Good afternoon. 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 Q4 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 the two. Thank you. Mr. Oberste, you may begin your conference.
Thank you, Joanna. Good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the fourth quarter and year ended 31st December 2022. I'm joined on the call by Brandon Barger, our Chief Financial Officer. Susie Rosenbaum Koehn, our 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 fourth quarter performance. Brandon 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 with, 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 and MD&A dated 8 March 2023 for more information. During the call, we will reference certain non-GAAP financial measures. Although we believe these measures provide useful and supplemental information about our financial performance, they're not recognized measures and do not have standard 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. 2022 was easily the strongest year in BSR REIT's history. Our focus on high-quality properties and high-growth Texas markets resulted in outstanding financial and operating performance. We generated Same Community revenue and NOI growth of 11.7% and 13.5%, respectively.
These figures were near the upper end of our recent guidance and exceeded the upper end of our initial guidance. We generated exceptional growth in FFO and AFFO per unit, which met our original guidance despite the impact of rising interest rates. I'm pleased to say that we also ended the year with a very strong quarter. Let me take you through a few of the Q4 highlights. Same Community revenue increased 13.3% compared to Q4 last year. Same Community NOI increased 11.7%. FFO per unit and AFFO per unit increased 21.1% and 29.4%, respectively. Again, despite higher interest rates. Net asset value per unit was $21.75 a year-end, up 9.8% year-over-year.
The results reflected continued high occupancy and strong growth in weighted average rent across our portfolio. Weighted average occupancy was 96% as of December 31, 2022, in line with a year earlier, and weighted average rent was $1,482 per apartment unit at year-end, an increase of 11.7% from a year earlier and a sequential increase of 1.5% compared to the end of Q3 2022. Breaking rent growth down a bit further, rental rates on new leases increased 2.1% during the fourth quarter, and renewals increased 11.9% over the prior lease, resulting in a blended increase of 6%. You can see the full breakdown of lease rate growth and occupancy in our Q4 MD&A and in the operational update news release that we issued on January 10.
As you're likely aware, we announced in early October that the TSX approved our normal course issuer bid that enables us to purchase up to approximately 3.3 million units or about 10% of our public float over a 12 months period. We were very active on this front during Q4, repurchasing approximately 1.08 million units under the NCIB and our Automatic Securities Purchase Plan at an average price of $13.55 per unit. We will continue to take advantage of opportunities to repurchase units when appropriate, enabling us to strengthen unitholder returns. BSR also received some recent recognition that I want to highlight. We were named one of the best places to work in multifamily and best places to work in multifamily for women at the 2023 Multifamily Innovation Awards by Multifamily Leadership.
We were also named one of the best places to work in Arkansas for the six straight year by Arkansas Business, and our online reputation score for 2022 from J Turner Research was 81.11, which was far above the national average of 62.8. We expect this score will be among the top publicly traded U.S. REITs when the scores are all published later this month. This score, as a reminder, is compiled based on resident reviews from websites like Google, Yelp, Apartments.com, and ApartmentRatings.com. These achievements all point to a common theme.
We have an outstanding and dedicated team that is proud to work for BSR and is fully committed to providing our residents the best possible living experience. It's a winning formula, and I'm proud to be leading such an exceptional team across all of our markets. Our outlook remains highly positive. We provided initial guidance for 2023 that forecasts continued solid growth in our key financial metrics, supported by very strong rental market conditions in our Texas MSAs. I'll speak more about this later in the call. I'll now invite Brandon to review our fourth quarter and full year financial results in more detail. Brandon.
Thank you, Dan. I'm very pleased to be speaking with you all on a quarterly conference call for the first time. I've met many of you in person and look forward to meeting more of you in the months ahead. Same Community revenue increased 13.3% in the fourth quarter to $24.9 million, compared to $22 million last year. The improvement primarily reflected a 12.3% increase in average rental rates for the Same Community properties from $1,225 per apartment unit as of 31st December 2021 to $1,376 as of 31st December 2022. Total portfolio revenue for Q4, 2022 increased 22.2% to $41.6 million compared to $34.1 million in Q4 last year.
This reflected $2.9 million of organic Same Community rental growth and a $6.1 million contribution from property acquisitions. This was partially offset by property dispositions that reduced revenue by $1.6 million. Net Operating Income, or NOI, for the Same Community properties was $13.8 million, an increase of 11.7% from $12.4 million in Q4 2021. The increase reflected higher Same Community revenue, partially offset by an increase in property Operating Expenses of $1.5 million due to higher payroll, administrative, and repair and maintenance expenses and increases in the cost of real estate taxes and insurance compared to Q4 last year. NOI for the total portfolio increased 23.9% to $23.2 million from $18.7 million in Q4 2021.
Same-community NOI growth boosted total NOI by $1.4 million, while property acquisitions and non-stabilized properties increased NOI by $3.8 million. Dispositions reduced NOI by $0.7 million. As a reminder, non-stabilized properties refers to properties that were undergoing lease-up or significant renovation during at least part of the comparative periods. FFO for Q4 2022 increased 37.6% to $13.3 million or $0.23 per unit, compared to $9.7 million or $0.19 per unit last year. The increase reflected the higher NOI, partially offset by an increase of $0.6 million in finance cost associated with debt incurred from property acquisitions and a general increase in interest rates.
AFFO increased 37.5% to $12.5 million in Q4 2022 or $0.22 per unit from $9.1 million or $0.17 per unit last year. The increase primarily reflected the higher FFO, partially offset by an escrowed rent guarantee realized in the prior year of $0.3 million. Net asset value, or NAV, increased 20.4% year-over-year to $1.24 billion from $1.0 billion at the end of 2021. NAV per unit was $21.75 at the end of December 2022, an increase of 9.8% from $19.81 a year earlier.
The REIT paid quarterly cash distributions of $0.1299 per unit in Q4 this year and $0.1251 last year, representing an AFFO payout ratio of 59.6% in Q4 2022, compared with 71.4% in Q4 2021. All distributions were classified as a return of capital. I'll now review our results for the 12 months ended 31st December 2022. Same Community revenue increased 11.7% in 2022 to $94.3 million from $84.4 million in 2021. The increase reflected a 12.3% year-over-year increase in Same Community rental rates, as I noted earlier.
Total portfolio revenue was $158.5 million, an increase of 32.6% from $119.6 million in 2021, reflecting higher Same Community revenue, as well as contributions of $40.3 million from property acquisitions and $1.1 million from non-stabilized properties, partially offset by dispositions that reduced revenue by $12.3 million. Same Community NOI increased 13.5% to $51.1 million from $45 million in the prior year. The increase reflected higher Same Community revenue, partially offset by an increase in property operating expenses of $3.8 million. Total NOI increased 35.9% to $85.5 million from $62.9 million in the prior year, reflecting the increase in Same Community NOI as well as a contribution of $22.4 million from property acquisitions and non-stabilized properties.
This was partially offset by dispositions which reduced NOI by $5.8 million. FFO for 2022 increased 57% to $48.1 million or $0.86 per unit, compared to $30.6 million or $0.60 per unit in 2021. The increase in FFO reflected the higher NOI, partially offset by increases of $1 million in G&A expenses and $4.3 million in finance costs. AFFO for 2022 increased 48.5% to $44.7 million or $0.80 per unit, compared to $30.1 million or $0.59 per unit in the prior year. The increase in AFFO reflected the higher FFO, partially offset by a lower realized escrowed rent guarantee compared to the prior year, as well as an increase in maintenance capital expenditures of $0.5 million.
The REIT paid cash distributions of $0.518 per unit in 2022 and $0.5004 per unit in 2021, with an AFFO payout ratio of 65.2% in 2022 and 85.4% in 2021. All distributions were classified as a return of capital. Turning to our balance sheet. The REIT's debt to gross book value as of 31st December 2022 was 37.3% or 35.2% excluding the convertible debentures. Total liquidity was $166.7 million, including cash and cash equivalents of $7.2 million and $159.5 million available under our revolving credit facility. We also have the ability to obtain additional liquidity by adding properties to the current borrowing base of our credit facility.
As of 31st December we had total mortgage notes payable of $499.1 million, excluding the credit facility, with a weighted average contractual interest rate of 3.3% and a weighted average term to maturity of 5.1 years. Total loans and borrowings were $726.4 million, with a weighted average contractual interest rate of 3.4%, which excludes the convertible debentures. As we discussed on our third quarter call, in July 2022, we entered into three interest rate swaps to hedge $280 million of variable rate debt. Two of the swaps took effect on September 1st, 2022. The third one took effect on 3rd January 2023, just subsequent to the end of Q4, and matures on 27th July 2029.
This swap has a notional value of $65 million at a fixed rate of 2.087%. Following the commencement of this swap, 99% of our debt is fixed or economically hedged to fixed rates at a weighted average interest rate of 3.2%. Near the end of the fourth quarter, we also amended an existing $80 million notional value interest rate swap, which reduced the fixed rate from 1.704% to 0.44% and shifted the maturity date from 10 June 2025 to 10 June 2024.
Subsequent to this amendment, in early January 2023, we entered into a new forward-starting interest rate swap commencing on 10 June 2024, with an $80 million notional value at a fixed rate of 1.828%. Overall, we have materially reduced our interest rate risk through these swaps. Finally, I want to note that our outstanding convertible debentures were valued at $42.6 million at year-end at a contractual interest rate of 5%, maturing on September 30, 2025, with a conversion price of $14.40 per unit. I will now turn it back over to Dan for some closing comments.
Thanks, Brandon. While 2022 was an exceptional year for BSR REIT, we're confident that our strong positive momentum is going to continue through 2023 and beyond. The rental markets in our core Texas MSAs remain very robust, supported by population and employment growth that are well above the U.S. national average. As I've previously noted, the Texas Triangle represents the 15th largest economy in the world, and it continues to attract major job-creating investments and corporate relocations. Occupancy rates in these markets remain high, and while rent growth has been very significant over the last couple of years, it's important to note that the affordability remains solid. According to the latest statistics we've seen, rent as a percentage of median household income is 27.2% in Dallas, 25.6% in Austin, and 22.6% in Houston.
By comparison, that same number is 35.3% nationally in the U.S., and above 50% in gateway markets like New York, Boston, and Los Angeles. In 2022, we provided annual guidance for the first time. It was highly positive, reflecting the bullish outlook for our Texas rental markets. While we made a couple of adjustments to the guidance over the course of the year, we met or exceeded those initial numbers, even though rising interest rates impacted our FFO and AFFO per unit. Yesterday, we provided guidance for 2023. Our guidance calls for further solid growth in our key operating metrics. We currently expect FFO per unit of $0.90-$0.96 compared to $0.86 last year. AFFO per unit of $0.83-$0.89 compared to $0.80 last year.
Same Community revenue growth of 5%-7%, Same Community NOI growth of 6%-8%, growth in property OpEx of 4%-6%. We'll continue to work hard to minimize operating expenses and identify efficiencies where possible. We're also continuing to evaluate further growth opportunities. We have the liquidity available to us to capitalize on any opportunities when they emerge. We're very disciplined buyers, as we've shown, we'll remain patient and take advantage of opportunities when they arise.
Through multiple years of capital recycling, we have sold everything we wanted to sell, we built a leading portfolio of high-quality properties in high-growth Sun Belt markets. These properties are delivering outstanding occupancy and rent growth that should enable BSR REIT to deliver strong returns for our unit holders for the foreseeable future. That concludes our remarks this morning. Brandon, Susie, and I will now be pleased to answer any 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 the star followed by the one on your touch-tone phone. If you are using a speakerphone, please lift the handset before pressing any keys. If you would like to withdraw your question, please press star followed by two. First question comes from David Chrystal at Echelon Capital Markets. Please go ahead.
Hey, thanks. Good afternoon, guys. Susie, maybe just a quick question on the markets. I know, Dan, you mentioned kind of strength in the markets is still solid, but can you comment on leasing momentum year-to-date and what you're seeing in terms of lifts on new and renewal leasing?
Yeah. Hi, David. Absolutely. In January and February, we're renewing at a little bit over 8%, and our new leases are coming in at a slight decline of 1.7%. However, you have to keep in mind that we're basically replacing short-term leases, and we did this in Q4 too. A short-term lease, a month-to-month lease is obviously more expensive than a 12-month lease. That's why our rates are being impacted by the replacement of the short-term leases.
However, if I take that piece out and we look at it on an apples-to-apples basis, meaning 12 months to 12 months, then it comes in closer to being consistent with the prior leases and takes us up to a blended rate increase of about 4%. I should point out here too that having a constant or flat increase related to new leases is a lot of the time related to seasonality in the winter too 'cause less people move.
Yeah, fair. Are you seeing momentum build up, or is it a little early to see what March rentals look like? Is there an improvement there, or is it kind of flat and in line with January and February?
Well, no. We're predicting obviously higher increases in revenue over the prior year in the first half of the year versus the latter half of the year just 'cause the comparables are easier. Right now, we're looking at already for renewals in May, and those renewals are coming in around 6%, so that's pretty consistent with our guidance.
Okay. Fair. Just across the whole portfolio, do you have an estimate of mark-to-market?
Yes. Mark-to-market would be around 8% right now. As we've said in the past, it usually takes about 18 months to get to recognizable mark-to-market. Our increase in revenue in the guidance considers the increase for mark-to-market as well as, some small offsets related to a little bit less other income.
Okay. Great. Thanks. Dan, maybe shifting over to the investment side of things. You're obviously very active on the NCIB in the fourth quarter. Where do you look at deploying your incremental investment $ from here?
Well, yeah. Thanks, David. you know, right now we're deploying our free cash flow into value add renovations in Dallas and, you know, continued smart home technology and renovations across the portfolio. The returns on that capital deployment are fairly healthy and they continue to be healthy. Those value add acquisitions that we bought in 2019, we look to close out the value add renovations towards the end of the year. Those investments, I think paid a healthy return to our investors and the renovations have only juiced the return. you know, our guidance doesn't assume any acquisitions or dispositions.
I want to also note our guidance also assumes no impact of that development that we have in play in Austin right now that looks to come online next summer fully, and then leasing will begin in 2024. Right now, we don't plan on selling the assets. I think when we look at deploying capital, our expectation is the acquisition market will probably pick up in the second half of the year. Our read-through of the market right now, you know, Colliers is doing a splendid job in their U.S. research in the past year. I think their January numbers have multifamily volumes down year-over-year, about 70% in the month of January.
Pricing on the multifamily deals that did trade, that's about $6.5 billion of apartments that traded in the U.S. in January. Pricing is down about 5% for those assets compared to January of last year. You know, that's not all that different from what we're seeing in our markets. We don't see. We continue to see a wide bid-ask spread between the value that sellers are willing to sell assets and the value that buyers just can afford to pay. We don't see any capitulation on that spread, any meaningful capitulation on that spread. It's just a recipe for transaction dropping.
you know, if we see opportunities in this environment to hit our returns, create accretion on an AFFO per unit and an FFO per unit basis for our investors, back to traditional external growth opportunities, and returns that we've seen in the past, we'll definitely take advantage of them. Right now, we don't love what we're seeing from an asking-price standpoint and a transaction-price standpoint in our markets. We'll remain patient and nimble, just like we have displayed. When we see opportunities, we'll pounce on them, much like you saw us pounce on the over 60 rotations that we did during the 36-month period, while we rebuilt the REIT from, I'll call it 19 to 21.
Okay, great. Thanks. Appreciate the color. I'll turn it back.
Thank you. Next question comes from Sairam Srinivas at Cormark Securities. Please go ahead.
Thank you, Operator. Just probably doubling down on David's line of questioning. Susie, in terms of, you know, the markets you guys are in, can you give some color on, you know, the diverging trends of rent growth and occupancy you're seeing in those markets and the health across these markets?
Sure. Right now we're seeing occupancy is holding pretty stable in the 95%-96% range, just like we were at year-end. However, I want to point out the guidance actually includes a slight decline from where we are at 96%, or where we were at the end of the year to 95% at the end of this year. That relates a bit to some of the supply we're seeing in Austin, which Dan is going to expand on.
I think the supply in Austin is twofold, Sai. We saw some net deliveries in downtown Austin, really outpacing absorption, the remarkable absorption that we continue to see in Austin, but outpacing it a tad, I'll say Q3, Q4. Our properties are really situated around the suburban corridor of Austin. Those net deliveries at a $3,400 a month rent price, $3.50 a foot, they don't really impact our operations and our property and our portfolio in Austin, I'll say to date. When we look forward, you know, one thing we're sensitive to is some supply growth in North Austin, in North Austin in particular.
Now, I want to highlight here that this new supply that's dropping in North Austin is, it may create some short-term, I'll say non-tightness in our leasing conditions. We've addressed that and guided, and our guidance reflects that. You know, overall, the cost to complete these projects is, let's say $260,000-$300,000 a suite. I think that compares very favorably to the $170,000 a suite that our REIT is currently trading at on the TSX. I think that compares very favorably to the $230,000 a suite that our REIT's recently reported NAV is sitting at.
You know, I think that sets us up quite nicely, to defend and continue to play defense and retain, our existing resident base. To summarize it here, we positioned this portfolio years ago and messaged it to, take advantage of market conditions. You know, we'd rather be us where we are right now, and we're in fantastic shape to operate our stabilized portfolio in, around Texas, but particularly in North Austin. We'd probably expect to see a little bit of softness in the near term. I'd say we the long-term supply in Austin and in Dallas and Houston, for that matter, the new starts that we're seeing, the credit conditions continue to, they continue to prohibit new starts from taking place, Sai.
That absorption and that net tenant resident demand driven by relocations, corporate relocations, and net move-ins, continues to keep up. It's a pretty simple argument or pretty simple math formula. We think that Supply could impact us for six months, de minimis. That in fact is included in our guidance. After that, you know, we're seeing supply drop off a cliff. That tees BSR up and any multifamily owner in these Sunbelt high-growth markets for probably two to three years of sustained absorption net, well net of existing starts that are set to be delivered in those years.
That's great color, Dan. Thank you for that. probably just digging into your comments on those markets, especially looking at Houston. rent growth seems to have, like, you know, dipped a bit this quarter in Houston and, you know, in terms of absolute dollar terms, it's kind of plateaued on a quarter-on-quarter basis. Is that something to do with the supply dynamics there or anything more specific in that market?
Sai, I think, I think you're looking at the fact that the effect of new lease rates were negative by 2.2% in the fourth quarter in Houston. That's also related to replacing short-term leases with longer-term leases. If you recall, we focused in the fourth quarter on building occupancy and locking in longer-term leases. If you take out the shorter-term leases and look at this on a longer term to a longer term lease, then it's no longer negative, and it's consistent with the prior leases or the same.
That's great, Susie. Thanks for that. My last question, Dan, you know you mentioned the repositioning program as such. Do you guys have a goal of the number of suites you wanna kind of reposition this year and the average spend you're expecting on that?
you know, I think We think about it in three different buckets, Sai. We've got another, let's say 4,000 units that we'd like to install smart home technology in. We'd like to tackle that investment by the end of the year. That's a quick update that we can oftentimes execute upon while the resident is still in their residence. The second part of the three, the three-headed dragon on value add for us right now is installation of washers and dryers. I believe we have 1,200 units throughout the portfolio that we continue to wanna install washers and dryers inside the units. Those.
Oftentimes those units have washers and dryers in them, they're owned by the incumbent resident, we'll wait on renewal or move out to install those washers and dryers. The return there is healthy. Call it $50 a month against a $600 purchase price, give or take. That one we're not in control of. We'd love to get those washers and dryers in sooner than later, let's roll that over a two years period.
You come back to the suite renovations. I think we did 42 more suite renovations last in the fourth quarter than we had budgeted for for the year. When we look on a look forward, I'd say that number of suite renovations looks to be less than 1,000. We'll probably say closer to about 300-400 suites over the course of the next 12 months, and we still like that north of 10% cash on cash return on the return for suite renovations.
Awesome, Dan. Thank you so much for the color. I'll turn it back.
Thank you. Next question comes from Brad Sturges at Raymond James. Please go ahead.
Hi there. Just to go back to the conversation around the bid-ask spread in the transactional market, where do you think we ultimately end up with from a cap rate perspective, given where we are today on financing costs? You've been, I guess, increasing your cap rate assumption a little bit, and you alluded to, I guess, valuations being down about 5%. Just curious where you think we trend here over the next couple quarters.
Yeah. I think the next couple quarters is not really gonna have a provide anyone a good opportunity for a read-through on values. I think we're in a dislocated market, and you've got a seller who's got a healthy rate on their existing debt and really doesn't have much of a desire to sell at a haircut on price. You've got a buyer that, because of credit conditions, is unwilling to finance at the low asking cap rate. You know, our view is that that bid-ask spread's gonna continue to remain wide so long as Jerome Powell and the governors at the Bank of Canada and the governors at the Bank of England remain household names for the majority of our populations.
I think the second those macroeconomic trends leave us, I would expect to see a floodgate of transactions open, under the historical spreads to constants on debt. I would tell you that, post a reopening, we expect transaction volume to pick up in the second half of the year. Here's my view, and, you know, it's our view. What we've historically seen is that high-growth markets, the premium on top of a Treasury is very thin. New construction projects, the premium on top of the U.S. Treasury, and I'm gonna use the 10 years as a benchmark, is very thin. What BSR has is a portfolio of new construction assets in high-growth markets.
I think you'd probably expect properties like ours, the cap rate trades on those type of assets to remain very tight, in a normalized post, you know, macro ownership environment where we see a tight spread over the tenure. What we'll also see is a widening spread in markets that we don't see a lot of growth in. Smaller markets, older assets, markets where you don't see a lot of humans moving to. I think those cap rates will widen up a bit. That makes a lot of logical sense. As far as specific cap rates are concerned, you know, I can recall buying a property in Austin, Texas in 2010 at a 6.26% look forward cap.
I'm not sure where the tenure was at that time, but that was a good representation of a value add asset in Austin, 14 years ago, is a 6.25% cap. I'd say BSR has a portfolio of brand new assets in the best submarkets in Austin. Against that backdrop of the 2013 10 years spread, the REIT was able to capitalize on an acquisition that made a heck of a return for our investors and our partners for the REIT.
I think when we see that reopening occur and we see spreads trade at traditional norms, we'll cherry-pick and deploy. Right now, we think our capacity is about a quarter of a billion dollars of acquisitions using our available lines. We think we probably deploy capital into those opportunistic acquisitions as they pop up, and if they don't, we're not gonna push a rope in a short term in order to feed a growth monster.
Just go back to that spread, comparable to your portfolio, what historically, what would've been that tight spread you're alluding to over Treasuries?
Comparable to the portfolio right now?
Yeah.
I'd elaborate on the question. I mean, if I was to or if really objectively, if anyone was to look at our portfolio, which is right now, I wanna say the youngest, the youngest publicly traded REIT of relevance in North America, with 91% of its NOI situated in the Sun Belt, Texas, Houston, Austin, Dallas, those are cap rate spreads that are gonna stay well below the national average on a look forward. The growth in those markets, and a handful of other markets, is just going to, it's going to absorb a lot of capital in the future.
So long as this debt environment exists, you're gonna see low transactions, and it's gonna be tough to read through on cap rates. I think the team did an excellent job producing a NAV, and really, you know, I'll say working through a methodical approach to produce a NAV that depicts, you know, accurately where we're seeing deals trade. The deal volume's lower, and the read-through on some transactions creates a little bit of distortion.
Okay. That's quite helpful. The just as you think about capital allocation, I guess in the near term, next couple of quarters while I guess transaction opportunity is a little bit more muted, what do you think is the best use of your retained cash flow? Is that to buy back stock or repay debt? Any thoughts in terms of where you think the best opportunities may lie?
Yeah, it's tough to repay much more debt than we're repaying as we're fully hedged at 3.2%. I thought you were gonna ask me how you managed to lower the interest rate on your debt that was fully hedged by 20 basis points quarter-over-quarter sequential.
That was my next question.
It's tough to pay down, it's tough to pay down that debt at that return, Brad. I think when we look at the value of our stock in the marketplace right now as it's trading, it's pretty compelling investment, especially when we believe in our NAV, and we work and live in these markets, and we see what these properties are producing operationally and what they're trading at. I do wanna remind everybody that 2022 is by far the best operational year in BSR, but in multifamily sector in general. If you look at 2023, you know, our guidance and heck, all of our US peers' guidance would mark probably the fifth-best year of multifamily since I've been alive. Up top, the product is selling. It's in high demand.
We're in a macro debt-driven market right now. I think when we think about deploying our capital, we look at our stock price as it's trading. I think I quoted that earlier. We're looking at trading values by the pound for new construction assets at $275,000 a suite. That looks pretty favorable to our $170 and change that our units are traded at right now. I think that's a nice little return for our investors, and we'll look to take advantage of that opportunistically with a mindful eye to liquidity. At the same time, Brad, we do believe that when markets open back up, the floodgates open. This too will pass.
you know, this is a frustrating market for real estate investors as it's driven by whatever Chairman Powell says in a Senate hearing. We understand that. When that volatility stops, the product is selling like hotcakes. Operationally, our product is in high demand, and we wanna keep enough capital available to take advantage of returns that over a three, a five, and a seven years modified internal rate of return exceed that the returns that we otherwise see by acquiring back our stock.
Okay. That's helpful. The, just to go back to the leasing discussion, in terms of, you know, trying to term out some of your leases here, would the bulk of the, you know, extending kind of these shorter leases out, is that mostly gonna be done by Q1, or would we see that continue on through the, maybe another quarter or two?
I mean, I think the answer to that is it depends, right? We, our rates change every single day. While we have been focusing on occupancy, and we continue to do so, right? If it's more profitable at the end of the day to continue with month to month, we'll do that too. I think that it's important, again, for me to reiterate here, though, that we're gonna get the biggest pickup in our revenue happens in the first half of the year, right? Compared to the prior year. While we expect increases in the second half of the year, they just won't be as large. While we've got a 6% total income increase, it's not going to be like on a straight line basis, right? You'll see our first two quarters come out higher than you will see the second two.
Yeah, makes sense. I'll turn it back. Thanks, Susie.
Okay.
Thank you. Next question comes from Himanshu Gupta at Scotiabank. Please go ahead.
Thank you, and good afternoon. In terms of concessions of free rent, is that mostly in Houston or are you beginning to see that in Austin market as well?
Himanshu, you know, one thing to remind everyone, in the U.S., stabilized operators really have moved to a revenue management system, where they don't issue concessions. Where we do see concessions is on a development lease up. We're not really seeing a ton of concessions in the Houston market. I think we are seeing on development lease ups in central Austin right now, concessions, traditional concessions that look more like one month of free rent on a 12 to 13 months lease. That's not unusual for lease ups, and it really doesn't have much of an impact on a stabilized operator, especially in an environment like this where it looks like migration patterns, intra-city migration patterns of residents. They look to be staying at home and renewing their lease as opposed to driving across town to get a $40 a month better deal.
Got it. You mentioned about Austin there. I mean, clearly a lot of new supply is coming this year. Do you also have an handle on the number of units under lease up in Austin? In the combination of two, how do you think, you know, market rents in Austin might go from here?
Yes. I think, you know, I think on number of units in lease-up, let's say. Let me see if I can get my math right. There's probably 12,000-13,000 units delivered in Austin last year, give or take on a rolling 12 months. Lease-up conditions in the first half of the year and the absorption was continued to be remarkable. I think a lease-up delivered right now, depending on location on a look forward, you're really gonna have to drill down into the submarket. So based on our view of the submarkets, you know, the Northwest Austin submarket looks to be a little bit slow on lease-up, fortunately, and perhaps by design, we don't have many of any properties in Northwest Austin.
I think if you're looking at Round Rock, if you're looking at Georgetown and Leander, and to a certain extent, if you're looking at Cedar Park and South Austin, you're seeing a bit of supply, but not anything extraordinarily high relative to the absorption that has come into those submarkets. That gives us room for encouragement on look-forward in the market in the short term. We kinda believe that Austin is gonna be resilient. You know, it's kind of They say it's hard to fall off the floor. Well, Austin has effectively been number one in a lot of accounts the last two years on apartment total unit over return growth. It's hard to crash through the ceiling.
We think absorption continues to remarkably keep up with supply in the long term. We think probably our guidance for 23 includes any movement to occupancy or rate that we're seeing out of Austin right now as a result of deliveries. I think the long-term set up in Austin is important to focus on Himanshu. These starts aren't coming off the ground. It takes about 20.5 months, give or take, to build an apartment complex. This absorption, this tenant demand, resident demand in these relocations continue to take place.
As long as that exists, and as long as our markets remain affordable relative to the national and gateway average, you're gonna see more relocations, you're gonna see more people moving in to these three markets every single year. If those individuals create households, you know, about 40% of them are gonna rent apartments. By our look through, it doesn't look like there's enough apartments available in 2024, 2025 and 2026 to fill the need of the residents migrating to Austin, Dallas and Houston, but Austin in particular.
Thank you. Thank you, Dan. Last question from me. I mean, if you were to rank the three Texas markets from strongest to weakest, I mean, is it fair to say, you know, Dallas number one, then Houston, then Austin, or it will be you think Houston could be a bit weaker than Austin, in the, in the next 12 months, I'm talking?
In the next 12 months, yeah, Dallas, we would probably rank on top. You know, one of our friends in Canada, I think put it best. Dallas grows by the population of Regina every year, those people need to live somewhere.
Yes, sir.
Dallas just continues to be a giant magnet of growth in good times and bad times. Population growth, job growth. It's a vibrant city. I think Houston and Austin right now are tied in my mind for different reasons. You know, in Houston's case, to Manshu, we saw, let's say about 100,000 people move there last year, 110,000, somewhere around there. We only saw absorption of about 1,500 units on a trailing six months. Those 100,000 people who've got to live somewhere, we didn't see as much household creation as we would expect. We would expect those 100,000 people to create about 20,000-40,000 households. Again, we'd get about 40%-50% of those people moving into apartments.
Eventually, those people are gonna create households. Right now, they might be living with mom and dad. You might have two, you know, two coworkers, renting a two-bedroom as opposed to two one-bedrooms. Eventually, we're gonna get them over in multifamily, and they're gonna create, they're gonna create their households. You know, that's the opportunity that we're looking at in Houston, is household formations generating outpaced demand in a city of 9 million people, with a giant port, with tons of concentration on energy and renewables, and it's somewhat tied to the future of the Federal government's spending policy on infrastructure improvement. Lots of long-term bullish bets on Houston on the BSR end.
Now, if I move over to Austin, the reason I'd tie it with Houston, different reasons, it's because of short-term supply issues that I think it'll overcome. I think it'll overcome them quicker than people anticipate. Again, we bought these properties that we own in this portfolio and our investors own at a much lower basis than what's being delivered in this market. We deliberately bought these properties. We got in early. This is a seasoned growth market, and it looks to be sustained as a healthy employment driver, population growth market for the foreseeable future.
Thank you so much for the color. I'll turn it back. Thank you, guys.
Thank you. Next question comes from Matt Kornack at National Bank Financial. Please go ahead.
Hey, all. Maybe some other participants, be they merchant developers or funds that have utilized higher leverage and maybe variable rate debt may not have the same ability to wait. Are you starting to hear or see anything on that front that they may ultimately be forced to come and sell assets to the market or are they finance providers giving them additional funding to continue to keep them afloat?
Yeah. What we're hearing right now, Matt, is that it's a little bit of both, but it's probably more concern over not what to do with an asset today. If you got a highly levered balance sheet filled with floating rate debt, it's more what to do with that asset in three to six months. I think banks are, you know, are not as willing to work with buyers as you would imagine, or sellers as you would imagine, especially in the multifamily world. That to us tees up acquisition opportunities opportunistically, some cases by the pound, as we look into the second half of the year. As far as any specific discussions we've had, we probably want to keep those discussions close to the chest for now.
No, fair enough. That's fair commentary, but it does sound like it's something that may precede maybe a return to more normal transaction activity between existing kind of long-term hold type investors.
Oh, certainly. I mean, in BSR's case, I guess you can call it smart, you can call it lucky. I'd rather be lucky than smart. In our case, you know, we've got a fully hedged balance sheet. We've got, as we said, about a quarter of a billion dollars of just clean acquisition dry powder. We can deploy those, some of that capital into NCIB. We bought back a third of those available units in the fourth quarter.
You know, we've kind of proven in the past that we're pretty opportunistic and quick to strike when we see opportunities. The second we start to see the, you know, primarily that transaction market open up and generate these long-term greedy returns that we like, you can probably bet that we'll pounce on those opportunities.
Yeah. No, that makes sense. Susie, I don't know if you have this information, but do you have a sense as to how much of the portfolio is kind of shorter duration leases?
Yeah. I'm sorry, Matt, I don't have that in front of me right now.
Is it fair to say, I mean, it can't be a huge portion that's. How, I guess, did those come about? Was that just?
Yeah.
opportunistic, or were those extensions to existing leases? I'm just interested.
Yeah. Sure. I mean, it's always been available. Normally, when someone's original lease matures, they have the option to go month to month at a just much higher price. There are plenty of people that might choose to do this because they need the flexibility. There are others too, that
Might decide at one point that it's just become too expensive and they should sign another lease for longer term. Our leases are generally 12 months, as you know. Yes, I would think that's where they normally start, and that would be the majority. However, as I alluded to earlier, we do have shorter ones as well, and we profit from those. After this call, I'll be able to get you the breakout of exactly what the ratio is from 12 months to the shorter term ones. I can confidently say that yeah, we probably have more long-term than short term.
Okay. No, that's fair enough. I guess maybe broader, broadly speaking, excluding that dynamic, do you have a sense as to the pace at which market rents may be moving within your markets? Only because it has a ancillary impact, I guess 40% of core CPI in the U.S. is rent growth. If that comes down, it may ultimately lead to lower interest rates. Just a sense as to how market rents are trending.
Yeah, I mean, they're still. They're not negative, right? They're still trending upwards, just not nearly as aggressively as they were over the last two years. While we do have a mark-to-market included in our revenue increase, we've also are in the guidance. We've also blended in increases for this additional growth. I mean, I think I said earlier, you've got all of that and then a little bit of offset related to other income.
Okay, perfect. That's great. Thanks, guys.
Thank you. We do have time for one more question from Dean Wilkinson at CIBC. Please go ahead.
Thanks. Afternoon, everyone. first point, Dan, Dallas has been number one ever since Troy Aikman won the MVP. on the issue of deal volumes, you know, I mean, down in the States, you've got the 1031 exchange. Have you seen a slowdown in 1031 transactions? you know, the second part of that would be, I'm assuming there's a lot of embedded unrealized gains for a lot of those holders. Could you see volume activity coming back such to the point that it actually puts a bidding war into some of the newer assets that could, say, fly in the face of increasing interest rates?
Yeah, that's a good question. To answer the first part of that question. We saw 1031s kind of linger into the summer last year, moving into the third quarter. You know, that's an excellent rotation opportunity for a U.S. investor that's unique to the United States. It enables a holder to defer their taxable gain into an investment in a like-kind property. BSR executed several of these in our rotations.
We did see some lingering 1031s roll into the summer and then into the third quarter. Right now, you know, the markets, you gotta find a buyer for your property at a price you want in order to defer that gain and move it forward. Due to that transaction value drop, we're really not seeing a lot of 1031s take place, which is healthy. It provides us a better look-through on true values. Oftentimes a 031 buyer will drive up the price in a bidding war of an asset, as you said.
Yeah.
We're not seeing a lot of that take place right now. You know, I think based on the deferred basis that these investors do have. I think they're probably gonna be more inclined to hold on to their cash flowing asset than to take a risk and rotate and look for something to buy, particularly to high grade. In other words, you try to do what BSR did in 2019 and you're sitting in 2023, you got a tough road ahead of you. That opportunity to rotate, defer, and high grade and high market, it was there right when we did it. It's gonna be tough for those same type of investors to execute on those kind of rotations on a look forward to further gains.
Good timing. That's all I had. Thanks, guys.
Thank you. You may now proceed with closing comments.
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 2023 first quarter results.
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating, and we ask that you please disconnect your lines.