Good morning. My name is Andrew, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q3 2022 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a Q&A session. If you'd like to ask a question during this time, simply press star, then followed by the number one on your telephone keypad. If you'd like to withdraw your question, please press the star followed by the number 2. Thank you. Mr. Oberste, you may begin your conference.
Thank you, Andrew, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the Q3 ended September 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 by providing an overview of our Q3 performance. Susie will then review the financials in detail, and I'll conclude by discussing our business outlook. After that, we will be pleased to take your questions. To begin, I want 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 forward-looking information in our news release in MD&A dated November 8, 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. The Q3 was another very strong period for BSR REIT. The multifamily sector in general, and our BSR product in particular, continue to remain in high demand. We continued to deliver very healthy financial performance with significant growth across all of our key operating metrics. Same community revenues increased 10.7% compared to Q3 2021.
Same-community NOI increased 9.7%. FFO and FFO per unit rose 48.1% and 31.3% respectively. AFFO and AFFO per unit increased 42.8% and 26.7% respectively. Net asset value per unit rose 25.6%, reaching $22.32 at quarter end. This healthy performance is supported by continued sound economic fundamentals in each of our markets. Strong rental demand enabled us to capture double-digit rental increases on both new and renewed leases during the Q3. Rental rates on new leases increased 12.3%, and rates on renewals rose 10.3%, resulting in a blended increase of 11.2%.
Overall, our weighted average rent as of September 30, 2022 was $1,460 per apartment unit, an increase of 14.5% from $1,275 a year earlier. It has also represented a sequential increase of 3.4% from $1,412 at the end of June 2022. There are a couple of other developments from the quarter I wanna highlight. In July, we began development of phase 2 of our Aura 36Hundred community located in the Austin MSA. We are developing 238 new apartment units with a total projected cost of $59.4 million. We expect to complete construction late next year.
This development partnership is an example of a high return growth opportunity sourced by our asset management business and which is already embedded within our portfolio. During July, we also entered into 3 forward interest rate swaps to hedge $280 million of variable rate debt. Once the final swap commences in early January 2023, all of our debt will be fixed or economically hedged to fixed rates at a weighted average contractual interest rate of 3.4%. Further, our team continues to effectively ladder our future debt maturities. With no debt maturing until 2024, combined with these hedging activities, our balance sheet remains relatively shielded from exposure to near-term rising interest rates. However, the last 2 quarters of rapid short-term interest rate increases have temporarily increased our interest costs.
As a result, we have narrowed our guidance for FFO and AFFO per unit this year, while leaving the rest of the 2022 guidance unchanged. I'll speak more about this later in the call. On October 3, subsequent to the end of Q3, we announced that the TSX has approved our intention to make a normal course issuer bid. It enables us to purchase up to approximately 3.2 million units or about 10% of our public float over a 12-month period. To date, we purchased and canceled 199,650 units under the NCIB program at an average price of CAD 13.99 per unit. The NCIB is an additional tool that we can use to deploy to increase value for our unit holders when appropriate.
Finally, I want to discuss a couple important management changes. As you probably saw in our Q3 news release, Blake Brazeal is retiring at the end of the year. Blake has been COO of BSR and its predecessor company since 2004. He's been an integral part of the team, and we are glad that he will continue to make himself available to us to consult going forward. Starting in January, Susie Koehn will assume the role of Chief Operating Officer, and Brandon Barger will take over as Chief Financial Officer and Corporate Secretary. You are all very well likely familiar with Susie, so I don't need to go through her credentials. I have no doubt that she's gonna do a terrific job as COO.
Brandon has been with BSR and its predecessor since 2014 and has been the Chief Accounting Officer since 2017. He's done an outstanding job in this role and has all the experience and skills necessary to be CFO. I'm confident that he is the right person for the job as we chart out the REIT's next stages of growth. I'll now invite Susie to review our Q3 financial results in more detail. Susie.
Thank you, Dan. Same community revenue increased 10.7% in the Q3 to $24 million, compared to $21.7 million last year. The improvement primarily reflected a 13% increase in average rental rates for the same community properties, from $1,199 per apartment unit as of September 30, 2021, to $1,354 as of September 30, 2022. Total portfolio revenue for Q3 2022 increased 27.9% to $40.5 million, compared to $31.7 million in Q3 last year. This reflected $2.3 million of organic same community rental growth and $9.3 million contributions from property acquisitions, partially offset by property dispositions that reduced revenue by $2.9 million.
NOI for the same community properties was $12.5 million, an increase of 9.7% from $11.4 million last year, reflecting higher same community revenue. This was partially offset by an increase in property operating expenses of $1.2 million, which includes increases in the cost of real estate taxes and insurance compared to Q3 last year. NOI for the total portfolio increased 31.6% to $21.7 million, from $16.5 million in Q3 2021. Same community NOI growth boosted total NOI by $1.1 million, while property acquisitions and non-stabilized properties increased it by $5.4 million. Dispositions reduced NOI by $1.2 million. As a reminder, non-stabilized refers to properties that were undergoing lease up or significant renovation during at least part of the comparative period.
FFO for Q3 2022 increased 48.1% to $12.1 million, or $0.21 per unit, compared to $8.2 million or $0.16 per unit last year. The increase reflects the higher NOI, partially offset by an increase of $1.2 million in finance costs associated with additional debt from new property acquisitions and the increase in interest rates. FFO increased 42.8% to $11.2 million in Q3 2022, or $0.19 per unit from $7.8 million or $0.15 per unit last year. The increase primarily reflected the higher NOI, partially offset by a straight-line rent guarantee realized in the prior year of $0.7 million. Net asset value increased 40.2% year-over-year to $1.3 billion, from $926 million at the end of Q3 last year.
NAV per unit was $22.32 at the end of Q3 2022, an increase of 25.6% from $17.77 a year earlier. Net income and comprehensive income for Q3 2022 was $23.8 million, compared to $107 million in Q3 last year. The variance was primarily due to a decrease in the fair value adjustment to investment properties of $185.8 million, partially offset by a higher NOI and increase in the fair value adjustment to derivatives and other financial liabilities of $95.4 million.
The REIT paid quarterly cash distributions of CAD 0.1299 per unit in Q3 this year and CAD 0.1251 last year, representing an AFFO payout ratio of 67.2% in Q3 2022, compared to 82.7% 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 September 30, 2022, was 36.2% or 34.1% excluding the convertible debentures, and the REIT's net debt to adjusted EBITDA ratio was 9.9. Total liquidity was $176.7 million, including cash and cash equivalents of $9.4 million and $167.3 million available under our revolving credit facility.
We also have the ability to obtain additional liquidity by adding properties to the current borrowing base. As of September 30th, we had total mortgage notes payable of $499.5 million, excluding the credit facility, with a weighted average contractual interest rate of 3.4% and a weighted average term to maturity of 5.4 years. Total loans and borrowings were $718.5 million, with a weighted average contractual interest rate of 3.4%, excluding the debentures, and 92% of the REIT's debt was fixed or economically hedged to fixed rates.
The outstanding convertible debentures were valued at $44.3 million at a contractual interest rate of 5% maturing on September 30, 2025, with a conversion price of $14.40 per unit. As Dan noted earlier, in July 2022, we entered into 3 interest rate swaps to hedge $280 million of variable rate debt. 2 of the swaps, which have notional values of $150 million and $65 million at fixed rates of 2.163% and 2.178% respectively, took effect on September 1, 2022, and mature on August 31, 2029. The third swap, which has a notional value of $65 million at a fixed rate of 2.087%, will begin on January 3, 2023, and mature on July 27, 2029.
Once this third swap commences, 100% of the REIT's debt will be fixed or economically hedged to fixed rate at a weighted average contractual interest rate of 3.4%, significantly reducing our interest rate risk. I will now turn it back over to Dan for some closing comments. Dan?
Thanks, Susie. We're confident that we are poised for continued strong financial performance in the quarters ahead. Both employment and population growth in our core Texas markets remains extremely strong, and we expect to continue generating significant growth in the rental revenue. I recognize that some people might be concerned that the rapid growth in rental rates we have witnessed in these markets over the last couple of years is not sustainable. I would note that even with the recent increases we have achieved, our rent as a percentage of household income remains highly affordable compared to the national average. Further, interest rate increases, while punishing to expenses, eliminates or significantly delays homeownership as a housing option for much of our resident cohort. We expect that favorable leasing conditions will continue in these MSAs in the months and years ahead.
As you're probably aware, 2022 was the first year in which we provided earnings guidance. The initial guidance we provided in March reflected our positive market outlook. In August, we increased the guidance based on the unprecedented growth we have experienced in our 3 core markets. We're now narrowing our 2022 guidance for FFO per unit and AFFO per unit as a result of rising interest rates. However, the rest of our guidance is unchanged, and we have effectively addressed our interest rate risk by entering into 3 forward-starting interest rate swaps in July. For 2022, we now anticipate FFO per unit of $0.85-$0.87 compared to our prior forecast of $0.86-$0.90, and AFFO per unit of $0.79-$0.81 compared to our prior forecast of $0.80-$0.84.
We continue to anticipate same community revenue growth of 10%-12% compared to last year, and same community NOI growth of 12%-14%. Property operating expenses are still expected to increase 4.5%-6.5%, which is well below the projected growth in revenue. These projections are on our current portfolio and do not take into account any potential acquisitions or dispositions. We are well positioned to continue pursuing attractive growth opportunities both within and outside our portfolio. The Aura 36Hundred development agreement is one example of how we can creatively generate acquisition growth through strategic partnerships, levering both our asset and property management capabilities. To that end, we also see opportunities to generate organic rent growth from suite renovations.
While acquisitions of stabilized properties from third parties are currently challenging, we're seeing interesting opportunities involving more strategic growth opportunities. As I've noted before, given the strength of our balance sheet and our outstanding financial performance, we are feeling no urgency to complete any major transactions in the near term. Rather, I would characterize our external growth as patient and disciplined. Overall, we are very pleased with our current competitive position. We believe that we have the right assets and the right markets to maximize returns for our unitholders, and that by executing on our strategy, we'll continue to deliver strong financial performance in the months and years ahead. That concludes our remarks this morning. Susie, Blake, and I would now be pleased to answer any questions you may have. Operator, please open the line for questions.
Thank you. Ladies and gentlemen, we will now begin the Q&A session. Should you have a question, please press the star followed by the number one on your touchtone phone. You'll hear a 3-tone prompt acknowledging your request, and your question will be pulled in the order that they were received. Should you wish to decline from the polling process, please press the star followed by the number 2. If you're using a speakerphone, please lift the handset before pressing any keys. We'll pause a moment for the first question. Your first question comes from Jimmy Shan from RBC Capital Markets. Please go ahead, sir.
Good morning, guys. Just on Austin, the same store NOI for the quarter was around 4%. It looks like revenue was fine, but OpEx might have grown wider than the rest of the market. Was there anything specific in the quarter that would have caught that?
Yeah. Hey, Jimmy. That's strictly related to timing of when we've made adjustments to our tax accrual. You can expect that to normalize again next quarter or in the Q4. If you look at it on a year-to-date basis, everything's normal there.
Okay. Just to ask. Maybe if you could just talk about the Austin market. You know, in the past, there's been a lot of supply, but demand seemed to have kept up. I kind of wondered, how you're thinking about that market today. Are we seeing any signs that, maybe this time around we're not gonna see it? We're hearing a lot of tech job losses, et cetera. I wonder if you could just comment on Austin.
Yeah, sure. I wanna make sure that we're talking about the same Austin and the same environment because the Austin I look at has had more jobs created since the pandemic on a percentage basis than anywhere else in the United States. I look at Austin as the 7th most expensive city in the U.S. to afford a mortgage currently on homeownership. Let me just say, the fastest employment growth and population growth market in the country pound for pound. Same Austin?
Yeah.
Yeah. Everybody's nodding internally. Okay. Jimmy, I mean, deliveries in Austin are a little bit shy of our expectations on the beginning of the year, and that makes a whole lot of sense. Some of the new deliveries that occurred in 2023, those projects were initiated in, call it, 2021, beginning of 2022. It takes a while to build an apartment complex. Labor and materials costs, as we've discussed in the past, spiked during those periods. I think what the developers chose to do is to stretch out their delivery timelines for that new product. We saw a few less projects delivered on the market in Austin this year than we anticipated at the beginning of the year. Net absorption, in our view, remains fairly healthy. We like those numbers.
Now, if we're looking forward into 2023 and 2024, you know, it's a mixed bag. Next year, if I'm looking at CoStar is gonna say that Austin has 17,422 units set to be delivered in 2023. Now, one of the components of that CoStar delivery matrix are planned construction projects. You know, if those planned construction projects can ever get financed in this environment, they may get off the ground. If they can, construct those projects in half the time it took them to construct projects in the last 3 years, they may deliver in 2023. That's a big unknown right now. I think what we're focused on is the continuance of net inflow migration and population growth and job growth, and it.
You know, the healthy absorption we're seeing in that market. We're still monitoring the deliveries. I think the one hanging issue is the interest rate increases are really forcing these developers to put pencils down on new developments. We talked about it last quarter, and the environment hasn't changed. You know, a developer just simply can't build a project and borrow enough money to float the development cost risk to initiate that project. Planned projects are breathtakingly large. Certainly in a 0% interest rate environment, we'd be concerned about that.
In this environment, you know, the carried cost of interest, you know, probably chills out a bit of the deliveries in Austin in the H1 of next year and the H2 of next year. The deliveries are coming there because people are moving there. Those deliveries, that housing delivery units will have to be delivered at some point. If deliveries are elevated in these Texan markets, it means that we continue to see population growth and compound annual job growth in these markets. High deliveries are a good thing. That's something we've experienced in, you know, in a lifetime of running properties in Texas. It's not anything we're worried about at this point. We continue to monitor.
As it relates to job activity in the tech sector, you know, Jimmy, I really don't know. I wish that I could talk to Mr. Musk and ask him if he's planning on laying off people at Twitter in Austin. Here's where my brain thinks toward. I think it's pretty logical. The tech offices that were moved to Austin in the last 20 years, they were moved to Austin because of the more affordable climate that was generated by the city of Austin. The business operator made that decision because they could provide their employees with a better lifestyle option in Austin than existed in the prior headquarters location. It would make logical sense that if we saw tech layoffs, we would see layoffs in the higher cost environments, and that bodes well for BSR.
You know, it means that layoffs occur in areas other than Austin. The operator or the tech operator may also decide to accelerate relocations to Austin, and accelerate layoffs concentrated in the higher cost coastal markets. That bodes well for BSR. But right now, we really haven't seen an impact in our portfolio from any recent tech layoff decisions at all whatsoever, in any marginal or material category of our company's operations. Looking forward, we either think it's neutral or positive for our investors' portfolio there.
Thanks for that. Maybe just a broader question then on financials. As we look to 2023 then, how do we think about the same-store NOI growth for that year?
Same-store NOI growth for 2023.
Mm-hmm.
You know, our thought is that we're early in the budgeting process, and we continue to look, you know, through every category. I wouldn't feel comfortable with the team answering 2023 NOI guidance until we get to 2023 and well into it. High level, we're very, very optimistic about this portfolio and its capabilities. We see rent trends continue to flow positively for our investors. We see high occupancy and institutional-grade assets located in. I'll tell you, if you take that Texas Triangle, Jimmy, it's the 15th largest economy in the world. We feel pretty good about our prospects for 2023. At this time, I probably wouldn't feel more comfortable going into any more detail.
Okay. Thank you.
Your next question comes from Sairam Srinivas, Cormark Securities. Please go ahead, sir.
Thank you, operator, and congrats on a good quarter, guys. Just looking at the occupancy numbers on a same-store basis, I know it's while rents have kind of grown and at a healthy level, occupancy seems to have declined on a year-over-year basis. Would you say that's mainly reactionary to higher rents, or are you also seeing a broader, somewhat of a slowdown in terms of appetite for people to actually rent out apartments in the U.S.?
Sure. Blake, you wanna take a stab at that one?
Sure. To refresh everybody on the last couple of quarters, we've been discussing our strategy concerning occupancy and rent. The Q3, just to start off, it met our expectations on occupancy of what we thought we'd do. The small decreases in occupancy in the quarter were primarily driven by replacing in-place leases with leases at higher-rate strategy. You know, in addition, you know, as most of you know, summer months have the highest number of unit turns, sometimes translating to longer make-ready days. Our occupancy in October has already rebounded and is trending even higher for November. I don't think there's any pushback from a customer standpoint. Our leasing activity was really strong for the Q3. Our same-store leases are up year-over-year, and same-store new leases were up year-over-year.
One thing that I would tell everybody that is still in play is that when you really look at sequentially and year over year, our calling people that are calling on leases, new leases from the internet to walk-ins is up. Twenty percent of our new leases, which was up over the last quarter, came from people moving in from out of state. That accounted for 47 states that moved into Texas this last quarter. That continues to be a strong metrics for us. Our leasing traffic continues to be one of the highlights that we have going on. I expect next year that we'll be looking at a good occupancy rate will be in the 95%-96% range.
Thanks for that color, Blake. That was really helpful. Just probably kind of digging deep on that one. Are you seeing any specific markets of the 5 markets you guys have perform better relative to others? Could you just probably give a bit of a market-by-market color on that?
I couldn't quite understand the question. Can you run it by me again?
Yeah, of course. You know, obviously your comments on the broader portfolio and the strength of the market was really helpful. Just looking at it from each of your markets, are some of these markets looking relatively more attractive to others? If you could just comment on it from a market-by-market basis.
More attractive from a rent growth standpoint or a move-
Yeah, rent growth as well as occupancy standpoint.
Yes. The top 3 that Dan discussed have they're all in a range, and there's none that really sticks out more than others. Dallas is really attractive right now, and Austin obviously is real attractive, as Dan talked about. I would say, Houston made quite a jump and, well, I'm seeing more traffic in the Houston area, and from a rental standpoint, we're improving in that area too. to kind of dovetail on what Dan talked about, I mean, these 3 cities continue to just move in, people moving in. that percentage I gave you, 20% of our new leases, it's not just tilted in any area.
The leader for the Q3 was Dallas, but all 3 of them are showing the same trends as far as people moving into them and our traffic count and what we're able to do as far as the rents. I do wanna stress this one more time to you guys. It'll be my last shot to do this. This is like a puzzle, and it started being a puzzle in the Q2. The puzzle entails occupancy and rate increases, and we spend a tremendous amount of time on this internally with some very sophisticated models as well as some very high intellect people who are working on this.
I think if you really look at what we've been doing and you look at the sequential growth of our revenue and the growth in general of our revenue and what I see happening in October and even into my models for November, I think the strategy will continue to work on revenue. It's being driven by the traffic that we're getting. I truly believe that this will continue after I'm gone because we've got a great staff. Susie's worked hand in hand with me for a lot of years, and I think she is very capable, and I don't expect to see any drop-off whatsoever in what we're doing.
Thank you for that, Blake, and all the very best for your next phase.
Thank you.
My last question perhaps was just on the transaction market. If you guys could just comment on what you're seeing there in terms of cap rates and is there any expansion you're seeing right there?
Yeah, sure. I mean, the Austin cap rates are probably a little bit tighter than other markets. I mean, let's just go ahead and talk about the market for cap rates in general. You know, we continue to see a bit of price discovery. You know, that's the wrong word. We continue to see more price discovery going on in the market than I've ever seen in my career. That is to say, Sai, the spread between, you know, the sellers' asking cap and the buyer's bidding cap. I've never seen it this wide. It could be 2%-3%. It makes sense when you think about that.
You know, I wanna remind everyone who's listening and everyone who reads these comments that fundamentally the operations of a multifamily business in the United States, specifically in the Sun Belt and particularly in Texas, have never, ever been better. If you own that product, it is just falling off the shelves, right? Rent gains, margin gains, cash flow increases, significant amount of volume. Why would you ever wanna sell that, right? I mean, you're gonna demand a premium in the form of a cap rate compression in order to sell those future gains in revenue, right? Let's base that premium on the seller interest at 3.5% cap, right? Now, if you're a buyer, you're willing to tolerate some negative leverage to get into a fast-growing market.
The current interest rate environment just practically prohibits you from buying at a 3.5 cap, right? You might need to have a cap. Let's say it's 5.5 cap. That might be the cap rate you need to have in order to make your deal make sense financially. When you have that wide of a spread between your bid and ask, you have a precipitous drop in volume. That's what we've seen in the Q3, and that's what we've seen in the beginnings of the Q4. You have an unwilling seller, right? Why should they be willing? They're earning money hand over fist. You have a buyer that can't build a financial model to take enough risk to acquire something.
Here you have in BSR, someone who's already bought and sold everything they need to buy and sold. You got $175 million in cash and waiting to deploy, and you got a very patient and disciplined management team. The only people that are selling in this market are people that need to sell, and the only people that are buying in this market are people that need to buy. Now, I think it's a little bit better in these Texas markets than perhaps in some other, high up and down markets that we've talked about in the past, perhaps in the west or the, you know, a little bit west of Texas and perhaps a little bit south of Georgia and east of Alabama.
You know, I think that we're seeing a bit more volatility in some other markets. As cap rate trades are concerned. In Texas, you got an unwilling seller and for good reason. You've got a buyer that just simply can't finance the acquisition at this time. It doesn't mean they're not interested. It just simply means that they're not willing to take the risk to buy at a 2% negative cap rate leverage. We think that over time. Look, the math supports us and I think every one of our competitors would say the same thing in this market, including competing buyers.
In the event cap rates move up to the bid, which is apparently where the markets in the U.S. and Canada are buying BSR as well as every one of our competitors. Substantial discount to NAV, right? Significant forward-looking cap rates. We are seeing no evidence of any trades whatsoever in that range ever, nor have we in the last 10 years, right? Okay, let's live in that environment. That would mean that rent increases go away. I don't think us or any of our competitors are saying that. That's number one. That would mean that the rising interest rate environment that we've seen for 9 months in the last 15 years would continue to persist in this, in the look forward.
I don't think central banks are telling us that. It's our viewpoint and the viewpoint of, I would say, everyone who transacts in real estate that you know, in this environment, volume goes down, that that cap rates and growth are gonna win, right? That if cap rates grow up, that's because you're gonna get the resulting growth that comes along with it. Austin is a great example of that.
Right. Thanks for the call, Dan. That was really helpful. I'll turn it back.
Your next question comes from Chris Koutsikaloudis with Canaccord Genuity. Please go ahead, sir.
I'm just curious what you see kind of being the longer term trend for rental rate growth for your portfolio and maybe how quickly you would expect growth to moderate toward that level. It sounds like, you know, your comments are pretty bullish, but as we look kind of over the longer term, wondering what your thoughts are there.
Chris, thank you. I was hoping that somebody would sense that our comments are pretty bullish. Yeah. Long-term trends to me and to our team are supply and demand-driven, right? Here's some headwinds, just gross headwinds to long-term trends being positive. Deliveries, right? We talked about the mitigating situations and factors related to deliveries. It takes 1.5 years to 2 years to build something to compete with us. We see existing deliveries down, and we see, you know, a built-up dam on new deliveries. Now, that may impact us at the tail end of next year or the moving into 2024 or 2025. But right now, we don't see any reason to not be extremely bullish about this portfolio and our markets. Let's talk about tailwinds, or headwinds and tailwinds.
How about the middle one? That's rising interest rates. Rising interest rates are certainly gonna affect cap rates when you lose growth. We don't see growth going away anytime soon, right? Here's who it affects more than us: single-family homeowners. The average mortgage in the United States, the average thirty-year fixed rate mortgage increase or rate, was 7.08%. That's a thirty-year rate, right? What that means is more renters. The U.S. homeownership rate current near-term peak was in the Q2 of 2020, and it hit 67.9%. In the Q3, that rate dropped 190 basis points to 66%. It's potentially and permanently on its way down to 60%-62%. What that means is more renters.
What's impacted us with cap rates can be experienced on the lever to homeownership, right? We don't see a lot of supply. I think those 2 big factors. We don't see a significant amount of supply net of absorption that would cause us to be anything but bullish about the future of BSR and specifically our 3 markets. Now, if you want me to break it down to percentage growth, you know, I think next year is very healthy for us. I think we'll exceed expectations that the market has for us right now. I think I'm more confident about 2024 than I was a quarter ago.
You know, plugging into the CoStar math, we've seen nothing but increases there on, you know, kind of a 3-year run rate of health in our sector and specifically in multifamily in the United States and the state of Texas. Percentage-wise, it's too soon to tell, but our viewpoint is it's better than everybody thinks it is today.
Fair enough. I guess maybe just on the comments regarding, you know, the cost of homeownership and how that's risen, wondering if you have this statistic at hand. If not, no big deal. Just the percentage of move-outs where those people are actually moving into homes and purchasing homes.
Yeah. Blake, I think that number sits with us and it, you know, it peaked probably in the Q1, which makes a lot of sense. I think we saw around 200 move-outs for new home ownership. That makes sense. You had low rates, right? You had a lot of people wanting to buy homes. It makes sense. You would also see that rate kind of decelerate throughout the course of the year as mortgage interest rates increased from their 3%, 2.5% number to 7%. Our trend lines followed. But with that said, Chris, it's always looked at about 15%-17% of our move-outs are coming from new home ownership.
We think the trend will be that shrinks, rather than increases, in the near and medium-term future.
Appreciate it. Thanks very much. I'll turn it back.
The next question is from Kyle Stanley from Desjardins. Please go ahead, sir.
Thanks. Morning, everyone.
Hey, good morning.
I was just wondering, and just kind of along the same lines of question there. Have you seen any, you know, material changes in turnover across the portfolio? You know, would that suggest maybe what's driving the acceleration in your renewal rent growth?
Oh, are you talking about move-in, move-out, you know, new units versus renewals?
Yeah, I guess generally just, you know, if the turnover trend, I mean, you know, I think the kind of rule of thumb is 60% turnover annually in the U.S. I'm just wondering, have you seen that, you know, trend any lower based on kind of the comp rate you just provided? Then is that driving the upgraded renewal spread?
You know, it has and I think the upgraded renewals are. Just by reference for the group, you're talking about the 12%+ renewal increase, sequentially.
Yes.
Yeah. You know, it's good to point out that the distinguishing factor with U.S. and Canadian multifamily is rents can go up at the termination of a lease in the United States. So as a result, our new tenants that we go and seek pay an increase in rent, but our renewals are also paying an increase in rent, you know, up to a certain amount. It's an economic decision of the landlord whether to take the risk to lose that resident in order to attract a higher rate on a new tenancy and perhaps turn the unit and incur a month's loss of occupancy.
All of that being said, if we go back to what we discussed at the beginning of the year, what we told you was, we were gonna take that year-end occupancy, and we were gonna compress it a bit while we attacked rates. Then we told you, as the year goes on, we're gonna build that occupancy right back up to a year-end 95%-96% level that Blake spoke about earlier. That's our viewpoint on that hadn't changed. Now, how that bleeds through your financials. It turns into a lower occupancy in Q1 than Q2, right? A little bit of maintenance over the summer season as we see high leasing velocity and high traffic. Then you see a sequential build back up in occupancy beginning in the fall.
That's precisely what this company has done, and that's how this portfolio has performed. The second thing that occurs is a little bit of a bleed through on turnover costs and expenses that roll through recurring CapEx and OpEx over the summer months. That's precisely what this company has exhibited. On the tail end of the year, you know, you're gonna see us really push for renewals moving into next year. That print on receiving higher rate increases on renewals, sure, that's also correlated with a higher renewal percentage than we enjoyed perhaps in Q1 or Q2 as we were attacking rates. You know, it ranges by month.
Blake, I would say it's, you know, please, you might wanna confirm the turn number, but I would say we're probably looking at about 57%-62% renewals right now in these September numbers. Would you say that's accurate?
That's accurate. Close.
Okay.
I will add, we signaled this would happen 2 quarters ago. It's exactly at this point, it's playing out exactly the way we thought it would.
No, I completely agree. Okay, just one more for me. Just how you're thinking about capital allocation here. I'm wondering, you know, you mentioned obviously the wide bid-ask spread, so a little bit harder to get anything done on the external growth side. You know, how has it changed now that maybe the NCIB is a bit more active? Or just, I guess, generally, how are you thinking about your capital allocation as you go into kind of next year?
Oh, yeah, sure. You know, in our view, an NCIB or buying back your shares is most analogous to a new property acquisition without taking any execution risk whatsoever. When we see our shares down at this opportunistic level and we can buy a share for, you know, to go back to my earlier comments, the bid, right? That remarkably low bid, and we don't have any execution risks, then we'll opportunistically pursue acquiring back our shares. That creates growth for our shareholders. You know, it's somewhat defensive to our shareholders' value. We've said that over and over again, we'll continue to do it. Our viewpoint on NCIB hasn't changed. What's changed is, you know, the fact that we're traded at a wider cap rate spread than any of our Canadian peers right now. That's what's changed.
When that happens, and we walk into our markets, and we see our product, being traded for well below where our stock price is traded, it's an easy decision for us to allocate our capital into buying back shares. So long as that continues to exist, we will continue to buy back our shares.
Okay, that's it for me. Thanks.
Your next question is from Himanshu Gupta from Scotiabank. Please go ahead, sir.
Thank you and good morning. I just joined the call, so I'm not sure if a couple of my questions have already been addressed. I'll ask anyway. First question is, what do you think is a mark-to-market rent opportunity or lease-to-lease in your portfolio as of Q3?
Sure. We like the number at about 10%-12%. Would you say that's fair, Blake?
Yes, that's fair.
Okay. That's your 10%-12% as of Q3. Thank you. Next question would be, again, you know, I'm not sure it's already addressed, like what are the rent growth expectations in 2023? Or put differently, have that changed or come down or gone up, in the last quarter when we spoke?
Well, our numbers are pretty positive, Himanshu. Our rent expectations for the next quarter and moving into 2023 are. They, I mean, they continue to exist. I wanna clarify a point that seems to be a fun topic in the market, the concept of decelerating, the concept of rate peaking, right? I think we gotta be very careful when we say these things. Decelerating doesn't mean declining. It means rates are increasing, but at a lower rate than they were increasing. I think if we go back and we're sitting in any year prior to 2023, right, or 2022, and you have a company that you're underwriting that's producing double-digit rent growth on the margin, turning into double-digit.
Significant double-digit NOI growth, and I think the numbers we reported, significant cash flow growth that results in significant NOI or significant NAV growth, I think everybody's jumping up and down. Now it seems like the topic turns into decelerating or rate peak. We think the rate environment is very healthy. We're conducting our renewals for January in the month of October. I mean, we do that 90 days out. We're extremely bullish on the performance of this portfolio, and we're not seeing anything in our eyes that looks like rate peak or declining rates. What we might be seeing is rate growth that's lower than 15.1%, which is what Blake told you it was this time last year. It might look like 10%-12%.
A landlord can collect that over anywhere between 12 and 18 months, which is what we said this time last year.
Okay. No, that's very helpful, Jim, there. My last question is, you know, IFRS cap rate is around 4%, if I look at your financials. 10-year Treasury is also around 4. I mean, obviously today it's a bit lower there. Do you think the multi-family cap rates will have to trade at a certain spread to treasury? Or any thoughts on how you look at cap rate or valuation from your standpoint?
Any thoughts on how we came about our NAV cap rate of 4.03%?
That's right. Yeah, that's fair enough. Yeah, that's the question.
Yeah. Our process to establish a NAV cap rate has not changed. We look at the transactions that took place in the market. We look at their underwritten cap rate. In many cases, you know, Texas is a non-disclosure state, so it's tough for people to read into that. In many cases, we know the buyer and the seller. In a lot of those cases, we talk to the buyer and the seller confidentially, and we use that process. We have different silos within our company that determine their own viewpoint of cap rates. They work independently, and they work with our external advisors to arrive at a cap rate.
You know, faced with someone who thinks that cap rates may go up and has their opinion, versus someone who is actually in the market seeing these transactions take place and providing you their opinion, I think I'm going with the latter, not the former.
Got it. Maybe the last follow-up question is, I mean, based on your experience, like over the years, does multifamily cap rate trade at a certain spread to 10-year Treasury? And is it like 100, 200, 0? Like how would you define that or look at that, if at all?
Yeah. I think a fine trend. You know, you gotta take it in blocks, Himanshu. Take 1982 to 2021 if you believe we're in a great reset environment. That's a fair block to see where the average spread in multifamily cap rates have occurred. You know, we've talked about this over the years. We saw a compression to that historic spread, with our prior portfolio, and we saw it as an opportunistic time to rotate into the portfolio we have right now, which just as a reminder is, by my viewpoint, the youngest public multifamily REIT in the sector.
When we look at that, we think that a trend you see is that cap rates in smaller markets associated with older, perhaps B or C properties, will expand faster than those cap rates in larger markets and what you can describe as B plus to A assets. You see a bit more rigidity in cap rates in, for example, Houston, which is the third largest MSA in the country. Probably a little bit more elasticity on cap rates of, you know, perhaps Toledo, for a C project at rents of $800 per month.
We would expect those cap rates to expand in this environment, right, a lot farther than they would against the U.S. Treasury for what we own, which is institutional-grade assets and the 3 as a combined, some of the 3 fastest-growing markets in the United States, when you bring them together, that are young and brand new. We think that spread for our type of product, relative to others, remains as tight to that treasury as possible.
Got it. Thank you. Once again, you know, thanks for taking my question. As I told you, I joined at the end, and I'm sure most of them would have been already addressed, but thank you. Thank you, guys. I'll turn back.
There are no further questions at this time. Please proceed.
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 Q4 and year-end results next year. Thank you, everyone.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your.