BSR Real Estate Investment Trust (HOMUN) Earnings Call Transcript & Summary

Good morning and welcome to the BSR Real Estate Investment Trust Annual Meeting. [Operator Instructions] I would now like to turn the call over to Neil Labatte. You may begin.

Good morning, and welcome to the Annual Meeting of the Unitholders of BSR Real Estate Investment Trust. My name is Neil Labatte, and I am the chair of the Board. I am pleased to preside over this meeting today. As an introductory note, due to travel, physical distancing and other restrictions put in place across Canada and the United States to combat the COVID-19 outbreak and to mitigate risks to the health and safety of the unitholders, associates and other stakeholders, we are hosting today's meeting virtually via live audio webcast. We have unitholders attending via the web portal today, and for those who may not be able to attend online, we have encouraged them to vote by using the form of proxy or voting instruction form provided in the proxy materials. Before we begin the formal proceedings, I would like to introduce John Bailey, our Chief Executive Officer and Trustee; Blake Brazeal, our Chief Operating Officer; Susan Koehn, our Chief Financial Officer; and Daniel Oberste, our Chief Investment Officer, each of whom is present for today's live webcast and available to answer questions. We are also pleased to have the following members of our current Board of Trustees present for today's webcast: Bill Halter, Bryan Held, Daniel Hughes, Graham Senst and Elizabeth Wademan. On behalf of the Board, I would like to thank those unitholders who have chosen to attend the virtual meeting today and those who submitted their proxies in advance. Today, we intend to first proceed with the formal items on the agenda, following which there will be a brief audio presentation by management. Following the presentation, we will be pleased to respond to your questions. The validated unitholders and proxy holders that are attending the meeting virtually today will be able to submit questions during the meeting using the question box in the bottom corner of the online portal screen. Though we may not be able to answer every question, we will do our very best to provide a response to as many as possible, and we'll address any appropriate unanswered questions after the meeting. [Operator Instructions] Please note that this meeting is being recorded. However, no one attending via the webcast or telephone is permitted to use any audio recording device. With the consent of the meeting, I will act as chair of the meeting, and I will ask Tara Hunt of Goodmans LLP to act as secretary; and Evelyn Gallardo and Alicia Mohammed of Broadridge Financial Solutions to act as scrutineers. I will now call the meeting to order. I have been advised that on April 4, 2020, the notice and access notice, together with a form of proxy, were mailed to each unitholder of record as of March 16, 2020, the record date for the meeting. Advising that the notice of meeting and management information circular are available online. We have received an affidavit of mailing from Broadridge Financial Solutions, and I ask that the secretary keep a copy of it with the minutes. I have been provided with a preliminary scrutineers report, pursuant to which, we have determined a quorum is present. As such, I declare that this meeting has been duly convened and constituted. When the formal report of the scrutineer is available, it will be kept with the minutes of the meeting. Each trust unit represented at this meeting is entitled to 1 vote. Voting on all matters will be conducted via the voting buttons on the online corridor. I will now proceed with the first item of business for the meeting and present the REIT's financial statements for the year ended December 31, 2019. A copy of the financial statements was previously made available to unitholders and is available online and on the web portal. Unitholders do not need to take any action regarding the financial statements. But if any unitholder or proxy holder has questions relating to the statements, I will suggest that they be submitted for the Q&A period at the end of the meeting. Now I will present the matters to be voted upon. Please note that we will give unitholders and proxy holders an opportunity to comment on the proposals themselves after all proposals have been presented. There will also be an opportunity to ask general questions following the management presentation. The first matter to be voted on is the election of trustees. The REIT currently has 7 trustees, whose term of office will expire at the end of the meeting, and the number of trustees to be elected at this meeting is 7. Each of the current trustees is a nominee for election. The management information circular sets out the particulars for all of the nominees. In addition to myself, Neil Labatte, the nominees for election are: John Bailey, Bill Halter, Bryan Held, Daniel Hughes, Graham Senst and Elizabeth Wademan. If elected, these nominees will hold office until the next annual meeting of unitholders or until his or her successor is elected or appointed. I have been advised that no other nominations have been made in accordance with the advanced notice provisions under the REIT's declaration of trust. Accordingly, I declare that the nominations are closed. As required by the rules of the Toronto Stock Exchange, the REIT has adopted a majority voting policy relating to the election of trustees. Details regarding this policy are provided in the management information circular. Under the policy, a trustee is required to tender his or her resignation if he or she receives more withhold votes than votes cast for his or her election. Based on the proxies received for the election of trustees, if elected, none of the nominees would have to tender their resignation under the policy. As a second matter to be voted on is the appointment of KPMG LLP as auditors of the REIT and the authorization of the trustees to fix their remuneration. The trustees on the recommendation of the Audit Committee proposed that KPMG LLP be appointed as auditor of the REIT until the next annual meeting of unitholders, or until their successor is duly appointed and that the trustees be authorized to fix their remuneration. If any unitholder or proxy holder would like to make a comment regarding any of the proposals, please submit your comment through the web portal live. We will now wait a few moments for comments. Since it appears there have been no questions submitted, I will now ask Bryan Held to move and Elizabeth Wademan to second a formal motion for the foregoing 2 proposals.

Mr. Chairman, I so move.

I second the motion.

Thank you. The voting polls are now open, and voting will be conducted by online ballot. Any unitholder or proxy holder, who hasn't yet voted or wishes to change their vote may do so by clicking on the voting but on the web portal and following the instructions there. Unitholders who have sent in proxies or voted by a telephone or internet and do not want to change their vote, do not need to take any further action. We will now pause a moment for voting. [Voting]

I assume now that everyone has had the opportunity to vote. I now declare the polls for the 2020 BSR REIT Annual Unitholders Meeting closed. We have been informed by the scrutineers that the preliminary vote report shows that each of the proposals presented for approval today have been duly passed. I declare that the nominees listed in the management information circular have been duly elected as trustees of the REIT until the next annual meeting of unitholders or until they resign or their successors are elected or appointed. And that KPMG LLP has been appointed as the REIT's auditors for the ensuing year. We will be reporting the final vote results in a press release and SEDAR filing following the meeting. Ladies and gentlemen, we have now completed the formal part of the meeting. As there is no further business, the meeting is hereby terminated. I would like to welcome CEO, John Bailey; and CFO, Susan Koehn, to make a brief presentation on behalf of management. John and Susie?

Thank you, Neil, and good morning, everyone. We are sorry we can't speak in person today, but we are still very pleased that you have joined us. Before I begin, I need to draw everyone's attention to the disclaimers on this slide. Please note that certain statements about future events in this presentation may be forward-looking in nature. Please also note that this presentation will contain non-IFRS measures that are commonly used in the real estate industry. Also, please note that all dollar amounts are denominated in U.S. currency. 2019 was a very busy year and successful for BSR REIT. Let me take you through a few of the highlights. Most importantly, we delivered strong financial performance. Susie would take you through the numbers in detail shortly. I will note for now that we have reported revenue of $111.7 million, a 10.7% increase from 2018, and net operating income of $59.7 million, a 12.5% increase from 2018. On a same community basis, we had revenue growth of 3.7%, and NOI growth of 6%. Weighted average rent at year-end was $942 per apartment unit, an increase of 14.7% from $821 at the end of 2018. These strong results were achieved while simultaneously advanced our capital recycling program, in which we are selling noncore assets in secondary markets in order to expand investments in primary high-growth markets and doing so on a tax-deferred basis. Under this program, so far, we have significantly transformed and upgraded our portfolio during 2019. We acquired 5 properties in primary markets in Texas for approximately $250 million and sold 15 noncore properties for $173 million. The capital recycling program is still going strong today. So far, in 2020, we have bought 1 additional property and sold 5, and we continue to elevate further value-building transactions. Our growth was strongly supported in the investment community during 2019 as we completed a $40 million equity offering and a $15 million private placement. And we were pleased to launch a Canadian dollar listing of REIT units, which was boosted -- which has boosted our trading, liquidity and overall investor interest in the REIT. On this slide, you can see where BSR rate is today following a significant restructuring of our portfolio through capital recycling. We have an internally managed portfolio of 36 garden-style multifamily properties comprising more than 8,500 apartment units. They are located in 10 suburban, primary and secondary markets in the U.S. Sun Belt, where the economic and demographic fundamentals are generally stronger than the national average. That positions our portfolio for above-average rent growth over the longer term. Our weighted average occupancy at the end of 2019 was 93.6%. This number has been consistently strong since the inception of the REIT. And you can see the meaningful growth in same-property NOI in weighted average rent that I just mentioned. I would like now to provide a little more detail on our capital recycling program and why we believe this is the right strategy to build value for our unitholders. During 2019, we noted a significant shift in relative market valuations. Specifically, we observed that the spread and capitalization rates between primary and secondary markets in the U.S. Sun Belt dropped to historical low levels. Under these conditions, we determined the way for us to maximize unitholder value was to capitalize on this narrowing spread. This means rotating capital out of secondary noncore markets and expanding the investments in high-growth primary markets with stronger rental market conditions, and that is what we did. Since we launched the program last year, we have acquired 6 properties for approximately $305 million. These properties are located in Austin, Houston and Dallas-Fort Worth, all primary high-growth markets. Meanwhile, we have sold 20 noncore properties in secondary markets for proceeds of $258.8 million, and we're not done. We plan to exit Beaumont, Longview, Blytheville and Pascagoula markets as long as market conditions remain favorable to do so. We currently own 5 properties across these 4 markets. We are also looking to sell certain properties in Houston and Little Rock that no longer meet our investment criteria. Combined, these sales should provide us with substantial additional capital to invest in high-quality properties in primary markets. Slide 9 shows how the capital recycling program has upgraded our portfolio on a pro forma basis. In the first quarter of 2019, 55% of NOI was generated from properties in primary markets. Today, that number has increased to 79%. The overall quality of our properties has increased as well. Since the IPO, in May 2018, we have added 2,562 apartment units with a weighted average year built of 2009 for just 11 years. At the same time, we have sold 3,666 apartment units with a weighted average year built of 1982 for 38 years. The portfolio's weighted average age is now 22 years, down from 29 years at the time of the IPO. This represents a very significant portfolio upgrade. Obviously, the world has changed a lot since 2019. Like everyone else, we have been focused on responding to the COVID outbreak since March and assessing the impact on our business. Thus far, I am pleased to say that there has not been a meaningful financial impact on the REIT. 97.3% of April rents have been paid in full, and 93.4% of May rents have been paid in full through May 11. To date, we have received 142 rent deferral requests for April and 14 requests for May, and we are working with these residents to accommodate them on a case-by-case basis. We recognize that the economic disruption from the virus has been extremely difficult for many people, including our residents, and we have suspended evictions, late fees and scheduled rent increases until the crisis ends. Fortunately, we entered this period of economic uncertainty with a very strong liquidity position. Susie will speak more about our balance sheet shortly. We are also taking numerous measures to support the well-being of our residents and staff and to minimize the spread of COVID-19. These include increased sanitization of frequently touched surfaces, closure of nonessential common areas, employees working from home wherever possible, doorstep delivery of our packages, virtual or self-guided apartment tours and other common sense measures to promote health and safety. Nothing matters more to us than the good health of the BSR team member and our residents. I'll now invite you -- I'll now invite our CFO, Susie Koehn, to take you through our financial results in more detail.

Thank you, John. We generated strong financial results in 2019 with growth in all of our key financial metrics. Before I go through the numbers on this slide, please note that the comparable figures in 2018 are for the full 12 months, including the period prior to the completion of the IPO in May. Revenue for 2019 was $111.7 million, an increase of 10.7%, from $100.8 million in 2018. The increase was primarily the result of property acquisitions, which contributed $14.9 million in revenue as well as higher rental rate across the portfolio, partially offset by dispositions, reducing revenue by $8 million. Same community revenues for the full year was $79.2 million, an increase of 3.7% from the 2018 levels, primarily reflecting increased rental rates. Net operating income or NOI was $59.7 million in 2019, representing a year-over-year increase of 12.5%. The increase was primarily the result of property acquisitions that contributed $7.9 million partially offset by $3.7 million attributable to dispositions and the higher same community NOI. As a percentage of revenue, NOI was 53.5% compared to 52.6% last year. Same community NOI for the full year increased 6% to $42.8 million due to an increase in revenue. The other figures you can see on the chart don't have comparables in 2018 as the REIT did not exist for that full 12-month period. Funds from operations or FFO was $29.3 million in 2019 or $0.71 per unit. Adjusted FFO, or AFFO, was $26.4 million or $0.64 per unit, and the repaid cash distributions of $0.50 per unit for the year, representing an AFFO payout ratio of 78.6%. I'll also review our results for the first quarter of 2020, which we reported on Wednesday of this week. Revenue totaled $27.5 million, which was slightly below last year's level. The decrease was attributable to the property dispositions that reduced revenue by $6.1 million, partially offset by acquisitions, which contributed $5.3 million in revenue as well as an increase in rental rates across the portfolio. We also received $0.4 million of additional revenue from a rent guarantee related to the Satori acquisition, but it is excluded from revenue, NOI and FFO in Q1 2020, however, it is included as an adjustment to AFFO. Revenue from same community properties of $22 million, represented an increase of 2.9% from last year, reflecting an increase in rental rates from $866 per apartment unit last year to $889 per apartment unit this year. Total NOI of $14.7 million declined 3% compared to last year, primarily due to property dispositions that reduced NOI by $3.3 million, partially offset by acquisitions that contributed $2.3 million, in addition to a 3.9% increase in NOI from same community properties. That increase in same community NOI was predominantly due to the increase in revenue, as noted a moment ago. FFO was $5.3 million or $0.12 per unit compared to $8.1 million or $0.20 per unit in Q1 2019. The decrease was mainly the result of a loss on extinguishment of debt of $1.6 million, of which $1.4 million was noncash, and the impact of the capital recycling program under which the pace of dispositions has so far exceeded the pace of acquisitions. Note that as we continue to recycle this capital into new acquisitions, as we expect the accretive impact will be reflected in our financial results going forward. AFFO was $6.6 million or $0.15 per unit compared to $7.5 million or $0.19 per unit last year. The decrease was primarily the result of the change in FFO, partially offset by the exclusion of the loss on debt extinguishment previously mentioned and the inclusion of the income related to the Satori rent guarantee. Total cash distributions for Q1 were $0.15 per unit, representing an AFFO payout ratio of 84.8%, also reflecting the quicker pace of dispositions versus acquisitions. The ratio will decline as we deploy funds in coming periods. Now turning to our balance sheet. We are focused on maintaining a prudent debt profile. While that is always one of our priorities, it is particularly important during the period of economic disruption. You can see from the chart that we have a highly staggered debt repayment schedule with the vast majority of repayments coming due after 2024. Our weighted average mortgage term to maturity was 9.3 years at the end of Q1 2020, with a weighted average contractual interest rate of 3.9%. Debt to gross book value is 47%, below our long-term target of 50% to 55%. And as of March 31, 2020, 81% of our debt is fixed or economically hedged to fixed rates. Total liquidity of $77.1 million, including cash and equivalents of $6.3 million. $35.8 million of borrowing capacity under the REIT's credit facility and $35 million available under a revolving line of credit. So we are well positioned to pay unitholder distributions and pursue our capital redevelopment strategy while maintaining a strong balance sheet. I'll now turn it back over to John to wrap up.

Thank you, Susie. I thank all of you for taking the time to join us this morning for your interest in BSR. It's unfortunate that the meeting had to take place virtually, but we sincerely appreciate the effort you made to attend. I think you can see from the remarks that despite the current market turbulence, BSR is performing extremely well and is positioned for long-term success. Blake, Dan, Scott, Susie and I would be pleased to answer any questions you may have. Please note that we will attempt to answer any questions as time allows, but only questions that are germane to the meeting will be addressed. Thank you Ladies and gentlemen, there are no questions. And we sincerely thank you for joining BSR REIT today for our annual meeting or AGM. And we thank you very much and God bless.

Thank you all for attending. This concludes today's conference, and thank you for participating. You may now disconnect, and have a great day.