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

Good morning. My name is Sophie, and I will be your conference operator today. At this time, I would like to welcome everyone to BSR REIT Q4 2021 Financial Results Conference Call. [Operator Instructions] Mr. Oberste, you may begin your conference.

Thank you, Sophie, 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, 2021. I'm joined on the call by Susan Koehn, our Chief Financial Officer. Also with us is Blake Brazeal, Co-President and Chief Operating Officer, who will be available to answer questions following our prepared remarks. Before we begin, I just want to say I'm very pleased and honored to be hosting this call for the first time as CEO. John Bailey is a tough act to follow, but he is a tremendous -- he has left a tremendous foundation for us to continue building on at BSR. And, of course, he remains involved with the company as Executive Vice Chairman of the Board of Trustees. I'll start the call with an overview of our fourth quarter performance and other corporate developments. Susie will then review the financials, and I'll conclude by discussing our business outlook. After that, we'll hold a Q&A session. First, I want to remind listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on forward-looking information in our news release and MD&A dated March 8, 2022, for more information. During the call, we will reference certain non-GAAP financial measures. Although we believe these measures provide useful supplemental information about our financial performance, they're not recognized measures and do not have standardized meanings under IFRS. Please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS measures. Also, please note that all dollar amounts are denominated in U.S. currency. BSR REIT had an exceptional performance through 2021, and we ended the year with our single strongest operating quarter since the inception of the REIT. Our portfolio is much newer and better situated in faster-growing markets than the portfolio we took public. When we apply our experienced management team to improved product in superior markets, we expect to generate superior returns. We generated stellar growth across all of our key financial metrics in Q4. Net asset value per unit increased 61% year-over-year, same community revenue increased 10.6%, same community NOI rose 19.3%, and AFFO increased 48.5%. Since our IPO, BSR has generated relatively strong leasing performance, and this past year, capped by the fourth quarter, certainly continued this trend. As we disclosed last month, effective blended lease rates at BSR communities grew 15.3% in the fourth quarter compared to 9.5% in the third quarter. Overall, our weighted average rent was $1,328 per apartment unit at year-end, and that's an increase of 22.1% from $1,088 at the end of 2020. Weighted average occupancy was 96% at the end of 2021, up from 93.8% a year earlier. BSR's combination of Dallas, Houston, and Austin as the core of our portfolio has proven a superior investment strategy. For years, these markets have displayed their strength, depth, resilience, and growth potential. Our decision to rotate capital and concentrate our ownership into younger, suburban communities situated in these 3 Texas markets has absolutely transformed the REIT's profile. Following our capital recycling strategy, we now generate 89% of our NOI from these 3 high-growth primary markets. At the time of our IPO in 2018, that figure was 34%. Our operating performance in the fourth quarter depicts the impact of this NOI concentration. As a result of our excellent operating performance and strong, sustainable cash flow generation, our Board of Trustees decided last month to increase the monthly distribution by 4% to $0.52 per unit on an annualized basis. We're delighted to be in a position to increase distributions to our unitholders. It highlights the benefits of operating a high-quality portfolio in premier Sunbelt growth markets. The fourth quarter was another busy one from a transactional standpoint. We acquired 3 communities, Aura Benbrook Apartments and Overlook by the Park Apartments, both in Dallas/Fort Worth; and the The M at Lakeline Apartments in the Austin MSA. These 3 communities provided us with a combined 1,059 apartment units. They all have attractive locations and are equipped with modern amenities. The cumulative purchase price was $273.6 million. We also sold 2 older properties, Windhaven Park Apartments in the Dallas/Fort Worth MSA and the Heritage at Hillcrest Apartments in Austin. These sales generated gross proceeds of $147.9 million. Both properties benefited from the BSR management platform, which was reflected in the strong sales prices. These transactions continued the transformation of our portfolio. Since the IPO in May 2018, we've acquired 22 communities in core markets while selling 39, mostly in secondary and tertiary markets. The weighted average age of the BSR properties has declined from 29 years to 11 years as a result of these transactions. I would also highlight that 14 of our acquisitions came after the start of the pandemic in March 2020. Our team continued to transform our portfolio up to and during a highly volatile market. I'd like to provide a brief update on COVID-19. We collected 99% of total monthly revenue in the fourth quarter, which was in line with our historic norms. The pandemic continues to have minimal impact on rent collection, even though the global COVID cases increased during the quarter due to the Omicron variant. In addition, as of February 28th, we've collected $2.1 million in rental assistance to the federal government's Emergency Rental Assistance Program, which assists households that are unable to pay rent and utilities due to COVID-19. The money was collected through eligible residents at our properties. While 2021 was an outstanding year, we're just as excited about 2022. We expect continued strong organic growth in revenues, NOI, FFO per unit, and AFFO throughout the year. I will speak more about our guidance later on in the call. For now, I just want to emphasize that with our strong portfolio, focused on these high-growth markets, our management teams remains in excellent position to drive further value for our unit holders. I'll now invite Susie to review our fourth quarter and full-year financial results in more detail. Susie?

Thanks, Dan. Same community revenue increased 10.6% in the fourth quarter to $12.8 million compared to $11.5 million last year. The improvement reflects an 8.8% increase in average rental rates for the same community properties from $1,039 per apartment unit as of December 31, 2020, to $1,130 per apartment unit as of December 31, 2021, as well as higher occupancy and other income associated with utility reimbursements. Total portfolio revenue for Q4 2021 increased 19% to $34.1 million compared to $28.6 million in Q4 last year. This reflected organic same community rental growth as well as the contributions from property acquisitions and non-stabilized properties, which added $12.4 million and $0.2 million of revenue, respectively. Property dispositions reduced revenue by $8.4 million compared to Q4 2020. As a reminder, non-stabilized refers to properties that were undergoing lease-up or significant renovation during at least part of the comparative periods. NOI for the same community properties was $7.2 million, an increase of 19.3% from $6.1 million last year, reflecting higher same community revenue. NOI for the total portfolio increased 23.7% to $18.7 million from $15.1 million in Q4 2020. Property acquisitions increased NOI by $7.2 million, while dispositions and non-stabilized properties reduced NOI by $4.7 million and $0.1 million, respectively. FFO for Q4 2021 increased 45% to $9.7 million or $0.19 per unit compared to $6.7 million or $0.15 per unit last year. The increase reflects the higher NOI, partially offset by a $0.2 million increase in G&A expenses and a $0.6 million increase in finance costs. AFFO increased 48.5% to $9 million or $0.17 per unit from $6.1 million or $0.13 per unit last year. The increase primarily reflects the higher FFO. Net asset value increased 83.5% year-over-year to $1 billion from $563 million at the end of Q4 last year. NAV per unit was $19.81 per unit at the end of Q4 2021, an increase of 61% from $12.30 last year. The REIT paid quarterly cash distributions of $0.125 per unit in Q4 of both years, representing an AFFO payout ratio of 71.4% in Q4 2021 compared to 92.9% last year. All distributions were classified as a return of capital. I'll now review our results for the year ended December 31, 2021. Same community revenue increased 7.1% in 2021 to $49 million from $45.8 million in 2020. The increase reflects higher average rental rates, higher occupancy, and higher other income associated with late fees, fees for allowing residents to lease apartments on a month-to-month basis, pet fees, and lease termination fees, as well as higher utility reimbursement revenue. Total portfolio revenue was $119.6 million, an increase of 5.6% from $113.3 million in 2020, reflecting higher same community revenue as well as contributions of $39.8 million from property acquisitions and $2.7 million from non-stabilized properties, partially offset by dispositions that reduced revenue by $39.5 million. Same community NOI increased 9.9% to $26.6 million from $24.2 million in 2020. The increase reflects higher same community revenue and an increase in same community operating expenses of $1 million. Total NOI increased 6.2% to $62.9 million from $59.2 million in 2020, reflecting the increase in same community NOI as well as property acquisitions and non-stabilized properties contributing $20.3 million and $2.2 million, respectively, to the increase, while dispositions reduced it by $21.3 million. FFO for 2021 increased 10.6% to $30.6 million or $0.60 per unit compared to $27.7 million or $0.61 per unit in 2020. The increase in FFO reflects a higher NOI, partially offset by $0.6 million increase in G&A expenses related to additional payroll, equity-based compensation, insurance, and other professional fees. AFFO for 2021 increased 18.5% to $30.1 million or $0.59 per unit compared to $25.4 million or $0.56 per unit in 2020. The increase in AFFO reflects the higher FFO as well as an increase of $1.9 million in realized escrow rent guaranty over the prior year. The REIT paid cash distributions of $0.50 per unit in both years with an AFFO payout ratio of 85.4% in 2021 and 88.7% in 2020. All distributions were classified as a return of capital. Turning to our balance sheet. The REIT's debt to gross book value as of December 31, 2021, was 45% and 42.4% excluding our convertible debentures. Total liquidity was $73.9 million, including cash and cash equivalents of $6.8 million, $22.1 million available on our credit facility, $35 million available on a line of credit, and $10 million available on a separate credit facility. During the fourth quarter, we amended the REIT's revolving credit facility. This increased the maximum credit availability to $500 million from $300 million. We can obtain additional availability by adding properties to the borrowing base. In addition, on January 24th of this year, the $35 million credit line matured and was not extended. As of December 31, we had total mortgage notes payable of $489 million, excluding the credit facility and line of credit with a weighted average contractual interest rate of 2.9% and a weighted average term to maturity of 6.1 years. Total loans and borrowings were $826.5 million, excluding the debentures, and 53% of the REIT's debt was fixed or economically hedged to fixed rates. We also had $51.7 million of convertible debentures outstanding at a contractual interest rate of 5% maturing on September 30th, 2025, with a conversion price of $14.40 per unit. Investment properties were valued at approximately $1.9 billion as of December 31, 2021, up significantly from $1.1 billion at the 2020 year-end. We recorded a $422.7 million increase in fair value in 2021, driven primarily by higher NOI and cap rate compression. I want to review a couple of other important developments that provide us with additional financial flexibility before turning it back to Dan. On December 1, 2021, we renewed our existing Base Shelf Prospectus, which is valid until January 1, 2024. It enables us to offer up to an aggregate of $500 million in trust units, warrants, and subscription receipts, or a combination thereof on an accelerated basis pursuant to the following of prospectus supplements. There is no certainty that any securities will be offered or sold under the shelf prospectus. In addition, on December 8th, 2021, we announced the establishment of an at-the-market equity program. It allows us to issue up to $150 million of trust units from treasury to the public from time to time at our discretion. As of December 31st, 2021, no unit had been issued under the program. I will now turn it back over to Dan for some closing comments. Dan?

Thanks, Susie. You can tell from our comments this morning that BSR REIT is in an outstanding competitive position. Our capital recycling program completed, we have upgraded our portfolio, and strengthened our exposure to our primary Texas rental markets at a time when they are simply booming. This is resulting in outstanding financial performance for the REIT. The fundamentals underlying these markets are very strong. Population and employment growth are well above the U.S. average, and their economies have more or less fully recovered from the impact of the pandemic. Given the exceptional growth in rental rates that we're seeing in these markets, we have provided strong initial financial guidance for 2022. We anticipate FFO per unit of $0.86 to $0.90 compared to $0.60 in '21, and AFFO per unit of $0.80 to $0.84, compared to $0.59 in 2021. On a same community basis, we expect revenue growth of 8% to 10% in 2022 and NOI growth of 11% to 13%. Property operating expenses are expected to increase 4.5% to 6.5%, well below the projected growth in revenue. This is the first time we have provided such detailed annual guidance. We're doing it because of the continued rental growth in our markets, and we have a great deal of confidence in our business outlook, which is supported by very strong fundamentals in our core markets. We will continue to update this guidance on a quarterly basis as necessary. So all the hard work we undertook to transform our portfolio is now paying off. We have the portfolio we envisioned when we started our capital recycling program back in 2019. We are generating unprecedented operating performance, and we are confident that it will continue to result in very strong returns for our unitholders. That concludes our remarks this morning. Susie, Blake, and I would now be pleased to answer any questions you may have. Sophie, please open the line for questions.

[Operator Instructions] And your first question will be from Kyle Stanley at Desjardins.

So first, I just wanted to say thank you for providing the guidance. Obviously, that's very helpful. One question with regards to the guidance. Are you assuming much in terms of further occupancy build, or would you say the current 95.5%, 96% occupancy within the same property portfolio is fairly stabilized?

Yes. Kyle, this is Dan. Thanks for the question. So I think our assumptions in the guidance is it's about 9% on revenue growth. What we're seeing in our markets right now from a rate growth standpoint is more or less similar numbers and similar bands that we saw in the fourth quarter. We're going to try to attack more new leases than renewals. And I think many landlords and many of our competitors are doing the exact same thing right now. As a result, we probably expect a slight pullback in occupancy through 2022 relative to Q4. That's just as we replace more new leases with incumbent leases and get our balance of new to renewal down to the ideal 50-50 percentage that we'd like to see.

Okay. No, that makes sense. You kind of mentioned it there, but I'll ask the question anyway. How are your leasing spreads looking so far in the first quarter? And is there anything in the markets that's telling you that this elevated level of rent growth that we've seen over the last 6 to 8 months can persist into the near term?

Kyle, this is Blake. As Dan touched on, we're seeing similar bandwidths to the fourth quarter. Nothing that's indicating a drastic change from what we saw in the fourth quarter. Our traffic's good, and we feel good about where we're -- we've put a lot of thought into the guidance, and we feel good about it and it's playing out into the first quarter.

Okay. Great. And maybe just one last one. Are you seeing any new pockets of supply in your markets that you may consider concerning? Absorption outpaced new supply for the most part across all those markets in '21. Just wondering if there's anything to indicate this changing in the near term.

Yes, Kyle, and I think that -- I think you asked the exact right question. So we are seeing pockets of supply, sure. Houston is a great example. But the pockets of supply aren't really concerning for us because we have a superior product and situated in the best submarkets in these MSAs. So let's take Houston. A lot of the supply we're seeing is in Central Houston, the River Oaks District. I want to remind everybody that where we own in Houston is in the north and the west suburban corridors of Houston. And those are the submarkets that have been and are experiencing the largest rent growths and the highest occupancy gains of just about any submarket in Houston. That's not -- I think, in Austin, we're seeing supply peppered throughout the market. And in Dallas, we're seeing some concentrated supply in and around Frisco, may create, I think, some leasing problems for some of our competitors in maybe the fourth quarter of this year. But I want to reiterate that our products are superior in these submarkets. Our management team, we feel, probably the best management team in the country. So when you -- I think when you combine I think that triple threat of being in the right submarkets with an experienced management team, and having the right product, then any supply is not necessarily a concern.

Okay. Congrats on the great quarter.

And your next question will be from Sairam Srinivas at Cormark Securities.

Dan, Susie, Blake, congratulations on a fantastic quarter. That was amazing. My first question is primarily around the leasing scenario. And as you mentioned, Dan, the fundamentals look very strong in your markets. Can you comment on to what extent are these fundamentals or leasing spreads reflected in the current portfolio?

Sure, Sai. Thanks for the comment. Before I hand it over to Blake to your question, I just want to say that we were pretty happy with 19.3%, but Blake's always -- he's frustrated he couldn't get it up to 20% and is somewhat apologetic to the management team. So Blake, do you want to answer the question about to what extent the rent growth in the market is reflected in our current portfolio?

Yes. We talked about it -- and it's good to hear from you. We talked about it a little bit earlier in our current portfolio. The rent growth and the bandwidth is reflected in the -- in our portfolio continued into the Q4 into Q1. And one thing that I'd give a factor into this is that if you look at the rent growth that we are generating, it's from a lot of -- from the migration we talked about. And I think this is a good time to talk about the migration. In that if you look at -- and why we feel confident going forward. If you look at our new leases for the fourth quarter, there were 17% of those were brand-new leases from out of state. And out of state leases, 43 states were represented. This in Q3 we had 20%. So we're seeing a great migration that continues to happen in our portfolio. It's risen our median income up to $79,000. And this is really good news when you've got $450,000 average cost on homes. So that's continuing to drive. And to answer your question, there would be probably a 10% to 15% loss-to-lease, if that's what you're driving with in that question.

That was really helpful. I was actually even referring to the last quarter you had mentioned about 95% of the portfolio leases had not been marked-to-market yet. I was just trying to draw a parallel to that number and see what that looks like at Q4.

Yes, Sai, this is Dan. So the trend in the fourth quarter continued in the first quarter. So I think you can probably continue to say that about 90% to 95% of our units are not reflected in our -- in the market rates that we lease -- that we're printing for the fourth quarter. Any time we live in an environment where market rates continue to increase sequentially from a month-over-month basis, you can only lease so many of them. So that percentage that Blake quoted in the third quarter and the last earnings call remains the same at 90% to 95%. Now how that's reflected? Another way that we look at it, is what Blake just said, it's reflected to us in about a 10% to 15% loss-to-lease number, and that number looks to continue to trend throughout 2022.

That's fantastic, Dan. My next question is slightly on the cost side. And just looking at margins, I think you guys have had a fantastic quarter in terms of margin improvements. Can you just talk about the broader initiatives you're doing as a team there to reduce costs and gain that momentum on that side?

I'll take this one. So yes, we did have a pretty good margin increase in Q4, but that's partially due to timing. In our guidance, we're assuming same-store margins for the year of about 55%.

Your next question will be from Brad Sturges at Raymond James.

Appreciate the guidance being provided this quarter. Just wanted to clarify on the FFO and AFFO guidance. Does that seem -- is that basically driven by same store, or are you assuming further acquisitions within the FFO and AFFO guidance?

Brad, so yes, the guidance that we issued, including FFO and AFFO, is for the portfolio we own now. So there are no acquisitions or dispositions included in the guidance.

Okay. Perfect. And given where you are from a balance sheet perspective, what would be the capacity today for acquisitions without having to raise additional capital?

Brad, this is Dan. I think we've got about $40 million of cash on hand and our balance sheet is sitting around 42% to 45% leveraged. In the past couple of years, we've been comfortable with a 50% to 55% leverage range. So if you -- if we did -- performed some maneuvering on our balance sheet, I think we could probably take that $40 million and acquire as much as about $200 million of assets and remain at about 50% leverage. Now with that said, right now, given the opportunities we're seeing in the market and cap rate compression that we've seen from a one-off property to a portfolio property, the compression that's existed in the first quarter looks to be sustainable through the end of March. We don't have anything under LOI or contract to buy or sell. And right now, we feel pretty comfortable with our lower leverage and holding on to our cash and looking for opportunities. But if we wanted to, we could buy about $200 million with our cash on hand.

Got it. And last question. Obviously, you provided guidance and then increased the distribution. I think that implies a low 60s -- low-to-mid 60s payout ratio. Is that where you want to be long-term from a payout ratio perspective?

Hey, Brad, yes, we like being in the low-60 area for dividends or distributions. However, that's obviously something our Board looks at quarterly. We look at the cash flow we have coming in, and then they make decision on whether or not they want to increase. We were happy to hear about the increase earlier this year, and we'll continue -- and the Board will continue to review it going forward as we continue to generate more cash flow based on our robust revenue growth.

The next question will be from Himanshu Gupta at Scotiabank.

So just on 2022 guidance, I think you mentioned you do not assume any acquisitions in this number. So is it on leverage-neutral basis as well? You're assuming the quarter 4 levels to continue for the full year in your guidance?

Yes. Himanshu, this is Dan. Just generally speaking, we haven't assumed any acquisitions. And if our revenue increases more than our expenses and our cash flow increases, we would expect leverage to naturally fall down a bit?

Okay. And then sticking to the guidance, 9% same-store revenue growth. What kind of growth do you have in the first half of the year compared to the second half of the year? Are you already expecting some kind of normalization in the second half of the year with respect to rent growth?

Himanshu, right now, we don't want to dig too far into our quarterly sequential returns, other than providing our -- we're pretty comfortable with our annual guidance for 2022. With that said, what we're seeing in the markets is a continued trend that rent acceleration that you saw us and other of our competitors that own in our markets print in the fourth quarter. I think any smart landlord in that situation is going to attack rate a little bit harder. And as you attack rate, you may experience a little bit of a pullback in occupancy. I think us and a lot of our competitors and a lot of landlords in the markets that we're in are performing in a very similar fashion. Now with all that said, generally, let's talk about the impact of COVID on supplies, deliveries, net migration, and just basic economics of being a landlord. So it takes about -- when you've got a market like an Austin, a Dallas, or a Houston, these markets have continued to experience net inflow migration from out of state for years, and we've talked about that. What's changed in COVID is a simple supply and demand issue. There's just more renters than available units in our markets. So you can't fix that in a month, and we've talked about it before, it takes about 2.5 years to deliver enough units to compete with supply. So if you look last year on just general deliveries in our markets, deliveries in Austin were about -- call it about 12,000 units, 12,253, give or take, against absorption of 18,500. Dallas about 20,000 units delivered against absorption of about 41,000. And Houston, similar percentages about 17,000 units, which is high for Houston, against about 35,000, I guess, net absorption numbers. So what you had last year makes a lot of sense. COVID shut down economies. Subcontractors and contractors were not able to deliver completed, finished product, including apartments, in our 3 markets and then in many other markets, where net migration continued to exist. So those net move-in or those net inflow migration numbers continued at a similar pace all the way through '19 and '20 that they had started at 20 years ago. They just continued with not enough units -- apartment units being able to be delivered. So as a result, you see those -- you just see more renters than available units. You see those massive absorption numbers driving rent increases in '21 and into '22. Now when we look at CoStar, RealPage, CBRE, what those -- I'll say, with those groups, and I think many of our competitors are predicting, is that rent trend to continue, decelerate a bit in 2023, but to continue all the way through 2023 and perhaps into 2024. I think these organizations assume organic rent increases in '23 of 5% to 8% along with probably some -- a little bit of net absorption, in particular, Austin, Dallas, and Houston this year. Now I don't think we're going to see twice the absorption in deliveries in '22 and '23, but it takes a bit of time to catch up, and rents are going to remain high until those absorption numbers catch up to deliveries. The market doesn't really predict that those deliveries will occur and really be able to fill the order until 2023 or 2024. So this looks like a sustained period. I don't know if we're going to see compounding 20% new rate growth, but it looks like that runway for growth is going to extend for a few years into the future.

That's very helpful. And clearly, it looks like it's going to continue the growth into next year as well. And then in the past, you have tracked rent-to-income ratios. After you're getting these 20% bumps, does that change a lot? Has your rent-to-income ratio for your portfolio or specific markets have they changed materially compared to historical levels?

Are you asking our renter habits or new lease rates of 20% against renewals? Or are our renters frustrated as they had a hard time? The question came through a little choppy on this end.

Yes, Dan, it's really the affordability question. After that 20% bump you're achieving, where does the rental affordability lead to there? And then in the past, as I'd mentioned earlier, you have done like rent-to-income ratio. So anything in that regard?

Yes, sure, sure. So 20% rent gain, I think when we speak to affordability, let's talk about 2 things, the percentage of rent to median income, or to the income of our residents. And Blake talked about this in addressing an earlier question. The average income of our residents is about $79,500. So that includes -- that's annually and that continues to climb. So that income has looked to climb and as a result, our rent to average income of our resident sits right at that 19% to 20% number that it's set at for the last 3 years. So suffice to say, our rent, as a percentage of the income of our resident, remains right where it was 2 years ago with a superior product and superior submarkets.

Okay. No, that exactly was my question. And just my last question is on IFRS valuation this quarter against fair value gains. Was it mostly because of your higher expected NOI, or did you change -- capped it as well in this quarter?

It's the NOI for Q4. That increase was, as you'll notice, our weighted average cap stayed at around 4.1%. So the increases we saw in Q4 were definitely related to increased projections of NOI.

Got it. That's helpful, Susie. And then 4.1% cap rate for your entire portfolio here, how does that compare to what you are seeing in transactions in the market in Austin, Dallas, Houston? Are you seeing it at sub-4% cap rates in the market right now?

Yes, Himanshu, I haven't seen -- I hadn't seen a cap rate higher than 4% in quite a long time in those markets. So I think it's important to distinguish between buy-side cap rates and our IFRS cap rate. When a buyer is buying a range of 3% to 3.5% cap, and that's the range in all 3% of those markets. It's 3% to 3.5% cap. When a buyer is buying that, they're going to be buying a tax-adjusted cap. So we talk about that with our margins. When we buy an asset in year 1, those taxes are going to catch up. So we're buying less NOI on year 1 than that seller is selling. So as a result, that seller has a little bit of a higher exit cap and our buy cap is going to be a little bit lower than that seller's sell cap. So when we buy in our markets, we're looking at a range right now of 3% to 3.5%, and that is a tight range. There's not an outlier at a 4% cap. Every asset that we see -- every asset that can run as fast as the assets we have in our portfolio is a 3% to 3.5% cap on the buy side.

Next question will be from Joanne Chen at BMO Capital Markets.

Congrats on such a great quarter. Just had a quick question on my end. Could you maybe comment on, I guess, obviously, very encouraging outlook for 2022, how should we think about what you guys are baking in for the average rent growth for the portfolio throughout the year?

Joanne, yes, so you saw, we ended the year with I think it was $1,328 of average rent, and it is continuing to increase. And we're looking at an average of about $1,400 for the year, probably ending the year at around $1,500.

Okay. That's pretty good. I wish I could be in your markets.

Well, Joanne, I don't think you'd want to be a renter in our markets right now. It's great to be an owner of multifamily properties or an investor in BSR in our markets. It's a -- it's a tough time to be a renter. The good thing about our markets is that there's tons of jobs available and those employees are making more income. And when we can have job growth driving population growth, driving rent growth, that's the equation we like to look for in our markets.

For sure, 100%. I just had a quick question on the occupancy. Obviously, up quite a bit year-over-year, but just wondering, quarter-over-quarter, it was a little bit lower. So I was wondering if you could comment on reasons why by region? Was it just mostly due to lease up or renovation?

This is Blake. It's about 17 units and it's centered in 1 property in Houston, and it's a common thing that happens in this property. It's one that -- it's an older property that we've had. It goes up and down. But if you'll notice that from a seasonality basis, normally in the fourth quarter we see this. And if you look at year over year, I think last year we were at 93.6%, but we also -- I'd also point out that even with the slight drop in occupancy, our revenue went up.

For sure.

That's part of -- in that segment that I'm talking about, the MSA. So that's part of the maneuvering that we're doing with the portfolio when it comes to occupancy, the balance of that, and increasing rents.

Got it. No, that's helpful. And I guess just switching gears on the acquisition side of things, obviously, you guys are very busy with capital recycling, but how should we think about what it will be like for 2022 in terms of the acquisition pipeline and are you going to continue to focus on the markets that you guys have focused on recently? And then I guess in terms of the pricing, what are you seeing right now in your target markets?

Joanne, this is Dan. So, first things first, we want to remind everybody, our guidance doesn't include the impact of any acquisitions.

Yes.

Now when we're thinking about markets, I'll take the questions from easiest to hardest, how about that? When we're thinking about markets, we love our Texas markets. So near-term acquisitions are going to be placed in Austin, Dallas, Houston. The reason for that is twofold: #1, every property we buy in these markets, BSR can make a little bit more money on it than somewhere else. And the rationale behind that is we don't have to hire any new senior managers when we buy a property inside of our portfolios in those markets. We already have senior supervisors and portfolio managers running those markets. When we look to expand in other markets, we'll look for some similar dynamics to what we see in Austin and Dallas and Houston. That's median income growing at a faster clip than the U.S. average, population growth growing at a faster clip than the U.S. average, and a supply and demand dynamic that favors the landlord and not the renter. There's a half a dozen markets in our country that fit that mold. We generally surveil them. We think that some markets are better than others, but at this time, we're going to stick with our 3 markets. Now let's take the tough one. So you heard me say 3% to 3.5% cap rate. It's tough sledding for a capital-disciplined player to deploy capital into a stabilized asset at 3% cap. Now with that said, the dynamic that we're seeing take place I would say in December all the way through today and probably through the end of this quarter is you're seeing a ton of rent growth on that rent roll, right? You're seeing 15% to 20%, 25% revenue growth up top. And those sellers, even though they only have 10% to 15% of their residents paying that rent growth, they want those buyers to pay for a 100% of that rent growth, and what that does is that presses down a cap rate. Now every month, every month that we move through these 20% and 30% rent gaining environments that mark-to-market starts to come down. So instead of having 10% of your residents paying a 30% rent premium, you got 20%, you got 30%, you got 40%. And our thought is we're going to sit tight through the first quarter and let some of those -- some of those effective rent gains to churn down through the actual collected NOI. And the impact that'll have is on -- is a slight increase to cap rates in the second and third quarter, the spot cap rate to buy. That buyer will be buying more stabilized NOI and less of that mark-to-market lease that the seller wants. The second thing, and I think the world is expecting this, is a movement from a super-easy monetary policy to a little bit tighter monetary policy, and that is to say an expectation of rate increases in the short-term. I think last week you saw the Bank of Canada increase its rates by 25 basis points, and I think there's an expectation that the Federal Reserve Bank will increase its rates by 25 basis points, as well as the Bank of England this month. That's going to have an impact on an increased borrowing cost to some of our competitive base that we see in the market, and we think it's going to have a chilling effect to those private investors wanting to lever and buy. With our leverage, that provides us an opportune time. We think our spot cap rates or that spread that we see on cap rates look to expand in the second and third quarter a bit, we got plenty of product in our markets. I think Dallas for the second year in a row sold more multi-family apartments than any market in the country. We have plenty of product available. And that slight uptick in borrowing costs, we think, is going to scare off some private investors who are levering with we'll say agencies or other financing alternatives, and that puts the REIT at really an ideal position to compete for acquisitions in the second and third quarter. Now with all that said, Joanne, I think what you'll see when all is said and done in '22 is that BSR remained disciplined. We didn't stretch our balance sheet to buy low caps to grow or [ nation build ]. We made very smart decisions with our shareholders' capital. We preserved our investors' value. I think the last opportunity that this opens up for us, and we've done this in the past, is you might look to see BSR engage with some of our development partners. We might work a deal to buy a Phase II of a phase 1 that we've acquired. Now that's what we did in Frisco last year I think in May when we acquired a Phase II in Frisco. We acquired a Phase I just prior to that. The second thing that I think you can see us do is use our balance sheet to work with a developer to build a Phase II. I think you saw us to execute a similar type of development in 2019 and that investment has paid off in spades. And I think we have some targeted opportunities throughout the portfolio to work with a reputable repeat seller and developer in order to build on our balance sheet for a little bit lower cost than what you're seeing market cap rates trade at today for stabilized assets.

Sure. No, that's super-helpful. And the #1 thing is you guys are getting really good growth organically for sure. So you definitely don't need the pressure to go out and buy for the sake of buying because your existing portfolio is generating so much organic growth. So that is good to see.

Your words are better than mine, Joanne. Yes, that's exactly right. When you can grow the way we're growing using organic growth, you don't necessarily need to distract the balance sheet by acquiring.

Next question will be from Matt Kornack at National Bank.

Congrats on a good quarter. These are numbers that we're not typically used to seeing in real estate. It's a little bit more [ techish ] these days. But on that note and just to follow up on Joanne's question and your response on the development side, what are rents that you need to justify building in your submarkets at this point? Is there a big gap to where in-place numbers are or is it pretty similar at this point for a new product?

Yes, Matt, not really. And that's the beauty of looking at Phase IIs. We have good rent comp in that Phase I. Historically, I think the development yield to cap rate -- spot cap rate is about 100 to 150 basis points, and we don't see any reason to pencil whip in underwriting to grow resulting rents any faster than the spot rents we're seeing for our properties right now. So if we were to look at a development, we'd probably look at the spot rents for Phase I, and we'd replicate those for Phase II. And the beauty of that is when you build that Phase II, you don't have to add a new property manager. So your marginal increase for that additional -- those additional units of NOI and that additional rent is much more efficient and serves to expand that operating margin a bit over time.

Okay. No, fair enough. And then just simple math wise based on the cap rates that you gave versus your IFRS figure, if you take 4.1%, multiply it by the almost $2 billion of assets, you get to $79 million or so of NOI. If I cap that at a 3% to 3.5% cap rate, that adds $10 to your current NAV. Is that where you think actual value is for this portfolio versus the IFRS fair value, or how should we think about those 2 cap rates?

Well, Matt, we don't really want to get into a debate on how much of the actual value we think is on a per share basis. But I think it's fair to say that we're confident in our Q4 NAV under IFRS. And #2, that in the first quarter, we've seen and I know the market has seen some above-the-fold cap rates on spot and year 1 that are extremely positive in the first quarter. And we've seen those cap rates compress for public companies in the U.S. We've seen them compress for single asset acquisitions in Dallas, Texas. But suffice to say, we're confident in our Q4 NAV, and we're seeing the same cap rate compression in Q1 that you're seeing. And anytime you can grow revenues faster than your expenses at the clip we're growing and you're looking at a market with compressed cap rates. I think that's a positive sign. And I'll leave it to our investors and analysts to do their own math on how positive of a sign that looks to be.

Fair enough. No, I hear you. And then just in terms of the affordability question, I would think you mentioned, and I can't remember if it was 17% or 20%, but a portion of your tenant base is coming from outside of the state, presumably from markets like California, New York, Boston where rents are substantially higher. So is part of that income gain within the portfolio a function of changing tenancies or are you generally seeing higher incomes in the Texas market?

We're generally seeing higher incomes in the Texas market. As Blake talked about earlier, our average resident income in the Texas markets is around $79,500. Now I guess if I just divide that by 12, it's about $6,300 a month before tax and our rents at $1,320 a month are about 20% of that gross income number. And that percentage really hadn't changed. It hadn't changed for us, and it hadn't changed for any of our local competitors in those markets. It's not driven by somebody making more money in California or the other 17% of inbound migration that we've seen churn through our rent roll in the past year. It's driven by those people moving to our states and getting jobs in our states that depict their look-forward income, not their trailing.

Next question will be from Jimmy Shan at RBC.

Just a quick -- couple of quick follow-ups from me. On the supply side, Dan, do you have the delivery numbers for 2022 handy? And then which market are you watching more closely in terms of potential impact into your specific portfolio?

Yes. Do I have them handy? I think, sure, there's a lot of -- I'll use CoStar's delivery numbers. Everybody is going to have a little bit different delivery number. So I'll look to that. And then secondly, I just want to point out, when we talk about projected deliveries, we're talking about the number of pool permits multiplied by the number of unit counts in those pool permits. And I want to remind everybody that not every development gets completed, okay? So let's start with Austin. '22 projected deliveries are about 16,200 units, and that's against about 12,000 units in 2021. So it's a little bit more, but it keeps up -- look, it fills that balance of deliveries and absorption, that mismatch that you saw in the last 2 years. In Dallas, in '22, deliveries look to be about 20,000 units, and that compares to about 20,000 units last year. And Houston, Houston looks to drop a little bit in net deliveries. So last year, we saw about -- I think I said about 17,000 and change units delivered, maybe 17,900 last year in Houston. This next year, Houston looks to deliver 13,300 units against some similar absorption numbers. So when you -- when we dig into that, and we try to extrapolate short-term and long-term growth, what we see is some very heavy rent growth in Austin. That's not surprising to us. The rent growth that we saw in the last year that we just printed was not a surprise given those dynamics. And it may decelerate a bit as these new units come online. Dallas, okay, somewhat similar. Similar to last year performance in Dallas. Houston is the market that we see that probably has the longest runway of growth. So Houston might grow a little bit less than Austin and Dallas, but for a lot longer on account of these supply and absorption dynamics. So Houston looks to have the longest runway of growth and Austin looks to have the highest peak of growth, right? And Dallas sits somewhere in between those 2.

Yes. That all makes sense. And then the migration stats. The almost 1 out of 5 of the new leases that you quoted coming from out of states, what did that number look like pre-pandemic? Is it notably different, or was it...

Yes, I'll mention something, then ask Blake to chime in and see what it looks like and give some of his perspective on our own portfolio. I think that generally, that inbound migration number has remained the same for quite some time in Austin and Dallas and Houston. It's driven by job growth. It seems like every week now we're seeing above-the-fold report on a new company who's moved its corporate headquarters or a giant gigafactory to 1 of these 3 markets. So that inbound migration when we look at the entirety of the market has been a sustaining 1 in 5 residents for quite some time. Now Blake, do you want to talk about what you -- if you've seen any changes to our portfolio in the last year relative to prior years?

Sure. Dan is right. Even before the pandemic, migration was really fueling growth in Texas. Why was that happening? Well, you don't have a personal income state tax. It's about as pro-business a state as there is in America, and you have great public schools. Put all those 3 together and you've got a lot of companies that are looking at that going, wow, like Toyota, the car [ dealership ], they moved their whole headquarters from California before the pandemic. You've seen all these companies that have moved pre-pandemic. Now the actual figure for -- in our portfolio was more in the 8% to 12% range that we were seeing, but we were not seeing as many states being represented because that number that I gave you for the fourth quarter, New York and California only accounted for 20% of the move-ins. The rest of those were from states everywhere. So after the pandemic, there's no question that we saw a pickup that got us into the last year where we've been sequentially in the 17% to 20% range. And I think a lot of that did have to do with people leaving a lot of these states for the jobs and -- but there's no jobs without the companies that are moving. And everybody's read about -- I've talked about it on the calls in the past, all the major Fortune 500 companies that are moving into our areas into Austin, Dallas, in Houston. Austin growth, as Dan talked about, has been incredible. So that's how I look at it. We were already getting it before, but the pandemic actually -- it's picked up since the pandemic.

Next question will be from Dean Wilkinson at CIBC.

Dan, who doesn't love Texas, including all my exes? Just looking at the capital recycling, you guys have sold like $760 million of real estate. That's like 90% of the value of the assets at the IPO. 2-part question. What constitutes a sellable asset at this point for you? And would you consider rolling that perhaps into a contractor or a design build where you're buying a little bit of vacancy, so you can pick up that upside to try and give you a little more growth going forward?

Yes, Dean, so let's start with that first one. And then we'll roll the dice and see who can tackle the second one over here. So on the first one, when we think about what qualifies for a disposition or for capital recycling. What we're going to do is really study the, I'll say, the street caps and the street demand for acquisitions in any one of our markets and determine whether there's more appetite for buyers and sellers in those markets and see if we can't get an opportunity for a little bit of an arbitrage in any particular time on an asset. So we'll look at that asset's return on fair value of equity to us. We'll then look and determine how much capital we think that we need to put into that asset over a period of time to generate growth. We'll see what that growth is, what that return looks like to us, and then we'll double check that spot cap rate on that asset to see if the market wants it more than we do at that particular time. And if it does, the final step for us is for our management team on the disposition side to communicate with the acquisition side and the operators to see if there's an opportunity to rotate out of a noncore market into a core market and we'll say NOI or cash flow parity or, in some cases, a justifiable reduction of NOI or cash, so at a 4% cap and buy at a 3.5%. If that is worth that spot compression in order to generate faster long-term value by placing NOI in faster-growing strengths. That's the discipline that we've executed over and over again. There are certainly opportunities right now in this low-yield, low-cap-rate environment that we're paying attention to. But with that said, as we stated on the call earlier, we don't have anything under contract right now to sell. But we -- there's certainly opportunities, and this team doesn't really think about our -- at least from a [ prideful ] standpoint the ownership of our portfolio. We think about it more from a capital discipline standpoint. So if we think there's opportunity for arbitrage, we believe our job is to keep our eyes and ears on the market and take advantage of arbitrage when we see it existing. Now I've spoken so much that I forgot the second half of your question. Blake says he's all over it, so he's going to try to tackle it for you.

You were right. On top, we discussed this earlier in the call, but just to [indiscernible], yes, you could -- and I think you can expect to see some drop in occupancy at the -- knowing that we will get an increased rent, for instance, 10% renewal rates on some of our properties. That's the math we wanted to go to because we've looked over at the new rates that are at 21%. So it's a balancing act, and it's a balancing act that is done on a literally daily basis on our portfolio. But you are right on the money in terms of possibly having a lower occupancy on a property but actually producing higher rents and higher income.

Well, you've never been afraid to go for the 2-point conversion, so that makes total sense.

Next question will be from Chris Koutsikaloudis at Canaccord.

Just a quick question here on the outlook for turnover. Do you expect a slower rate of turnover this year than we've historically seen from BSR? Just given the cadence of rent growth, would some tenants just be reluctant to move?

Yes, Chris, I don't think it's about tenants being reluctant to move. I think that ideally, we like about 50% of our units, our apartment units, each month executing new leases on those. And about 50% of our leases each month executing renewals on those existing leases. We like that 50-50 number. And I think when we look at a rising rent environment, we're naturally going to want to attack more of those new rates than those renewals, which can at time be economically just a little bit lower than new lease rates. In that environment, you could see us execute a few more new leases than renewals from an incremental standpoint. But we like that 50-50 number and that's what we try to achieve at any given month. Rising rents, falling rents, makes it more and more difficult for Blake and the operations team to execute that 50-50 number. But backing completely out of that commentary and addressing your question on the head. Our resident mindset and psychology right now is not just not wanting to move. Our residents really enjoy living at BSR. They enjoy the service that we provide and the products that we provide. They make that statement loud and clear with their online reviews to BSR.

Got it. Okay. And then just on the maybe the property tax side, how are you thinking about maybe an increase in property taxes this year just given the increase in values that we've seen?

Yes. Our guidance includes about a 10% increase in real estate taxes of the same portfolio.

Next question is from Aaron Skloff at Skloff Financial Group.

Can you please review your strategy as to entering into a new market in a new state and the financial impact, of course, to let's call it a start-up market at least for the company? If you can quantify your approach as well as the strategy, that would be very helpful.

Yes, sure. This is Dan. I'll try and quantify it. So the first things first is we like everything about our 3 markets right now. The concept of entering into a new market by inference would -- if that ever means that we don't love our markets that we're existing in right now, we want to throw that out the window. We love our markets, and we have plenty of depth and room to grow our footprint in those markets. When we think about perhaps a longer runway of external growth in new markets, we've executed in 2 different ways. The first step is our operations team would identify an expert operator in those markets. That's going to create an embedded cost. So in that respect, we'd like to tackle a portfolio acquisition as opposed to 1- or 2-off in a new market. The second thing is -- that we want to talk about on new markets is how we surveil and buy in those new markets. Now our acquisition team and growth team is pretty experienced and has deep contacts in our Texas markets. They are also well out ahead on various new markets that meet our criteria. It takes a significant amount of prep time to build the relationships and to identify the right submarkets in any new market. And BSR, as we move to the path of new markets in, say, the long future, those markets would one have to have properties and a resident profile that allows us to run as fast or faster in those new markets as we are running in our existing markets, right? And number 2, we are going to attack it with a level of discipline and method similar to what we've employed when expanding our presence from one property in Austin, at the time of the IPO, to a nice portfolio today, or from 2 properties in Dallas, at the time of the IPO, to our portfolio that we have today, which is to say, we'll be methodical and disciplined. We will develop deep relationships with reputable developers and sellers that own and want to sell us properties in the right submarkets of the right markets. That takes some time and some thought.

And as a follow-up to that, are you having discussions with developers, with consultants, with feet on the ground looking at markets outside of the state of Texas?

I'd say we always have discussions about markets. This team up to and prior to the IPO has ran a portfolio that's stretched across the Sunbelt. So we're pretty familiar with these markets. We have contacts. But we don't -- I want to reiterate, we don't have any current plans of expanding beyond our 3 markets right now. So discussions -- I wouldn't throw a consultant in there, but discussions with local market experts, that is just -- that's the daily job of our growth department. They have those discussions regardless of any plans to enter in the markets. And part of the reason they have those discussions is to understand and obtain a sense of relevancy for the values that we see in our markets, for the growth that we see in the combination of our markets, and to determine if there's a faster way to grow outside of our markets. And right now, we don't see a faster way to grow.

Thank you. And at this time, sir, we have no further questions. Please proceed.

So that concludes our call today. And thank you all for your interest in BSR REIT. We look forward to speaking with you again after we report our 2022 first quarter results in the spring.

Thank you, sir. Ladies and gentlemen, this does conclude your conference call for today. Once again, thank you for attending. And at this time, we do ask that you please disconnect your lines.