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

Good morning. My name is Anas, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q4 2020 Financial Results Conference Call. [Operator Instructions] Mr. Bailey, you may begin your conference.

All right. Well, thank you, Anas, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the fourth quarter and year ended December 31, 2020. I am joined today by Susan Koehn, our Chief Financial Officer. Also with us are Dan Oberste, President and Chief Investment Officer; and Blake Brazeal, Co-President and Chief Operating Officer, who will be available to answer questions following our prepared remarks. I'll start this call by providing an overview of our annual and quarterly performance and other corporate developments. Susie will then review the financials, and I'll conclude by discussing 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 forward-looking information in our news release and MD&A dated March 9, 2021, 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 further -- additional further 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. 2020 was a challenging year on many different levels. However, BSR prevailed by delivering strong financial results while dramatically upgrading our portfolio through the capital recycling and portfolio growth program. We collected nearly all of our build, rent and operated without significant interruption in the midst of an ongoing pandemic. It is a tribute to our professional BSR team for performing so well under the unprecedented circumstances. Let me take you through a few quick financial highlights. At year-end, weighted average rent was $1,088 per apartment unit, an increase of 16% compared to year-end 2019 of $937 per apartment unit. Same-community revenue increased 2.1% in 2020 compared to 2019, while same-community NOI was up 2.7% even with the impact of a pandemic. These numbers demonstrate the benefits of our growing exposure to primary Sunbelt markets with strong economic fundamentals. In short, our strategy is working. This is an excellent opportunity to take stock of our current portfolio. If there's little resemblance to the one we took public in May of 2018, during 2020 alone, we acquired 6 high-quality apartment communities in primary markets for an additional $338 million, including 2 in the fourth quarter. At the same time, we completed the development of Wimbledon Green phase 2, adding 156 apartment units to the portfolio, and we sold 17 noncore properties for proceeds of $346 million, 12 of which were sold in Q4. After including the sale of Towne Park at Har-Ber apartments, which we completed last month, we have acquired a total of 14 properties since the IPO while divesting 33 properties. We still consider Northwest Arkansas an attractive market. However, we have not achieved critical scale. Therefore, we determined our best course of action was to capitalize on the strong property values in this market and deploy the capital where we do have scale. The result of this activity is a highly -- is a high-graded portfolio in high-growth primary markets in Texas. When BSR went public, we generated about 52% of our NOI from primary Sunbelt markets. Today, that number is 95%. And the weighted average age of our properties in our portfolio has declined dramatically from -- by 12 years since the IPO from 29 years to mid -- in mid-18 to 17 years today. As I mentioned earlier, COVID-19 is not having a material impact on our rent collections. We collected 99% of total build revenue in December 2020 and also in January and February of '21, which is in line with historic norms. Also, nothing matters more to us than having all necessary measures at our properties to maximize the health and safety of our residents and employees. Finally, I want to talk about -- talk briefly about the impact of the severe weather, which struck the U.S. Sunbelt last month, including our markets in Texas, Oklahoma and Arkansas. First, we had no loss of life among our employees or residents; second, we were fortunate not to have material damages to our business with no down apartment units. We have incurred about $0.1 million of costs associated with the freeze damage, and we do not expect total expenses related to the storm damage to ultimately exceed $0.3 million. No insurance claim is being filed at this time. Our expert and capable team did an exceptional job with responding to the needs of the affected residents in the aftermath of the storm as we dealt with the utility service interruptions and other temporary issues. Now I'll turn it over to Susie to further review our fourth quarter and full year results in more detail. Susie?

Thank you, John. Same-community revenue increased 0.8% in the fourth quarter to $12 million from $11.9 million last year, reflecting an increase in same-community average rental rate from $915 per apartment unit as of December 2019 to $924 per apartment unit as of December 2020. Total portfolio revenue for Q4 2020 increased 1.8% to $28.6 million compared to $28.1 million in Q4 2019. The increase was primarily the result of property acquisitions, which contributed $7.1 million in revenue as well as higher rental rates across the portfolio, partially offset by dispositions that reduced revenue by $6.7 million. NOI for same-community properties were $6.5 million, in line with Q4 last year. The increase in revenue was offset by an anticipated increase in real estate taxes and insurance costs. NOI for the total portfolio increased by 1.6% to $15.1 million compared to $14.9 million in Q4 last year. The increase was primarily attributable to acquisitions contributing $3.9 million, partially offset by property dispositions reducing NOI by $3.6 million. FFO for the fourth quarter was $6.7 million or $0.15 per unit, which was consistent with Q4 last year. The increase in NOI was offset by $0.2 million of severance and retention costs. I also want to note that we excluded from FFO a loss on extinguishment of debt of $10 million primarily related to the noncash write-off of net discounts premiums and prepayment-embedded derivatives. Q4 2020 AFFO was $6.1 million or $0.13 per unit compared to $6.3 million or $0.14 per unit last year. The decrease in FFO was primarily the result of $0.5 million less rent guarantees related to property acquisitions, partially offset by a decrease in maintenance capital expenditures of $0.4 million. The REIT paid quarterly cash distributions of $0.125 per unit in Q4 of both years, representing an AFFO payout ratio of 92.9% in Q4 2020 compared with 89.6% last year. The payout ratio will decline as we complete the disruptions caused by rotations of this magnitude. I'll now review our results for the year ended December 31, 2020. Same-community revenue increased 2.1% in 2020 to $47.7 million from $46.7 million in 2019. The increase reflects higher rental rates as well as an increase in utility reimbursements of $0.3 million, partially offset by the absence of late rental fees of $0.2 million related to COVID-19. We resumed charging late fees in August 2020, as previously disclosed. Total revenue was $113.3 million in 2020, an increase of 1.5% on from $111.7 million in 2019. Property acquisitions contributed $25.8 million of revenue, while dispositions reduced revenue by $25.2 million. Same-community NOI increased 2.7% to $26 million from $25.3 million in 2019. The increase in revenue was partially offset by a $0.2 million increase in property insurance expense. COVID-19-related expenses of $0.3 million in 2020 were offset by lower payroll expenses. Total NOI was $59.2 million in 2020 compared to $59.7 million in 2019. Property dispositions reduced NOI by $13.9 million, while property acquisitions contributed $12.7 million. FFO for 2020 was $27.7 million or $0.61 per unit compared to $29.3 million or $0.71 per unit in 2019. The decrease in FFO in 2020 reflects the reduction in NOI and a $0.3 million increase in G&A expenses related to share-based compensation and employee benefits partially offset by lower legal and professional fees and lower travel expenses. The amortization of deferred financing fees contributed $0.5 million to the decrease in FFO, while severance and retention costs related to the capital recycling program contributed $0.2 million to the decrease. A loss on extinguishment of debt of $11.6 million was excluded from FFO primarily related to the noncash write-off of net discounts premiums and prepayment-embedded derivatives. AFFO for 2020 was $25.4 million or $0.56 per unit compared to $26.4 million or $0.64 per unit in 2019. The reduction in AFFO reflects the decrease in FFO partially offset by a $0.6 million decrease in maintenance capital expenditures due to emergency-only maintenance conducted in the second quarter of 2020 as well as the rotation out of older properties into newer properties. The severance and retention cost adjustment mentioned are excluded from AFFO. We repaid cash distributions of $0.50 per unit in both years with an AFFO payout ratio of 88.7% in 2020 and 78.6% in 2019. As previously discussed, the payout ratio will decline once the portfolio is stabilized. Turning to our balance sheet. On February 9, we completed a bold deal equity offering, in which we issued approximately 6.3 million units at a price of $10.95 per unit, raising gross proceeds of approximately $69 million. We were pleased to see the over-allotment option granted to underwriters was fully exercised, clearly reflecting strong demand from investors. In addition, as John noted earlier, we completed the sale of Towne Park at Har-Ber property on February 16, which generated gross proceeds of $31.7 million. Accordingly, our total liquidity is now $170 million, and our debt-to-GBV ratio has declined to 40%. We are well positioned to pursue our growth strategy with our strong liquidity position. As of December 31, we had total mortgage notes payable of $355 million, excluding the credit facility and line of credit, with a weighted average contractual interest rate of 3.8% and a weighted average term to maturity of 7.6 years. Total loans and borrowings at year-end were $475.9 million, excluding the debentures, and 87% of the REIT's 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. Thank you, Susie. The past year has been a challenging one, but our solid performance demonstrates the strength and resilience of high-quality, affordable multifamily housing in primary suburban Sunbelt markets. As we have said before, our market fundamentals are very robust. They include strong economic and population growth and are key markets over the long-term as well as the propensity to rent among millennials who make up more than half of our resident base. We continue to evaluate attractive acquisition opportunities and noncore asset sales. The market for multifamily properties remains a very liquid and active one. Even during a difficult 2020, we completed a large number of deals. Our acquisitions team is very busy evaluating opportunities, and we are confident we will build value with our external growth strategy. With our current liquidity position of approximately $170 million and debt to gross book value of 40%, we are in an excellent competitive position, and we are excited about the growth opportunities ahead of us. While the pandemic isn't over yet, and economic uncertainty remains elevated, we are optimistic that 2021 will be another successful year for BSR. That concludes our remarks this morning. Susie, Dan, Blake and I would now be pleased to answer any questions you may have. So operator, would you please open the line for questions.

[Operator Instructions] Your first question comes from [ Leon Chen ] with IA Capital.

A couple of questions for me. Just on the Wimbledon Green phase 2 development, what was your yield on cost on the project? And was it in line with your budget? And how did the expected yield on cost on your project evolve over the last year in light of increasing material costs?

This is Dan Oberste. Our original yield on cost, I think we reported our cost there at $16.5 million, and our yield looked to be $675 million to $7 million. We've -- that property's lease-up and current stabilization has outperformed our expectations. So we're probably a little bit higher than those numbers. And as it relates to the construction costs, as we penciled in and fixed all of our construction costs prior to last year on that development. We were firmly insulated for many run-ups and the prices of lumber or other construction materials. So as our investors have right now, they bought a 4.5% cap for a 7% cap. We're pretty happy with that, and we hope our investors and stakeholders are as well.

That's great. And then last one for me, just looking at the single-home residential market across the U.S., particularly in the -- in Texas. And your pricing seems to remain very robust. Does this particular environment translates to much stronger demand for rentals within your markets? Just curious as to what you're seeing on the ground today.

This is John. And from the standpoint of single-family homes, there has been a run-up in pricing. And in our markets, in particular, you have -- let's just go maybe to Austin, Texas, where you have about $400,000 for your average home price. And our cohort is a middle-income cohort that has an income of -- range of $60 thousand to $70,000. And buying a home in Austin, Texas, for $400,000, that equates to about $10,000 a year just for the -- simply for paying for property taxes. The cohort that we cater to primarily, this particular cohort is much more flexible, mobile. They have -- their balance sheets are pretty well stretched out by having student loan debt. There's about $1.6 trillion of student loan debt to this particular cohort. And we don't see this as being a direct competition even with the continued demand for housing in these markets. And we don't see the demand for the housing to go away in the next several years. I mean it's quite robust with the amount of population and economic growth that we've seen in these Texas markets, which is exactly why our strategy has been to be moving toward these markets.

Your next question comes from Brendon Abrams with Canaccord.

Maybe just on the capital recycling front, just wondering if you could remind us how much is left within the portfolio that you'd like to dispose of and maybe in terms of either units or dollar value. And then just on the acquisition front going forward, with about 80% of the NOI in the 3 big markets in Texas, are there any other markets or geographies within the Sunbelt you're looking closely at right now to potentially add to the portfolio?

Sure. This is Dan. First, as it relates to the rotations and the capital recycling, we may look to trim the hedges of the portfolio a bit with some tactical gardening, but overall, the lion's share of the dispositions are complete. I think we've telegraphed our intentions with Northwest Arkansas. And yesterday, we sold the free apartments in Blytheville for what I see is a foregone 4.1 cap. If that's not representative of the current disregard for cap rates in our markets, I don't know what is. So I guess, in detail, we'll be opportunistic with our capital discipline. If we see sales prices far exceed what we can otherwise produce on a, call it, a fair value return on what we believe the market value of the property is, then sure, we'll be opportunistic. But I don't think you're going to see us selling -- what did we sell? 34 properties in the last 2 years. I don't think we have the capacity to do that kind of rotation on a look forward. So smart sales. Probably further entrenching our NOI in the 3 markets in Texas is probably what to look out for on a look forward. And as it relates to our markets for acquisitions, we're going to continue to focus on Dallas, Houston and Austin. This real estate investment strategy has proven to be a bull's eye in the past 36 months, and we see no compelling reason whatsoever to throw a dart in another direction off the board. So we'll continue to look at those 3 markets. We like the demographic trends. We like the fact that every quarter and every year, one of those 3 markets, it leads the nation in absorption, employment creation, demographic trends, net migration, population growth. These are the main ingredients in the, I would say, AFFO growth and value growth. So as long as we continue to see those 3 consistently hit the top mark or the top 5 mark in every one of those categories year-over-year and decade-over-decade since as far back as we can look, 1960, we're going to continue to hit the ball into those markets.

And this is John. I'd like to add on to that, too, is we've -- as you know, the REIT owns the management company and our platform. And what we want to do is part of our overall strategy, and we haven't backed off. As a matter of fact, we see more and more opportunity to continue to build scale and opportunity with this team's, I would say, expert capabilities and their abilities to continue to find product at more favorable prices than what I would think any other competitor out there would be able to do with our relationship, purchasing and capability. So I'll just go with our platform's efficiency going forward is where we're targeting to continue to grow our scale in these markets for every bit of what we talked about our platform scalability.

Okay. That's helpful. That's good color. And then just last question for me before I turn it over. Just in terms of occupancy, it hovered around the -- or just under the 94% mark. Just wondering if you consider that kind of a stabilized figure for your portfolio and within your markets? Or is there a potential for that number to increase as you've acquired properties and you deploy some of your active property management techniques on those assets?

This is Blake. 94% is pretty much what we forecast for this year. And that -- we do consider that to be stabilized. But I must add that with some of our newer properties that are coming online, we're hopefully expecting that we could pick up some occupancy during that time because it's probably a pretty good time to remind everybody that our same store and nonsame store is about 50-50 right now, and that ratio is going to keep going up on the nonsame store. So we've got a lot of new product that is performing really, really well right now. And we're hopeful that we can move the needle south on that 94%.

We have a following question from Brad Sturges with Raymond James.

Brad, we can't hear you.

Can you hear me now?

Brad?

Can you hear me?

Yes, we can hear now.

Sorry about that. Had to take myself off mute. Just on those line of questionings, I guess, rent growth year-over-year has been trending around the 1% range. And with, hopefully, a successful rollout on the vaccine front, do you see that being a level that can start to -- like rent growth year-over-year start to accelerate from here over the next few quarters? And where would you think that could normalize out to?

Looking at -- Brad, it's Blake. Looking at what we're -- for 2021, we're expecting a 2% rent growth. That's what we're expecting internally. And hopefully, in our markets, as we continue -- we've discussed this in past calls, we spent so much time on revenue management and looking at our markets and looking at our competitors. And as we continue to get further along past the original pandemic outbreak, we are hopeful that 2021 will create a 2% growth and really looking forward to 2022.

And with that thought process, where would you currently expect your margins to trend for the year?

Brad, it's Susie. I would say about 54% is what we're predicting for our margins, same store.

Okay. And maybe just one last one for me. In terms of the outlook for acquisitions, can you give a little bit more of a context or commentary in terms of your expectations for capital deployment? And when you think the REIT could reach more stabilized levels in terms of debt metrics?

Sure. And Brad, let's start out with cap rates because that's a fun conversation to have. If I'm looking back to Q3 of '20, U.S. multifamily cap rates compressed 20 basis points, and that's just for Q3. So we're looking at the average of 5.09% is the average U.S. cap rate. Now there's 2 items to note here. First, let's take Dallas. DFW was by no means average. Last year, it was the top U.S. metro for multifamily investment in the United States. And second, now I haven't seen accurate numbers for Q4 cap rates yet, but since October and through yesterday, I'll tell you right now, cap rates in our markets have compressed substantially. I haven't seen a cap rate above 3.75% in Austin since last October. And I'm seeing comps to our recent DFW and Houston acquisitions trading at 20% and 25% premium since the date we acquired those. I'll tell you right now, Houston is probably a solid 4% to 4.5% cap market at this time. Now those are the headwinds. That means that the way I see it, what we bought is worth a lot more than what we paid for, but it does make it somewhat competitive on a look forward. I don't think our investors would be happy with us buying at 3.5% cap in Austin, and we won't do that, right? But I want to remind the group that we got about $400 million of acquisitions that we're looking to close on between now and the end of July, June or July. We're pretty confident in that number. Obviously, we haven't disclosed any acquisitions yet. That's just the nature of the public disclosure of acquisitions. We're pretty confident that we've filled half that number to date. We're excited to roll out our pipeline as we close. I don't think that we are really going to participate in the low cap rate environment that we saw coming through in December and January. The majority of our acquisitions that we source are off-market and from repeat sellers. The REIT's ability to close in a short period of time and to quickly underwrite and do exactly what we tell people we're going to do, that helps our credibility in these markets. I think the second thing that helps right now is the cash on hand that we have to deploy into acquisition. What that enables the REIT to do is trade a little cap rate for some volume. What I mean by that is that it opens up the door for portfolio dispositions from a developer standpoint or from a seller standpoint, allows a little bit more elasticity in cap rates so that we can go ahead and acquire at cap rates that we think are a little bit higher than where we're seeing the market trade right now and then turn around and hedge in our debt behind that so we can preserve the economics for our investors. Now one other component that -- what we're seeing in the current cap rate environment is the majority of the buy and the sell side and the lending side, for that matter, they're underwriting some pretty substantial 2022 organic growth numbers. Some of the numbers that I'm seeing that are commonly dropped on the Street are a 9% and 10% organic growth number for Austin; 6% for Dallas; 5%, 4% for Houston. And they're embedding some of that organic growth into the current cap rates that they're trading properties out in the market. So when you look at how that investment looks over a 3-year period, you're seeing cap rate look-back expansion that's sometimes double what we're historically used to. And I think that and a little bit of the leverage and the lower rates we saw in December through February is enabling a buyer to probably lever up a little bit, fix the rates and sacrifice a little bit lower cap for the -- for kind of the year 2 and year 3 growth expectations simply out of just organic rent growth. On the margin of 56%, on the AFFO margin of 50%, you can turn that into year-over-year cash flow growth pretty quick. And I'll drop the mic.

That's quite helpful. So just to maybe clarify, it seems like the -- maybe the off-market opportunities are more with the developers at this stage where you can take advantage of liquidity and maybe a little bit of lease-up just to get a little bit better stabilized yield.

That's fair to say. It does help us out with economics and having solid trading partners. You know what? I think we came into the IPO and 11 of our 13 prior acquisitions were off-market from repeat sellers. That number -- those statistics really haven't changed since IPO. A lot about acquiring and selling in our markets is knowing everybody at the table who builds and buys and rehabs and brokers and lends and keeping up good relationships with them. And that turns into really the ability to confidently project $400 million in acquisitions by the end of the second quarter.

Your next question comes from Kyle Stanley with Desjardins.

So it sounds like the acquisition pipeline is fairly deep, and you just gave a pretty good rundown of what you're seeing out there. Are you seeing any portfolios available for sale, maybe you can get that capital deployed even quicker?

Yes. I'm seeing -- this is Dan. I'm seeing portfolios, I'm seeing one-offs. It's a great time to shop for properties in our market. When I look at last year's volume, you got $10.5 billion of multifamily trading in Dallas, you got $3.5 billion in Austin and $3.5 billion in Houston. That -- I see no signs of that slowing down. As a matter of fact, I see that's probably going to accelerate into '21. So we're seeing everything from a fractured condo deal to 17 property portfolios.

Okay. Great. That makes sense. And then maybe just given your commentary about not participating in the low cap rate environment, I mean you mentioned maybe targeting some developer-owned property with some lease-up risk. But would that also indicate maybe you're looking at some assets with a bit more value add than maybe what you've done in your most recent deals?

Probably not. Our view of value add right now is it's a good time to be a seller of value-add properties. It's very -- I think it's very easy to -- I think it's relatively easy to underwrite to increased economics for you, and it's much tougher to execute upon those increased economics. So if I'm looking at hedge debt of, call it, a 2.5% and walking into the back of a 3- to 5-year increase in interest rates that's going to potentially drive cap rates, I really want to run to quality all day long. So with that said, if you look at the last call it, 6 or 7 acquisitions we've done, they've all been new assets, and they've all been strategically located. I don't think there's any signs that BSR is going to stop doing that.

Okay. Makes sense. And then just looking at one of the more recent acquisitions, Vail, just how is the leasing program going there?

Blake?

Kyle, this is Blake. Going really well. We're leased at 75% as of today. Our budget called for 55%. We are reaching the pro forma lease rates. We're actually a little ahead of that right now. Our traffic is great and really, really doing well.

Okay. Great to hear. And then just a last one for me, maybe a little higher level. Just curious on your thoughts on the 1031 exchange program under the new administration. Any chance that we see any changes there? Or just your general thoughts.

Kyle, before Dan answers that question, I would want to add too also the Satori, which was one of our first properties that we took on a lease up, is at 97% as of today, reaching the rents that we had projected.

Okay, Kyle. So this is John, and I'll take the 1031 question. It's just we've noted that there was a discussion about that during the presidential election period. And this President, Biden, has put all kinds of different priorities out in front of him, including just raising overall taxes, much less than getting into the weeds on how they would raise taxes or do a wave of certain components of the real estate side. I will say this: the 1031 has been around since 1921 in some form or fashion. And since 1987, it's been the way that we're looking at it today, and it's provided a great lift to the whole economic component of the U.S. economy. So to me, I think that it's pretty far down the weeds to say that this is going to go away or it's going to have a meaningful change. But we don't control that. And as far as we're concerned, we're going to continue conducting our business and utilizing 1031 as long as it's available. But we don't believe that it's going to be something that's going to morph or go away due to 1 administration's discussion about it in last presidential election. It was a good wording around -- good fodder for talk speak, if you will, in order to be elected.

Your next question comes from Joanne Chen with BMO.

Maybe just a quick follow-up on the acquisition side with respect to the $400 million acquisition. In terms of given how competitive the pricing environment is, would you say that the kind of cap rate that you'd be looking at on those acquisitions is probably in the low 4% range?

Yes. Joanne, this is Dan. I think it's fair at this time to give a range. Let me give you a 100 basis point range between 4% and 5%, the way that we look at cap rates, which might be different than the way that the rest of the market views it.

Okay. No, that's helpful. But maybe just switching gears a little bit. I guess, on the maintenance CapEx side of things, how should we think about that to trend, I guess, in '21, '22 just given the significant shift in the portfolio this year?

I'm sorry, you faded out for a second, Joanne. Did you ask about maintenance CapEx?

Yes. How should we think about that to trend in '21 and '22 given the significant shift in the portfolio this year?

Right. Yes, so generally, we predict around $430 a door-ish. That's going down a little bit, maybe closer to, I would say, $375 based on the age of this new portfolio.

Okay. And I guess, just this quarter, there was -- the weighted average cap rate on the portfolio compares quite a bit, just 4.9%. Can you talk to maybe some of the drivers of that 30 bps move quarter-over-quarter? Was that mostly from acquisitions of some of the newer properties?

Yes, right. So I'm sure everybody has noticed the weighted average cap rate of our portfolio has been trending down, and that's -- there's 2 reasons, right? We are buying properties with lower cap rate, yes, but we're also selling a lot of properties that had higher cap rates. So it's a combination of both.

We have a following question from Matt Logan with RBC.

Just wanted to touch on your disposition of Towne Park. When we think about the remaining assets in Northwest Arkansas, would those be something that you would consider selling? Any color there would be appreciated.

Matt, this is John. And Northwest Arkansas was certainly one of our target markets to grow in. But I will say this, the market has -- they paid an outrageous price from our perspective for Towne Park and that it was also some out-of-market debt that was with it. And when you look at the look-back cap rate that we received on the property, it was compelling to the point that we wanted to rotate that capital and put it back into where we do have scale and where this -- where our platform could take advantage of the opportunities, as Dan had discussed before. And we've seen the same thing for the remaining property in Mount Ranch. I mean we look at the pricing being in that particular market, so just -- I wouldn't be surprised if you ever saw us move out. You know our strategy is a clustering strategy. And if we aren't growing, then most likely, we're going to take advantage of an opportunity to move our capital and put it where we can grow it with scale.

Yes, and this is Dan. I'm going to echo some of John's comments and generally say, let's take that Towne Park acquisition -- or that disposition. I think it was $31.7 million give or take. Now I want to note there, and I think we hit on it in some of the disclosure materials, the buyer in that transaction assumed a 10-year fixed-rate 4.5% interest rate loan that carried with it at closing about a $5 million -- I think it's $5 million or $6 million prepay. So if you're looking at what that acquisition cap rate would look like all cash, you're looking at a 4% cap flat for Towne Park, right? And you have a buyer that assumed a lower-levered loan at a way out-of-market interest rate. And that's what drove down some of that sales price on Towne Park. Now even with Towne Park sales prices at $31.7 million, let's call that a mid-5s exit cap. And when you're stacking the prepay on top of that $31.7 million you're looking at a -- yes, you're looking at a 4%. And when we decided to get in and anchor Northwest Arkansas as a core market for us, we saw the basic demographic trends, the net population growth, the AMR growth the supply and demand mismatch, but if we're going to see assets trade at 4% cap in Northwest Arkansas, then I think it's just basic capital discipline that we would revisit our hold strategy there.

Makes total sense to me. Any thoughts on Oklahoma City at the moment?

None at -- this is Dan. No real -- I mean we've got tons of thoughts on them, but no real thoughts that are going to turn into tactics or strategies. We think the Oklahoma City NOI is what I would call pure. Our assets are pretty well capitalized there. We've acquired some of them post-IPO. And then I think if you really look at Oklahoma City performance during COVID, a big pillar of that economy has been hospitality since 2005. And the Oklahoma market performed well in the last 1.5 years, though hospitality was one of the hardest hit factors of our economy in 2020. So we like the way the market -- the way the city market, I guess, performed against some of those negative global macroeconomic trends. On a look forward, we hadn't seen much, if any, development in '19 and '20 in Oklahoma City, and I think some of our organic expectations this year and next make it kind of a quite pleasing market for us to have to hold on to. With that said, we'll continue to be opportunistic.

So I guess focus of the acquisitions is really Texas given positive dynamics. Oklahoma is moving along well. In terms of the NOI outlook, I guess, we've got 1%-ish rent growth, stable occupancy and a 54% margin. Correct me if I'm wrong, but with a 52% margin in 2020 and 53% in 2019, that should translate into some pretty healthy NOI growth here in the next year.

Yes, we think so. I mean we -- this is Dan. We spent the last year beating up on our competitors every quarter. We think we'll continue to do that in the next quarter, we hope. And I think the motto of BSR is we want to be able to control what we can control. And we are real estate managers and real estate investors, so we're going to keep our heads down, and we're going to continue to be excellent landlords and provide a great service and great properties in great locations for our residents and our employees. And I see no additional ingredients to apply. And I kind of see the proof is in the pudding on a look back, and I would expect this to continue to perform and outperform when I look forward.

And Matt, this is John. I'll add on to that in that this just speaks volumes to our strategy and why we've been growing primarily in just Austin, Houston and Dallas. The trend for population and economic growth is forecast by REITs, CoStar, all the different outlets that are forecasting this type of growth going forward is way outpacing the other markets where we had existed. And we're going to continue taking advantage of any type of opportunity to have rotated, and we're extremely pleased that we have rotated with the lower cap rate spread compression between our secondary and our primary markets.

Absolutely. And maybe just one quick question for me before I turn it back. Can you give us a sense for what you're seeing for indicative interest rates these days?

Yes, sure. This is Dan again. So this is a topic that majority of the run-up in rates that we've seen carries between years 3 and 10 on a curve. So the premium to finance will generally sit in those areas. The premiums for hedging against the curve right now is virtually nonexistent between years 1 and 3, which generally follows current fed thinking on short-term rates. I think for BSR, we'll likely look to hedge our future debt obligations to the usage of caps. And we'll just say a 25 basis point cap purchase in lieu of swaps, this will enable the REIT to enjoy current short -- low-term LIBOR rates while protecting our investors from the potential of rising rates beyond '23. Right now, if I'm going to look at spot money, 5-year money probably looks like 2.5% to 2.75%, leverage dependent. And 10-year money probably sits around just a hair south of 3.5%.

Your next question comes from Yash with Laurentian Bank.

Are you guys modeling any specific number for your same-property NOI growth and FFO per unit growth given what you know, what is happening in your markets?

I believe you were asking what are we modeling for same-property NOI growth?

What your model is spitting out based on your margin assumptions and rent growth? You said about 2%.

We're looking currently at 1% to 2%. We always -- which is quite a bit more than our competitors in a lot of areas down in the Sunbelt. And -- but we're always looking to beat that mark. But at the current time, that's what we're modeling.

Right. Okay. And on your FFO per unit growth, how do you guys think about the FFO per unit growth? This new portfolio that you have put together and given the rent growth you're seeing, what kind of FFO per unit growth do you think you can achieve over the next, say, 5 years?

Well, 5 years -- this is Dan. 5 years is a long time. And if I was ever accurate on a 5-year look-back, then I should get more than a trophy. But I mean if we're really looking -- I would say, now more than ever, capital discipline and discipline in underwriting is so important, right? So if I look at last year, the team looked at 107 acquisitions, and any one of those 107 acquisitions would have been a great asset to the REIT. That's about 35,000 suites. It's a collective asset value of $6.5 billion, and the average asking price of what we looked at was about $59 million, average age of construction was about 2011. And you saw we bought 5 -- or we bought 6. That penetration rate of about 5% to 6% is what we like to see every single year. We can only coach to that. We look at that number, and it's a good bellwether number for us to know whether we're reaching on acquisitions or not. Now if we look back again and dig through our discipline a little bit more, we like to see a 75 basis point cap rate expansion on a 3-year look-back. I don't see any reason why we can't continue that trend of, call it, a 3-year look-back, turning into NOI and thus FFO growth of a 75 basis point expansion. Now with that said, there could be a couple of curveballs in our market. We sat in last year of some flat-to-declining rent AMR numbers, right? Now our markets continue to lead the nation in population growth, job growth, right, and in some cases, rent growth. So when I'm looking at and modeling some Austin acquisitions, I'm looking at potentially a 9% to an 11% organic growth from new constructions and AMR in year 2022. Now that's not going to chase my buy cap down, but it may afford to REIT the opportunity to meet and exceed that 75 basis point look-back cap rate number that we generally model to. As we go out 5 years, as I -- and as I said earlier, I think there's a lot of premium built into years 3 and 5 that on the borrowing spreads. So there -- it creates a little bit more uncertainty. So I think if we continue to focus on what we can control and buy these assets in the right submarkets in the right markets, the other aspects of real estate investment will take care of themselves.

Dan, something that I feel like I talk about every call but I think is really, really important to think about is that when you just pull up the information on cities and you're looking at the overall rental growth rate, so the occupancy rate, it's really important to look at the submarkets. I mean Houston, I mean, we've owned properties that are 60 miles apart in Houston. And these submarkets, and Dan does a fabulous job of this, and it's something that Dan and me look at when we're putting together our projections every year is we go through and we literally look at the projections by 3 different forecasters of what the rates are going to look like for the coming year. And you can't just -- I stress this again, you can't just look at the overall city, you've got to look at the submarkets. And I think that's been one of our biggest strengths is buying in the right areas at the right time.

Blake brings up a good point. This is Dan. I mean let's take Austin as a snapshot as of December 2020. On a look-back, I'm seeing the -- for the entire MSA, I'm seeing a negative 3.2% average rent performance for 2020, right, and I'm seeing occupancy reduced year-over-year by 4.2% in that market. A lot of that is driven by the 17,000 to 18,000 units in lease-up and the 21,000 units under construction. So there's some supply chain issues there. Now with that said, let's take a snapshot of where BSR owns in Austin, right? In South Austin, it's Cielo, and that's our -- we have 2 assets in South Austin and Hays County. Now Hays County was the highest-performing submarket in 2020 in Austin. It demonstrated rent growth of 3%. Now I want to point out here that only 5 of the 23 submarkets in Austin last year had positive rent growth, Hays County was one of them. BSR has 2 properties there, and we told you exactly what was going to happen when we bought them. Now the second and third -- well, the third and fourth assets we own in Austin are in North Austin, that's up in Williamson County. Now Williamson County was the only submarket out of all 23 of those submarkets that witnessed not only positive rent but also occupancy growth in the fourth quarter, and that's 2% and 4%, respectively, but for the year as well where we saw rent growth of 2% and 6% occupancy growth. So I think you can derive 2 things: number one, we like to be in the right submarkets; but number two, that's kind of indicative of that suburban growth and urban slack that we saw last year where you saw some of the migration out to more affordable apartments with better amenities in the, we'll call it, the donuts around an urban MSA.

And going back to what I said probably in my first question and I think to tag along on Dan, what we're seeing on these nonsame-store assets is the performance is, in each instance, either right on top of what we were thinking or -- and you just heard me reference Vail. We were performing at 55% at the time. We're at 75% now. So we feel really, really good over the next year about where these assets are going to take the portfolio.

[Operator Instructions] There are no further questions at this time. Please proceed.

All right. Well, that concludes our call this morning. And thank you for your interest in BSR REIT, and we look forward to speaking with you again as we report our first quarter 2021 results. God bless, everyone.

Thank you.

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