipated that. We've talked about that. Where the supply pickup is concentrated right now that we see is Austin, Texas, with you know.
We're paying attention to that current inventory change relative to the 2015 to 2021 average annual inventory change. In Austin, it's generally been able to handle about 5%-6.5% inventory increases a year, and to absorb that 5%-7% number, I'll say in the last six years on average. It's been fair to say. What we're seeing this year is a slight drop of assets under construction. Well, by slight drop, I mean about a 0.1% drop in assets under construction.
We see the deliveries that have taken place so far this year being fully absorbed at the same pace that they were absorbed at last year, which somewhat emboldens our thesis in this market, 'cause as you recall from the prior two quarters, we were specifically concerned about supply and absorption net of supply metrics in Austin. That's healthy. The supply environment in Houston continues on track as we anticipated in the prior quarters and at the beginning of this year. That is to say, assets under construction right now are down about 31% year-over-year, and deliveries in place this year seem to be on track to be about, I'll say about 12,000 to 13,000 units. And that's about 2,000 to 3,000 units below the Houston average.
As it's planned, I think the new construction planned in Houston is something that we find intriguing right now, which is about 4,900 units or suites to be developed. Those are assets. That anything that's planned, we would expect to be delivered in 2025. Anything under construction, those 19,000 units, we would expect to be delivered over the course of the next 24 months, 18 to 24 months. These are all favorable dynamics. I mean, these markets continue to embolden our operating strategy. Well, I mean, I'm sorry. We're happy to see that the absorption figures continue to stay on pace as those exhibited in these three markets last year.
Okay, great. Any commentary on Dallas?
Oh, yeah, sure. It's fun to talk about relativity here. You know, we've said last year, Dallas looked to absorb about 40,000 suites against a backdrop of about 20,000 suites delivered. We expected this year for Dallas to deliver about 20,000 suites and to absorb 20,000 suites. I will say this far into the year, those delivery and absorption numbers look to remain on track, which is fair. I think what we see that's positive is, you know, going back to that average annual inventory change. In Dallas, what we've seen in the last six years is about a 3.6% annual inventory change per year for the delivery of multifamily apartments.
Dallas has done a remarkable job of continuing to absorb that inventory. What we're seeing now are about 26,000 to 27,000 units under construction, right? Those are units that are gonna be delivered over the course of the next, I'll say, 24 months. That's about half the pace or about 60% of the pace that we've seen in 2021 and in the first six months of 2022. In addition, now, and I'll say it as an inverse to Houston, the assets that are planned, and that is to say those assets that we think will be delivered in the back half of 2024 and into 2025, are about 37,000 suites. That looks to keep on pace with the expected absorption in the market for 2024 and 2025.
I guess if we're digesting all of that, all of those fun facts, what it looks to me like right now is that the landlord won by 20,000 units of absorption last year. Looks like this year the party continues with rent growth and occupancy acceleration. Blake remarked just the other day how in Frisco, where we have a high concentration of assets, quarter-over-quarter deliveries actually dropped, which was, you know, that was a pleasant surprise for us. When we look forward into 2023 and in right now into the beginning of 2024, it looks like that the asset deliveries may be on track with our original expectations.
Historically, supply has diluted the net migration positive metrics that have come into these markets in, I'll say, the 80s and the 90s and the early 2000 s. It doesn't necessarily look to be the case right now. It looks like the fundamental housing issues and the high demand and the high occupancy and rate increases continue to sustain well into next year, which gives us comfort for our guidance this year.
Great. You are in an enviable position, and I'll turn it back. Thank you.
Thank you. Next question comes from Brad Sturges at Raymond James. Please go ahead.
Hey there. Just to follow on the new supply there, a couple questions. One, so it sounds like from the data that you're providing there, it's more of a 2024, 2025 kind of increase in new supply, and you may not see a headwind from new supply, I guess in 2023. Is that the way you're seeing it right now, particularly in like Austin and Dallas?
Yeah, that's absolutely correct, Brad, and it makes a lot of sense if you think about it. I mean, land prices are going up, construction prices and labor costs are going up. Then I think we've got that fun little gift from central banks in the last quarter, and that the cost to borrow has gone up in the last three months. The combination of those three factors should yield no surprise that a developer might be a bit timid to build a new project at a higher cost.
The type of product that is in the pipeline right now, is that more garden-style suburban assets similar to, you know, the product that you have or in the submarkets you might be in? Or could that be more like mid to high rise, more urban? You know, would there be a differentiation in, you know, location of the type of product that could be delivered?
Yeah, I'd say it varies, Brad. I would say it varies, but we're seeing more and more urban wrap, urban mid-rise and high-rise being developed in these markets, particularly in Houston, but also in Austin. That's a factor. I mean, it makes sense. It's a developer trying to maximize their return on their land purchase. There, you know, the economics make you just buy fewer acres of land and try your best to build the same number of units, you gotta build up. Now we think that puts BSR at a strategic advantage. There are fewer and fewer apartments under construction in these markets with ground up parking.
That is to say, the resident parking in a parking lot, parking in a covered spot or with their own personal garage, and spending about 30 seconds walking up to their apartment unit, taking their groceries with their kids in tow. That resident wants to live in that suburban garden three-story or that suburban garden walk-up, that mansion build with ground up access to parking. That's the most desirable asset right now. It's also the cheapest to construct. However, because of land prices, because of the labor costs and the construction costs, and most recently, the soft cost of financing an asset, I think we've seen a pullback in deliveries and in new planned constructions of suburban garden three-story and four-story elevator product, and we're seeing more concentration of those high-rise assets.
Now, to provide just a little bit more perspective on that, if you're gonna build a high-rise asset in one of these markets, it's gonna cost you about $500,000-$600,000 a suite to construct it. Imagine the rent that you're gonna have to collect in order to break even on that development. If you're gonna build an urban mid-rise, it's gonna cost you about $350,000-$375,000 a suite in hard costs to construct your asset. An urban wrap's gonna cost you about $300,000 a suite in hard costs. This is before the cost of I mean, this is also before the cost of the land to build. So while we're seeing more concentration of these high-rise units, they're also costing those developers more to build.
We wish them the best of luck, and right now, we think that we would rather own our garden style properties and our four-story mansion builds over just about any product in the market, including single-family rental.
Okay. Just to go back to the leasing for a second. You know, based on what you've done so far in Q3, and what you're seeing so far, has there been much moderation in the kind of the leasing spreads you're achieving, what you got in Q1, Q2? Or, I'm assuming, you know, that's still the expectation for the back half of the year that we could see some moderation, but just curious to get your thoughts in terms of what you're seeing on the ground today.
Well, actually, a lot of I really try to look as far into the future as possible, and a lot of the reasoning for increasing guidance is based on all the metrics that I talked about earlier or tried to talk about earlier. When you look at July and August, we're seeing the same incremental increases that we have been seeing in the second quarter. In some cases, we're seeing improvements. Now, you know, obviously, that's preliminary numbers, but you know, I think through the years, you all know, we've been pretty good at forecasting it. I'm very bullish for the remainder of 2022. Now, before anybody asks me about 2023, I'm gonna say that we start a pretty comprehensive budget analysis next month. At this point, I could.
Obviously, if you ask me right now, I would say that 2023 would look good, but I don't feel comfortable really talking about it a whole lot. Third quarter, definitely I see good trends, and into the fourth quarter, I'm expecting that to continue.
Okay. That's quite helpful. I'll turn it back. Thanks a lot.
Thank you. Next question comes from Himanshu Gupta at Scotiabank. Please go ahead.
Thank you, good morning. Just to follow up on the Austin development. I think, Dan, you mentioned $39 million construction loan will be provided by the developing partner. The question is, what is the interest rate there? Does the partner participate in any value upside upon completion of the property?
Himanshu, to answer your first question, you know, because it's the developer's loan, we don't feel comfortable disclosing their terms. That is to say the total cost including carried interest of that $59 million development is included in the $59 million.
Okay, that's good. Does the partner develop in any upside upon completion, or that's not the case?
Any upside upon completion, is that what you asked?
That's right. Yeah. Yeah.
Certainly. I mean, I think our partner would expect to see the traditional upsides that a developer enjoys for owning 2.5% of a project, that's completed, that's a phase II, that's leased up and run by the owner of the phase I. I know they're eager to construct and complete that project, and so are we.
Okay, fair enough. I think you mentioned the development expected yields to be 300 basis points above the cost of debt. You know, assuming like mid-three, are you, like, penciling something like mid-six development since then?
Well, you know, we don't love to quote cap rates, and we don't love to quote yields, which are cap rates, unlevered returns. Hadn't been our practice. I would say it's fair to assume that the spreads between our stabilized weighted average cost of capital and where we see acquisition opportunity and where we see development opportunity remain intact. That is to say, if we're at 3.4% and we see yields for stabilized assets at 4.5%-5%, then we'll look to take advantage of that opportunity. Unfortunately, we just don't see that right now as evidenced by our NAV, and the fact that we haven't deployed capital. That's, to me, representative of a management team that's extremely disciplined with its capital deployment.
Where we do see the opportunity is in a co-development similar to what we announced yesterday. When we see the opportunity, we generally see it at 300 basis points north of our cost of funds.
All right. Thank you. Very helpful. Just changing gears on the occupancy trends in the portfolio. Is the management view to sacrifice some occupancy to you know for continued and better rent growth? Is that how you're approaching it?
Well, you know, I'll start off on this, and Blake has some details to add. We discussed this at length. You know, if you recall back in prior quarters, what we talked about from the end of last year to Q1 was we anticipated a little bit of a little bit of an occupancy reduction in the first quarter of this year to enable the REIT's managers who are experts at leasing apartments to take advantage of these accelerated rent metrics that we see in our sub-markets in the second and third quarters. I think our numbers this last quarter reflect that end, which is a 0.5% pull or increase in occupancy, not yet to the occupancy level we displayed in Q4 of 2021.
We still see a little bit more opportunity there. Now, with that said, we also see some suite renovations in two of our Dallas value-adds coming to fruition, and we'll probably look to accelerate some suite renovations on our projects in the second half of the year. The impact of suite renovations is a direct, I'll say, a little bit of a ghost vacancy amount as it takes a bit longer to renovate an apartment than it does to turn an apartment. Blake, is there anything else you want to add on to that?
The only thing I would add is that, you know, we discussed this in the last quarter when occupancy went down a little bit, and we said it was exactly where we thought it would be. This quarter, our 95% is right on top of what our internal projections were. You know, up to this point, when you look at what we had internally predicted for 2022, our occupancy has been within 0.1%-0.2% on the first two quarters. If I was projecting out for the third quarter right now, I think we're gonna be really close to what we projected out at the start of the year.
Okay. Thank you. Maybe just follow up on the occupancy front in a more broader view. I mean, in case of a recession scenario, how has occupancy responded, like in the past cycles? Like, do you see a lot of occupancy erosion risk or maybe, you know, slowdown in adoption, in that scenario?
Yeah. You know, in this portfolio, no, we haven't. It's specifically because this portfolio is the average rents are sitting right in the middle of the market, to, I'll say, the B+ / A - range. When you own a portfolio and as our investors do, that has rent levels situated in, I'll say, on that spread, it enables that owner to play defense in a recessionary environment by maximizing occupancy, and it enables that owner to play offense in an expansion environment as we've displayed in the last two to three years. To us, we deliberately pick this type of portfolio. Now, if I was gonna go back and look market wide, you know, and I was gonna take Houston, let's say Houston between November of 2014 and let's say March of 2018, right?
Let's begin with that fracking issue and OPEC, and then let's end with Hurricane Harvey. What we saw in the Houston market over that time is about an aggregated, let's say, 13% increase in rate over that 42-month period. You know, these markets are propped up by job growth. The job growth and accelerated wage growth is gonna have a direct correlative effect on our ability to collect rents. Our product within these markets is going to be occupied in a recessionary environment and is gonna generate outpaced rent growth in an expansion environment.
All right. Okay. Thank you. You know, the job growth environment continues to be supportive, and the portfolio continues to be affordable, some insurance against downside scenarios. Okay. No, I think that's very helpful, and I'll turn it back. Thank you.
Thank you. Next question comes from Jimmy Shan at RBC Capital Markets. Please go ahead.
Thanks. Good morning, guys. Just on the development of Aura, if I look at the cost per suite, it's about $250,000. When I compare that with some of the acquisitions you've done, even the first phase, it looks like it's north of that. Is it fair to say that assets today are trading at or even higher than replacement costs? I'm just kind of curious, historically, that's been the case, I assume, right?
Yeah. Certainly, assets are traded at higher than replacement costs. I think. Now it's been a while, and I've slept since we bought phase one, but I think we bought phase one for $264,000 this week, and we'll develop phase two, including accounting for carried interest at a projected cost of $250,000 this week. That right there is evidence that 12 months ago, an asset constructed and unleased is worth the premium over the construction costs. That trend is magnified, as we talked about earlier in the call, the second you put residents and NOI on top of that stabilized asset. Sure, assets in our markets are trading well north of their construction costs if you can find the right assets in the right markets.
Okay. Have they ever traded below replacement costs?
You know, Jimmy, I'm certain. I'll say the answer, I don't know. It hadn't been for a while, but I'm sure that we can dig in and certainly find periods of time where asset sales have taken place below their construction costs. To us, that's a fun time to buy.
Okay. Maybe on the swaps, you know, the swap rates you got is quite incredibly low. Just kind of wondering, is that just a reflection of the timing in which you struck those contracts? I know they've got options on them, so it looks like it's more of a two to three-year swaps. Maybe if you could comment on that, I guess it'd be one. My own, my only other question is on the Austin market, sort of, if there's anything you've seen, any cracks at all that you're seeing, in that market or from a demand side perspective, especially given what's going on in the tech sector.
Yeah. Jimmy, I'll speak to the swaps. First and foremost, the interest rate of 3.4% covers our mortgage debt and our credit facility. It doesn't include the convertible debt or amortization of deferred loan costs and discounts and premium. I just wanted to clarify that for everyone on the call. You're right. We got some really good rates. While some of that is timing, also it's related to the fact that there's staggered one-time call rights for early termination. That also helps lower the cost. Let me emphasize again, it's just one time call rights.
Right. Jimmy, as it relates to cracks in the Austin market, you know, we're not seeing them right now. We thought we would see them in Austin at the tail end of this year. We're not necessarily seeing any cracks in occupancy or rate acceleration, from a net dollar amount. I mean, if I was an economist, I'd probably give you a better answer, but I can tell you that I'm a subscriber to the Austin American-Statesman, and I'm looking a couple weeks ago, and I'm seeing Samsung announce plans for a $200 billion development on top of the $20 billion that they just put into the Northeast Austin sub-market over the course of the next 20 years.
To put that in perspective, $200 billion is about half the cost of the United States interstate or the interstate system is constructed in today's dollars. That would dwarf the largest development project that we've seen in the U.S. from a chip manufacturer ever. I think the political winds are in favor as well with the recent laws that have been passed by the Senate that looks to be passed in the House shortly related to the CHIPS bill. You know, those kind of job creating that'll generate about 10,000 jobs. Those kind of job creating investments by companies that probably look to be the bubble gum to fill any cracks that might exist in an otherwise healthy market at this time.
Okay. Thank you.
Thank you. Next question comes from Matt Kornack at National Bank. Please go ahead.
Just one quick one, apologies, Susie, if you already covered it in your initial comments, but the property tax figure sequentially looked like it was down based on my calculation. My calculation may be wrong, but by about $1 million. Is that a good run rate, or should we kind of look to Q1 and average it or take Q1 as the property tax figure?
Yeah. Hey, Matt. You're right. Each quarter the real estate taxes are going to be lumpy, and we did have some favorable settlements in Q2, which made it lower. We're looking at anywhere between $28 million and $29 million for real estate taxes in 2022 in total. Yeah, it's hard to establish a run rate based on one quarter.
Okay. Perfect. I'm looking at my model, and it has that number, so I'm gonna keep with it, and congrats on the quarter. My brain capacity has been reached this morning.
Thanks.
Thank you. Next question comes from David Chrystal at Echelon Capital Markets. Please go ahead.
Thanks. Afternoon, guys. Maybe just building on Matt's question there on the property tax, were there any other OpEx line items that were one-time non-recurring or lumpy in the quarter that maybe smoothed out and maybe just some guidance on NOI margin expectation for the balance of the year?
Yeah. We're still pretty happy with what I've been saying the last few quarters at about 55% margins. For the year, as you recall, we didn't change our guidance for operating expenses. That does include the impact of inflation that we're seeing right now.
Okay. Perfect. That's helpful. Thanks.
Thank you. Next question comes from Chris at Canaccord Genuity. Please go ahead.
Hey, thanks. Hi, everyone. I'm wondering if you're able to share the market rent growth expectation or assumption you've made in your underwriting for Aura phase II.
Not at this time, Chris. I think that it would mirror our market asking rents for phase two would somewhat mirror our expectations for phase one market rents that we're seeing today, as slightly grown over the course of the next 18 months by, let's call it 3%-5%. I think that's a conservative estimate. When we underwrite organic rent increases that we're seeing in Austin and particularly in Round Rock right now, we're seeing accelerated numbers. We'll look to provide further guidance on that probably next year as we get a little bit closer to the delivery phase of phase II.
Okay, that's helpful. Just last question from me. I'm wondering if you see a lot of incentives being offered on new product being delivered in your markets to accelerate lease up. If so, you know, how would those net effective rents compare to you know, the rents you're able to achieve on your properties?
Right now, we're not seeing many of any incentives in our markets and on our properties. I think Blake spoke to the 10%-15% loss to lease number that we use and that most of our competitors use. You know, I like to think that the incentive concept is moving by the wayside in operating apartment complexes, particularly in Texas now. The only ones we're really seeing that use that are developers on lease up. Experienced property managers and landlords generally adhere to the revenue management systems. That to me creates, and to us, creates a clear picture and depiction of where your collected revenue is going over the near future.
Okay, got it. Thanks very much. I'll turn it back.
Thank you. There are no further questions. You may proceed.
Thanks, everyone. That concludes our call today. Thank you for your interest in BSR REIT. We look forward to speaking with you again after we report our 2022 third quarter results in the fall. We hope you all enjoy the rest of your summer.
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