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

Good morning. My name is Pam, and I'll be your conference operator today. At this time, I'd like to welcome everyone to the BSR REIT Q2 2020 Financial Results Conference Call. [Operator Instructions] Mr. Bailey, you may begin your conference.

Okay. Well thank you, Pam. And good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the second quarter ended June 30, 2020. I'm joined by Susie Koehn, our Chief Financial Officer. Also with us are Blake Brazeal, President and Chief Operating Officer; and Dan Oberste, Executive Vice President and Chief Investment Officer, who will both be answering -- able to answer questions following our prepared remarks. I'll start this call by providing an overview of our Q2 performance and other corporate developments. Susie will then review the financials, and I'll conclude with some comments on our outlook and strategy. After that, we will hold a Q&A session. Before we begin, I need to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on the forward-looking information in our news release and MD&A dated August 12, 2020, for more information. During the call, we will reference certain non-IFRS financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including for reconciliations to the nearest IFRS measures. Also, please note that all dollar amounts are denominated in U.S. currency. We are continuing to operate very effectively despite the disruptions created by the COVID-19 pandemic. Our rent collections remained marginally below pre-COVID historical levels, and we're successfully executing on our capital recycling strategy. During the second quarter, we further high-graded our portfolio with the acquisition of Retreat at Wolf Ranch Apartments in Austin, Texas, and the sale of 4 properties in Longview, Texas: Summer Green I, Summer Green II, Summer Brook and Summer Lake. Subsequent to the end of Q2, our July 30, we announced -- on July 30, we announced the acquisition of Broadstone Park West, a high-quality property in Houston, Texas, with 370 suites. Our in-place rents track to market rents for similar properties. With these specific rotations, we sold weighted average rent of $773 a month in Longview, Texas and bought weighted average rents at $1,310 a month in Austin and at $1,103 a month in Houston, where over time, we expect to achieve higher rent growth. Following these transactions, we are now generating approximately 81% of our NOI from our targeted high-growth property Sunbelt markets. That compares to just 52% at the time of the IPO in May 2018. Our average monthly rental rate has increased 28% in that period. The average -- the weighted average age of our portfolio has declined by a full 9 years from 29 to 20. The ongoing transformation of our portfolio was evident in our Q2 results. Weighted average monthly rent at June 30 was $996 per apartment unit, representing a substantial year-over-year increase of 16.1%. Q2 revenue and NOI were lower than last year because we have been selling properties at a faster pace than we have been buying them. We expect our financial performance to strengthen as we continue to redeploy capital in our targeted primary Sunbelt markets and MSAs with some of the strongest economic fundamentals in the country. As was noted on our last conference call, we plan to sell our 5 remaining properties in Beaumont, Blytheville, Longview and Pascagoula markets as well as certain assets in Houston and Little Rock that we now view as noncore. Our portfolio continues in its transformation as we recycle capital to take advantage of the compression in cap rate spreads from secondary to primary markets. To date, the COVID-19 pandemic has not materially impacted our financial performance. As we noted in yesterday's news release, we collected 98% of total monthly revenue in each of June and July, which is just below our historical average of 99%. For those residents that are struggling to pay rent, we have negotiated deferral agreements. As of July 31, we had 131 deferral agreements in place, representing approximately $46,000. All required payments in those agreements have been made as scheduled. At each property location, we have taken a number of steps to mitigate the spread of COVID-19 to support the health and safety of our employees and residents. We continue to monitor the situation closely to ensure that we are doing everything we can do to provide as safe of an environment as possible. During the second quarter, we provided $0.3 million of additional benefits to employees including paid time-off, on-site bonuses and medical reimbursements. We also waived late fees for our residents, representing approximately $0.2 million in other income. So during these unchartered times, our valiant team members have performed exceptionally well. Economic uncertainty obviously remained heightened. But with our current liquidity position of approximately $54.5 million, combined with our strategic focus of owning and operating high-quality properties serving the middle class and some of the fastest-growing markets in the United States, we are well positioned to navigate these unique times and to successfully execute on our strategy. Now I'll turn it over to Susie to review our second quarter results in more detail. Susie?

Thank you, John. Same-community revenue increased 1.8% in the second quarter to $19.7 million, reflecting an increase in average community rental rates to $901 per month at June 30, 2020, from $887 per month a year earlier, partially offset by the absence of late rental fees of $0.2 million, which were not charged during the quarter due to the pandemic. Total revenue for the quarter declined by 2.5% to $27.3 million from $28 million last year. As John noted, this reflected the impact of property dispositions related to capital recycling, which reduced revenue by $7 million. This impact was partially offset by acquisitions subsequent to March 31, 2019, which added $5.8 million of revenue as well as higher rental rates across the portfolio. Same-community properties totaled $10.6 million, an increase of 2.8% compared to $10.3 million in Q2 last year, primarily due to higher rental rates. Increases in real estate taxes and insurance as well as the additional expenses incurred as a result of the pandemic were offset by a decline in payroll expenses. NOI for the full portfolio declined by 6.2% to $14.2 million compared to $15.2 million in Q2 last year. The property dispositions reduced NOI by $4.2 million, which was partially offset by a $2.8 million contribution from acquisitions completed subsequent to March 31, 2019, as well as higher same-community NOI. As John indicated earlier, our capital recycling strategy has impacted revenue and NOI in the short term due to the more rapid take of dispositions versus acquisitions. As we continue to redeploy the recycled capital from secondary markets into primary markets, we expect the accretive impact to be reflected in our financial performance. FFO for the second quarter was $6.6 million or $0.15 per unit compared to $7.4 million or $0.19 per unit last year. The decrease was primarily due to the lower NOI, partially offset by $0.1 million decrease in finance costs due to the timing of acquisitions and dispositions during the respective quarters and a $0.1 million decrease in general and administrative expenses, which was related to a reduction in professional fees and travel expenses. AFFO was $6.2 million or $0.14 per unit, similar to $6.2 million or $0.16 per unit in Q2 last year. The lower FFO was offset by a decrease in maintenance capital expenditures of $0.7 million versus Q2 last year. I also want to note, we incurred employee severance and retention costs related to the rotation of capital of $0.2 million in Q2 2020 and $0.1 million during Q2 2019. These costs are adjusted out of AFFO but are included in FFO. The repaid quarterly cash distributions of $0.125 per unit in Q2 of both years representing an AFFO payout ratio of 90% in Q2 2020 compared to 80.3% last year. The higher payout ratio reflected the more rapid rate of dispositions versus acquisitions to date. All of the distributions were a return of capital. Turning to our balance sheet. Our debt to gross book value ratio at June 30, 2020, was 48.5%. Following the acquisition of Broadstone Park West that we completed subsequent to quarter end, debt to GBV increased to 49.8%, still below our long-term target of 50% to 55%. With regard to Broadstone Park West, we funded the $51 million purchase price by growing $40 million on our credit facility and issuing $10.4 million in REIT units, net of prorations, to the seller in a private placement at a price of USD 12.25 per unit. As John mentioned, our current total liquidity is $54.5 million. That includes cash and cash equivalents of $7.6 million and $46.9 million of borrowing capacity available under our separate credit facilities. As of June 30, we had total mortgage notes payable of $397.4 million, excluding the credit facility, with a weighted average contractual interest rate of 3.9% and a weighted average term to maturity of 9.3 years. Total loans and borrowings at quarter end were $543 million and 84% of the REIT debt was fixed or economically hedged to fixed rates. I will now turn it back over to John for some closing comments. John?

All right. Well thank you, Susie. The year 2020 has been challenging for all of us. However, BSR continues to deliver solid performance. We believe this reflects the outstanding performance of the BSR team members within our management platform, our portfolio and generally the resilience of the multifamily real estate sector. Our portfolio will strengthen further as we continue to execute on our capital recycling strategy. As you have seen, transactions have continued at a solid pace during the pandemic. We are seeing substantial interest in properties we have available for sale and our corporate development team continues to identify attractive growth opportunities in our primary target markets. Like everyone else, we are monitoring the spread of COVID-19 closely. The rate of infection in the Sunbelt is clearly a concern. Fortunately, there has been significant economic recovery since the lockdowns in the spring. The economic performance of our markets has historically outpaced the country as a whole, and we have no doubt the long-term trend in these markets will remain highly positive. At this point, we are comfortable we have made all the appropriate adjustments to our daily operations in order to minimize the spread of COVID-19. If we determine further changes are necessary, we will implement them rapidly across our portfolio. That concludes our remarks this morning. Susie, Blake, Dan and I would now be pleased to answer any questions you may have. So operator, would you please open the line for questions?

Your first question comes from Kyle Stanley with Desjardins.

So it was good to see occupancy tick up a bit sequentially. I'm just wondering, was that a function of improved leasing demand? Or was the lower occupancy last quarter just a bit more frictional in nature?

Kyle, it's Blake. Good to talk to you. I think there are 2 or 3 factors, but I do think it's increased leasing demand in our areas. We track quite a few metrics, but one thing that we've noticed is in our leads, which are people that contact us through the Internet or walk in or call. Those are up -- they were up 20% from the first quarter, and they're up 17% year-over-year, which is pretty good, I'd say barometer on exactly how much velocity we're getting as far as people looking for apartments. Also, another interesting stat that I really keep up with, and I think I discussed it a little bit on the last call. But in the second quarter, we hosted 1,914 virtual tours and closed 26% of those. That's people on the Internet looking for apartments. And we had self-guided tours, which is really a new concept that we're using and I think other people have started using. We had 2,016 of those, and we closed on 49%. So you basically had 2,016 people in our portfolio coming out and looking at a unit on their own. So the velocity that we're seeing in our areas is excellent. And I would contribute a lot of the increase to that.

Okay. Excellent. That sounds good. Just looking at Wimbledon. So you completed the Wimbledon project this quarter. Can you talk a bit about that process, maybe how lease-up is going? And given early indications on the Wimbledon project, is it something you're actively considering maybe on some different sites?

Yes. Right now, on Wimbledon, lease-up is going really good. We had a little bit of a slowdown getting started because of construction and weather. But as of today, we're right at where we thought we would be. And we're at least close to where we thought -- we're at 41% actual occupancy. And we're projecting to close August at 58%, which if you extrapolate that out into September with what we have going into September, we're basically going to be right on top of our budget where we where -- where we wanted to be, excuse me, Kyle.

Okay. Great. And then so coming into 2020, you'd identified about $350 million as a disposition target for the year. So you've done probably about $86 million now. Just wondering what your expectations are for the rest of the year, fully understanding, obviously, COVID has slowed things down?

Kyle, this is Dan. Yes, I think that we probably expect to close out our next round of disposals in Little Rock, Houston, Beaumont and Pascagoula in the third and fourth quarter.

Okay. Perfect. And then I guess just the last one for me. I guess a higher-level question. So has the operating environment changed a bit in 3Q, just with the higher COVID case load that you mentioned in your prepared remarks? I mean just wondering if expectations related to leasing activity, occupancy, rent collection, things like that?

Well I mean obviously, you're going to have changes. We stay on this basically every day, the -- our markets and what we need to do. It's changed somewhat from an operational standpoint in the fact that our offices are still closed. You can make an appointment to get in to see people in our offices. We've also gone on to an AV on July 13. We went to an AV strategy. That's splitting the staffs in the bigger units into Monday, Tuesday, Wednesday, Tuesday, Thursday with whatever each property determined was the right way to go. So that way, we can limit the amount of people that could contract the virus all at once. So those little things like that as far as operationally, we have had to deploy somewhat. But in terms of the part of the velocity of the people looking for units and our ability to increase occupancy, in that regard, I think we've done a pretty good job of being nimble and coming up with ways where people could lease some property, lease a unit or see a unit if they want.

Your next question comes from Troy MacLean with BMO Capital Markets.

On the late payment fees, I know you didn't charge them, but it was about $200,000. How would that compare to a normal quarter? Is that about the same level of late payment fees?

Yes. Yes.

And then I'm not sure if you would have this, but are tenants -- can you tell if tenants are using credit cards to pay their rent more than they have in the past as opposed to checks or debit?

We actually do have that. We kind of -- we monitor that. And there's been -- there's basically no change in people that use credit cards since the COVID started.

That's good. And then just finally for me. Given what's happened in the economy, are you seeing competitors or any competitors in any markets starting to offer lower rents or getting too aggressive on discounting? Or are competitors kind of behaving more in line with they have in the past?

Well that's kind of it depends. It's funny. And now in Houston, in particular, you've got the submarket. We talked about it a lot. These cities are so big that you've almost got cities within cities. So the submarkets kind of are different. In some submarkets in the areas, we are seeing some of our competitors that are getting more and more aggressive on that. Other submarkets, we don't see it quite as much. So for us, that's where the LRO that I talk about each call kicks in, and it really helps us in doing -- adjusting our rents as we need to. Also, I'd like to mention, and I'm sure you all have read on the stat, but there's quite a bit of difference in the activity of urban versus suburban rent. And I feel like the urban properties are under a little bit of pressure, and they are being more aggressive in that regard in the suburban property where we are located. So we haven't seen it to the extent that you're reading about or seeing about in the urban markets.

That's a really good point, Blake. But are you seeing in your latest leasing that you're seeing tenants that are coming to the suburbs like leaving the downtowns to kind of get more space or maybe lower price points than they were paying in the downtown? Have you seen anything like that?

We have seen that. And we've also seen a slight uptick in the average income of our residents this April also, so yes. Obviously, I want to get a little more data, but the last 3 months have really indicated exactly that.

Your next question comes from Matt Logan with RBC Capital Markets.

Wondering if we could carry on with some of the questions that Troy had and maybe just roll it up a little bit. Like when we think about your overall portfolio, would it be fair to think about occupancy and rents as generally stable on average?

Yes. Yes. I think you would -- a little bit of that. The numbers indicate that, that we've had a pretty stable occupancy range that we've been in. Our rents have gone up. But I would say, in general, you want to use the term stable, it's a good one.

And then when we kind of go down the operating launch, when we think about the expenses, how do we expect those will trend over the next 2 or 3 quarters? Could we see some burn-off of higher costs and potentially with stable revenue, hopefully, a stronger NOI as well?

Yes. I think you will if you're looking at our overall expenses. Taking the second quarter, the higher sequential expenses were driven by the taxes and insurance, which is always a lumpy category. We're where we wanted to be for a year-to-date standpoint, but the second quarter was higher in taxes and insurance. Our operating expenses, excluding those, sequentially and year-over-year were flat. Actually, year-over-year, they were down. So I do think as we get into the third and fourth quarters, as the lumpiness and the taxes and insurance kind of flatten out, you will see that.

Also, I want to add quickly, too, that [indiscernible] we had $300,000 in additional expenses related to COVID-19. And we expect to incur half of that next quarter, in the third quarter.

Great color there, Susie. And maybe just...

I was going to add, too. I think Blake previously mentioned it as well. We will begin to charge late fees again on August 17.

August 17. We've already notified the residents. So we should be -- in the third quarter, we should be getting approximately half of the amount back.

That was my next question. So I appreciate that commentary. Maybe just changing gears to some of your recent acquisitions. Could you talk a little bit about the thought process or the approach to value-add for the assets in Houston and Austin? And maybe with Houston exposure ticking up, also your thoughts on how much we could see quantum of sales at Houston we could see in the back half of the year?

Sure, Matt. This is Dan. I think when we looked at both of those acquisitions -- and let's talk about all 3 because we did make an acquisition on March -- in and around March in Plum Creek in Austin. So we've got 2 acquisitions here to date in Austin, 1 in Houston. We look at all 3 of those as BSR's team [ Dolan ] darts. When we apply value-add to 2/3 of those, to the 2 Austin acquisitions, it really is, I'd say, a concept of platform application. We believe that when we are able to put our managers, our leasing agents, our lead maintenance, service techs, our operations teams and our accounting teams and apply our insurance platforms, our tax platforms to these 2 properties that are newer in Austin, that we could generate higher growth than a competitor. That's proven out with the last 11 acquisitions we've done. We see no reason that those 2 darts aren't going to hit at or close to our expectations on really, I would say, some pretty aggressive NOI growth. As it relates to the Houston asset, that's a 2015 constructed asset in, I'd say, West Houston. A lot of the same concept with the 2 Austin deals that we closed, I'd say one little add-on for Houston is you might see us deploy some capital and a little bit of redevelopment of the suites and the property itself over the course of the next 12 to 24 months. And we like the product. We like how we can apply our management team and platform to the product. As to your second question, can you repeat that for me, Matt?

Second question was just on the Houston exposure ticking up. On a pro forma basis, do you have a target for what percentage of NOI you'd like to see from Houston or maybe a targeted number of suites instead?

Sure. So I think right now, it's similar to last quarter. What we would say is medium and long term, we love the Houston economics. I think in the short term, it's 1 step forward, 2 steps back. I think you see us acquire Broadstone. We have told you that we were looking at selectively selling some of our assets in Houston. I believe 3 are openly marketed right now, and they represent some of our older assets in Houston. So the result of that should shrink our net exposure to Houston by the end of the year and should use in the company even further than the 9 years we've used ourselves in the last -- since the IPO.

And last question for me, just on the disposition pricing. Have you seen any material change? Is it off a little? Are there different markets that are up or down or maybe some commentary there?

Sure. We're seeing, I'll say, not within our portfolio and how we review our dispositions. But generally in the market, we're seeing some sub-tertiary, I'll say, pricing decreases. I'll just refer the group back to the average cap rate of multifamily in the last quarter relative to the prior years. You've seen about a 12 basis point expansion in tertiary and sub-tertiary markets on cap rates generally, which kind of leads to the national average cap rate increasing 6 basis points quarter-over-quarter. We don't see it in the markets where BSR is currently operating in. And I think part of that has to do with just the positive demographic shift in the Sunbelt and just generally, the job creation and population migration that we're seeing just across the board in Sunbelt.

Your next question comes from Yash Sankpal with Laurentian Bank.

Just 1 question I have. The Starlight acquisition, do you expect to do similar -- more deals like that in the future?

Yes. Similar to the last 3?

No. The one you -- where you gave some units to the seller?

Yes. That's a good question. So I just want to remind the group, the BSR management team has been buying and selling operating properties for a few decades now. So we've seen transactions like that pick up, as I say, sporadically in '16 and '12 and again with the Starlight transaction. We're always open to a stock-sponsored deal. If the seller desires, as in the case with Starlight, to acquire stock in our REIT while allowing us to preserve the economics for our existing unitholders, we'll certainly do those deals in the future.

Your next question comes from Matt Kornack with National Bank Financial.

Just a quick question in terms of performance on sort of your newer A and older B class properties. Has there been any distinction as far as performance within COVID? It didn't look like it from an operation standpoint. If anything, occupancies in some of the markets that you were potentially going to sell out of were increasing. But just interested in your thoughts there.

Actually, I look at that quite often. This is Blake. And there hasn't been a differentiation. I actually rank these almost on a weekly basis in terms of looking at week-over-week performance. And I break them down into age and I break them down into MSAs and I break them down into submarkets. And interestingly enough, there hasn't been a tremendous difference in any of those characteristics.

And is that -- I mean do you think in this early phase of COVID, where the government has obviously been very proactive and we'll see what happens on the federal government side over the next few weeks but -- that maybe there's a delayed impact on some of the secondary market stuff, and at this point, rents are low and they're getting some pretty good benefits from the government?

Another question that I ask myself probably every other hour. And if I had a crystal ball, I wish I could use it, but this is my thinking on that. We've been looking at it every month in terms of payment patterns. Also looking at the -- trying to get a feel, which is almost impossible, on how many people are unemployed that are being affected by that. Our payment patterns have continued to stay stable up until this very day. And so the answer that I have right now is no, I don't think it has affected us. And I don't think it will affect us as much as it would in a lot of different regions, as we've talked about. And that's intuitively from the standpoint from the areas that we're in are probably as open as far as business and have been for a longer period. And I think that's probably translating into our numbers.

Fair enough. On non-evictions, are there any policies within the markets you operate in that are preventing evictions at this point? Or I think there were maybe some restrictions if you had agency financing, but I'm not 100% sure on that.

Yes. There's 2 -- there's probably 3 layers to it. You've got the CARES Act, which has expired. And I guess we alluded to it earlier. We're waiting to see exactly what Congress will do. I'm sure they're going to extend it. And that kept us from being able to evict residents. And we have 19 properties that fall under that CARES Act. Then you have -- like in Texas, you might have different -- jurisdictions have different feels on it. Austin is a little tougher on allowing evictions than Houston and Dallas. Now where we are right now is there's no restrictions other than a couple of pretty punitive restrictions on notices that have to be given in Austin, which luckily, for us, we don't have very many people that we would even need to evict and there's a couple of others in Dallas County jurisdictions that we have. But -- so yes, there is -- that is something that can affect the evictions. Luckily for us, we track this daily. We do not anticipate having a large number of evictions that will affect our bad debt at a large level. And so we're lucky in that regard as it stands right now.

And I know you guys pride yourself on tenant relationships. Do you think that helped with -- I mean some other landlords have talked about [indiscernible] within their tenants, knowing that they had anti-eviction legislation. So they use that to their advantage. I assume maybe your higher tenant -- or better tenant relationships may have helped in that respect.

I think there's no question. I mean can I quantify that? No. But there's no question. I think that, that had a lot to do with it from the very start. We were -- we really work with people on deferral agreements and starting out. And we're really -- we were reaching out to people, talking to everyone. And I think that's why we've had such success on our deferral agreement payment. I think we did 172 total. And out of that amount, we've only had 8 people that did not make a payment, which is extraordinary to me. So I think that also speaks to our relationship with our residents.

Okay. That's great. Last question for me, and this one, you probably don't have an answer, but maybe you've seen some incremental change in the acquisition and disposition market. But there was some presidential politics around 1031 exchanges and whether or not that would continue under a new administration. Have you seen any changes in the way people are approaching acquisitions or dispositions at this point? Or is the view that, that's too far off to care?

Yes. Matt, this is Dan. I think the current view in the transaction market is politics are politics. And we're a little bit too far off from any, I'll say, outlook on transactions resulting from who may or may not win an election and then who may or may not pass a bill a year or 2 after an election victory.

[Operator Instructions] There are no further questions up the time. Please proceed.

All right. Well that concludes our call this morning, and thank you very much for your interest in BSR REIT. We look forward to speaking with you again following our third quarter 2020 reporting. In the meantime, we wish you all very good health and hope you enjoy the rest of your summer, and God bless.

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines. Have a great day.