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

Good morning. My name is Sylvi, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q1 2022 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Oberste, you may now begin the conference.

Thank you, Sylvi. Good morning, everyone. Welcome to BSR REIT conference call to discuss our financial results for the first quarter ended March 31, 2022. I'm joined on the call by Susan Koehn, our Chief Financial Officer; Blake Brazeal, co-President and Chief Operating Officer is also with us and will be available to answer questions following our prepared remarks. I'll begin the call with an overview of our first-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 be pleased to take your questions. 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 May 10, 2022, for more information. During the call, we'll 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 US currency. Q1 was another period of outstanding financial performance for BSR REIT. We generated robust growth across all of our key financial measures supported by very strong rental market conditions and our core Texas markets. Let me take you through a few of our highlights. Same community revenue increased 11.2% compared to Q1 last year, same community NOI rose 16.3%. AFFO and AFFO per unit nearly doubled and net asset value per unit increased 66.4% compared to Q1 last year, and 11% sequentially from the end of the fourth quarter. Our weighted average rent at quarter-end was $1,349 per apartment unit representing a year-over-year increase of 19%. Rental rates for new leases excluding properties undergoing initial lease-up increased 17.4% and renewals increased 9% for a blended increase at 12.5%. We carefully balance the time an apartment unit is unrented, as well as the cost to turn an apartment unit when determining whether a renewal lease to maximize net operating income. That gives you a sense of just how much the Austin, Dallas, and Houston real markets are booming. It also highlights the strength and resilience of the BSR property portfolio, which was significantly upgraded through our capital recycling program. We continue to pursue attractive growth opportunities in our core markets. As you know, we recently completed $115 million equity offering. It strengthened our balance sheet and gives us considerable financial firepower to capitalize on potential acquisition or development opportunities. We didn't announce any new acquisitions in the first quarter, but there was still a very significant announcement for our unitholders. In February, our Board of Trustees approved a 4% increase to our monthly distribution bringing it to $0.52 per unit on an annualized basis. This decision highlights the strength of our portfolio and our positive business outlook. I'm also proud to note that BSR was recently ranked second among all US multifamily REITs and online reputation assessment scores for 2021 by J Turner Research. For those who aren't familiar, J Turner ranks top properties and management companies in the United States based on reviews from websites like Google, Yelp, apartments.com, and apartment ratings.com. BSR's ORA scores of 82.08 for 2021 is a strong indicator of resident satisfaction. By comparison, the national average ORA score is 62.62. Our team members work hard every day to be responsive to our residents and provide them with the best possible living experience in our communities. This ranking is a credit to our team, our culture, and our residents. I'll conclude by simply noting that we are thrilled to be generating such strong financial performance. And given the strength of our portfolio and our core Texas rental markets, we are confident there's more to come. I'll now invite Susie to review our first quarter financial results in more detail, Susie?

Thank you, Dan. Same community revenue increased 11.2% in the first quarter to $22.2 million compared to $20 million last year. The improvement primarily reflected a 9% increase in average rental rates for the same community property from $1,136 per apartment unit as of March 31, 2021 to $1,239 as of March 31, 2022, as well as $0.2 million increase in other income. Total portfolio revenue for Q1 2022 increased 45.7% to $37.5 million compared to $25.8 million in Q1 last year. This reflected a $2.2 million of organic same community rental grades, as well as contributions from property acquisitions and non-stabilized properties, which added $13.5 million and $0.6 million of revenue respectively. Property dispositions reduced revenue by $4.6 million compared to Q1 2021. 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 the same community properties was $12.1 million an increase of 16.3% from $10.4 million last year, reflecting higher same community revenue. This was partially offset on increase in real estate taxes of $0.4 million. NOI for the total portfolio increased 47.1% to $19.6 million from $13.4 million in Q1 2021. Same community NOI growth increased total NOI by $1.7 million while property acquisitions and non-stabilized properties boosted it by $6.9 million. Dispositions reduced NOI by $2.3 million. FFO for Q1 2022 increased 90.6% to $11.1 million or $0.21 per unit compared to $5.8 million or $0.12 per unit last year. The increase reflects the higher NOI partially offset by increases of $0.2 million in GNA expenses and $0.6 million in finance costs. FFO nearly doubled year over year in Q1, 2022, increasing 98.2% to $10.5 million or $0.20 per unit from $5.3 million or $0.11 per unit last year. The increase primarily reflected the higher FFO. Net asset value increased 66.9% year over year to $1.15 billion from $688 million at the time of Q1 last year. NAV per unit was $21.98 at the end of Q1, 2022, an increase of 66.4% from $13.21 a year earlier. As Dan noted, NAV per unit also increased 11% sequentially from $19.81 per unit at the end of December 2021. The repaid quarterly cash distributions of $12.80 per unit in Q1 this year and $12.50 last year, representing an AFFO payout ratio of 63.3% in Q1 2022, compared with 117.3% last year. All distributions were classified as return of capital. Turning to our balance sheet. The REITS debt to gross book value as of March 31, 2022, was 43.2% or 40.2% excluding the convertible debentures. Following our equity offering in April 2022, total liquidity increased to approximately $150 million and debt to GBB improved to 37.9% or 35.1% excluding the debentures. We also have the ability to obtain additional liquidity by adding properties to the current borrowing base. As of March 31, we had total mortgage notes payable of $488.8 million excluding the credit facility with a weighted average contractual interest rate of 2.9% and a weighted average term to maturity of 5.8 years. Total loans and borrowings were $831.6 million. Following the April follow-on offering, total loans and borrowings were $721.8 million excluding the debentures, and 61% of the REIT's debt was fixed or economically hedged to fixed rates. We also had $42.4 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 $2 billion as of March 31, 2022, compared to $1.9 million at the 2021 year-end. We recorded a fair value gain of $118.8 million for the quarter driven primarily by cap rate compression and higher NOI. I briefly mentioned the Ball deal equity offering we completed. I'd now like to provide a little more detail. We issued 5,888,000 units at a price of $19.55 per unit for gross proceeds of approximately $115.1 million and net proceeds of $109.8 million. The over-allotment option granted to underwriters was fully exercised, underwriting the strong demand from investors. Net proceeds were used to pay down the REITs credit facility to fund future acquisitions and for general trust purposes. I'll now turn it back over to Dan for some closing comments. Dan.

Thanks, Susie. We're obviously very pleased with our current competitive position. We have a high-quality portfolio focused on 3 incredibly strong Texas rental markets. Given the robust fundamentals underlying these markets, including population and employment growth that far exceed the national average, we expect continued strong rental growth moving forward. Accordingly, we are maintaining the highly positive guidance for 2022 that we first provided in March. We anticipate FFO per unit of $0.86 to $0.90 compared to $0.60 in 2021. An AFFO per unit of $0.80 to $0.84, compared to $0.59 in 2021. In addition, on a same community basis, we expect revenue growth of 8% to 10% in 2022, an NOI growth of 11% to 13%. Property operating expenses are expected to increase 4.5% to 6.5% year over year well below the projected growth and revenue. These numbers are based on our current portfolio and do not take into account any acquisitions or dispositions. However, external growth remains an important priority to us. We are continuing to pursue creative acquisition opportunities in our core markets as they arise. As always, we prioritize off-market or limited bidding situations. At the same time, we are highly disciplined and committed to maintaining a strong balance sheet. By focusing on our internal and external growth strategies, we're confident that we will continue to deliver strong results for our unitholders. That concludes our remarks this morning. Susie, Blake, and I will now be pleased to answer any questions you may have. Operator, please open a line for questions.

[Operator Instructions] And your first question will be from Sairam Srinivas at Cormark.

Congratulations on a good quarter. My question's firmly around the supply chain crisis, as well as the higher rate amount we're seeing around us today. Are you seeing that impact to supply response in your markets? And if so, how does that impact end growth?

Sai, this is Dan. I'll try to tackle that. Yes, the supply chain, we'll say the supply chain disruptions are definitely slowing development in our markets. I mean you've seen, I'll say a disconnect and supply-demand drivers. That is to say that absorption last year in our markets was roughly twice the pace of supply. And to dig into that, you got to think about what it takes to build an apartment project. Let's say it takes 10,000 different items to be purchased. Well, if 3 of those items can't be produced, then you can't lease a unit or an apartment or residence to a resident. If the water heater can't be delivered from China or from another area, you can't lease an apartment. And so I think that's what we're seeing. It is about, let's say about 80 to 90% of the supplies necessary to build an apartment are readily available albeit at different costs, most of the time higher. There still remains that 15 to 20% that takes a little bit longer for those developers to obtain. That's going to stretch out deliveries that has stretched out deliveries in the last year. It continues to do so. Our development partners continue to I'll say stretch out their construction timelines for new starts, and underwritings for a firm hedge pool. So we don't expect that to go away or the dynamics we've seen in the last 6 months generated by supply and demand dysfunction to go away anytime soon. And then as it relates to the runway of continued rent growth. Right now, our markets are projecting elevated rent growth through 2023. And again, that goes back to just more renters than available apartment units being delivered in our markets. It makes a lot of logical sense when you think about it.

That makes sense. And it's in line with other things that I'm reading around over here. Probably looking at this from the other side, has there been any policy response as such in your market and in terms of like making, renting more affordable, or generally dealing with the housing crisis?

Are you talking about affordability, discussions, rent caps, and the like?

Yes, especially from the local governments or the local municipalities?

Yes, we think about that, and I know, it's a general concern and housing in the United States and to a certain extent in Canada, the way we look at it is our current rent, even with the increases, we've seen, is a percentage of our average resident income is 21.4%. That's around the range that our rent to income was when we went public. And that, so long as it stays down at those levels, I will say, we feel more comfortable than the property owner who owns an apartment project in an MSA where the rent to median income is 43% or 45%. We see that our markets, from just a economic standpoint, are far behind, we'll say 50 to 75 of other markets. We haven't seen a big push in affordability discussions outside of we'll call it Boston, Minneapolis, parts of California, and the upper Pacific Northwest at this time. So that's the economics of it. We think that it [ only ] in the BSR investment strategy. Now down to the politics of it, Texas has historically been and continues to be a different political environment. So the concept of government-regulated affordability, and income and rent restrictions I wouldn't say it's foreign in Texas. I would say Texas, doesn't look to lead the charge in that political topic.

And probably my last question before I turn it back on the acquisition pipeline. In terms of the product you're seeing in the market like is that changing because of all the factors we'll discuss until now? Do you see more deals coming through or had the pace slowed down?

Sai, sometimes I wish, this Dan again, sometimes I wish it would. I want to remind everybody that we don't talk about cap rates a lot because my cap rate your cap, rate, they're all different. What we buy is a spread, an unlevered spread above our cost of capital. We like to buy around 1% to 1.5% spread on top of where we see that prices sit. So in the current environment that puts even with underwritten growth, that oftentimes puts BSR and other discipline underwriters like us, outside of the competitive stack. What we've seen in our markets is no impact to volume or pricing. And let me detail that a little bit. In March and April alone our team assessed, underwrote, walked 31 potential acquisitions, aggregated about 10,355 suites with a collective asset value of $3.04 billion. The average asking price of those assets was $98.2 million and the average year of construction was 2012. Every single one of those assets sold and BSR didn't buy one of them. What we're seeing in our markets, specifically in Dallas and Austin as well as Houston, is those cap rates remain entrenched at 3% to 3.5%. That differs from the rising interest rate environment so we're seeing a lot of buyers go in and lever at 4.50 or 4.75 and buy a 3.25 cap. They're buying that red spread increase that's depicted in our markets. So there's a half dozen to a dozen other markets in the United States that exhibit the same fundamentals and that's a rigid cap rate compression, and part of that's driven by that opportunity for lease increases as there embedded over the first year of ownership. Where we are seeing some cracks are in markets not like ours. Where we see rent compression, we don't see the same 20%, the same outpaced rent increase numbers. We're seeing a developing bid-ask spread between a seller and a buyer. And these are not in our markets, these are other markets. That is to say that the seller is not capitulating on its compressed cap rate ask and the buyer simply can't afford to buy an asset with such high leverage. The seller is not capitulating, because even though they may not have 25% growth in their rent and revenue side, they're still experiencing a healthy 5%, 10%, 15% growth number. And that seller is very happy to sit on their on their existing debt and watch their cash flow position increase. It's a very favorable and I'll say very bullish trend that we're seeing in multifamily, and again, it makes a lot of logical sense. Multifamily and industrial seem to be very, very attractive asset classes with limited options outside of those 2 sectors.

Next question will be from Brad Sturges of Raymond James.

Just to follow on to that line of questioning, but more related to the elevated pace of rent growth that you're seeing. Can you just talk about some of the leasing spreads you're seeing in Q2 today and how you see that trending over the course of the year? I guess the last couple of quarters you were on a blended basis more in the low to mid-teens. I'm just curious if that's still the level of spread that you're getting on new and renewal leasing together?

Brad. This is Blake. Yes, we're continuing to see that acceleration of the rent spreads. What we're noticing a little bit is our renewals are going up because some people are choosing to do shorter-term leases right now and we've capitalized on that. But in terms of the percentages that were quoted in our MD&A and what we're seeing going forward and what I see going into the rest of the year, I think we've kind of had a reset where we're -- if you look at our last lease, we're around the 15% to 16%. I think that's what I told the group last time. And I see the same thing developing into the rest of the year.

Okay. That's great. And I guess, do you think, given some of the move in rents, would that have any impact, do you think, on your retention rate with existing terms or do you think that will be fairly stable?

No, actually, I don't. I see our retention rate improving as we've been seeing this over the last month or so. We've seen a flip. We were at a 60/40 I believe. Now we're at a 52-48 so I really feel good about where we're heading in that regard just because of, as I told the group over the last couple of quarters, that the migration into Texas just continues and continues. We're looking at an 18% of our new leases are coming from out of state residents. 43 different states represented. And the housing supply in Texas, a good thing that I monitor is how many people -- We take surveys when people leave us, and what dropped from Q4 to Q1 was the amount of people leaving for houses. So all these factors combined are trending in a positive direction which is helping us accelerate rents and also accelerate occupancy. And we feel like that's going to continue into the future. Also, another thing that I told you all in quarters past, but I think it's really important, our median income on our residents has gone up to $83,000 to $844,000. That's over a 7% increase over last quarter again. So all of these factors combined are playing into a good situation for us and I feel like that's going to continue in the rest of year.

Great. Dan, in your opening remarks about growth initiatives or opportunities, you did highlight acquisition and development. I just wonder if that development piece, is that more related to what you've been doing recently in terms of buying new construction assets from developers, or is there an expansion of that strategy to maybe considering doing, maybe, intensification of existing communities on balance sheet or even Greenfield development?

I would say, Brad, it's a little bit of an expansion. The developers that we work with are some of the best in the country and the most prolific in the country. And we also hold the belief here that you're good at what you do a lot of and BSR does a lot of managing properties and a lot of acquiring and underwriting of stabilized assets. These developers are really good at developing. I think when we look at the assets that we bought and our experience with those assets and the availability of Phase 2s for those assets, as well as the availability of other developments developed by these developers in the submarkets that we are very well familiar with, we see an opportunity. We've talked in the past about how we see the development spread to stabilization to be about 100 to 150 basis points north of where we see stabilized cap rates for acquisitions right now. That's a compelling growth sleeve for BSR. And I think it's a win-win-win, in all respects. A partnership with a developer on a Phase 2 who delivered the Phase 1 that we obviously loved and we're obviously enjoying and our unitholders are enjoying the ownership of a partnership there is just going to help our operating margins. It's we've already been in the sub-market. We've vetted the developer, we've vetted the product, and we have a pretty clear understanding on how to lease out the product. It makes a lot of logical sense in this environment to kind of expand upon, I think, what the REIT has done a little bit of in the past few years.

And when you say partnership, is that like an equity partnership or would it also include potentially providing development laws with a ROFO in return to buying the asset on stabilization?

I think that the beauty of working with a pretty prolific developer is it's kind of like looking at the menu on the cheesecake factory. They can slice it and dice it however you want to look at it. I think the REIT managers and the executive officers here will make the best decision for our unit holders on a development by development case, but each option is attractive depending on where we see the REIT currently and where we see it headed over the near term. I'll call it 6 months. And then the strategic term that the board management focus on, which is more of a 3-year plan. So, all are on the table right now and BSR's method is to take the most disciplined approach for our shareholders.

Next question will be from Jenny Ma at BMO Capital Markets.

I wanted to ask about how you're thinking about acquisitions over the near term because you talked a lot about the desire to remain disciplined and cap rates remaining fairly low. But after the equity offering, your leverage is sitting quite nicely well below 40%, and I think in the past, you mentioned wanting leverage to hover around the 50% level. So how should we think about where you think your leverage might settle out in the next 6 to 12 months against the opportunities in the market?

Yes. Jenny, this is Dan. When our team looks at leverage on a look forward, we feel very comfortable with a leverage range between 40% and 45% debt to GPV. And we'll say a guidance or a target over the long term, on a sustained single-digit debt to EBITDA coverage ratio. That's a little bit different from the profile that we have spoken about in the past, which is a 50% to 55% range, but that's where we feel comfortable with in the current environment. 40% to 45%. As to your question on the current environment for immediate deployment of capital and destabilized acquisition markets, our stabilized acquisitions in our markets I think about it like a baseball player coming up to the plate. You can't -- BSR right now doesn't have anything under contract because the deals that we're seeing in our markets, they're just not our pitches. They're fantastic properties but we see -- we talked about it. We like to buy a spread above our cost to capital. And we start to feel a little uncomfortable when that spread gets to 50 to 100 basis points. And right now, if I'm looking at rates that the private buyer's financing at, they're financing at 4.23 to 4.75 on an interest rate, and they're going to pay 3.25 on a cap rate. We wish them well and we know that there is a good investment thesis that they have behind that. But that's not the BSR's pitch. We're not going to swing at that ball. We don't think that's a permanent environment for multifamily properties in our markets. We see, I think, a very stable and disciplined opportunity to hit a single or a double in a kind of a property intensification Phase 2 co-development. That opportunity is certainly in front of us and we continue to surveil these markets. And I would remind everybody that we're not the biggest REIT in the world. We've proven time and time again that we can deploy capital accretive to our unitholders on an AFFO per unit basis and a NAV basis. We'll just continue to do that. We don't feel much urgency to put something under contract for the sake of deploying our shareholder's capital. We like to buy the best property in the market that we look at. And we're comfortable being disciplined, and if that market hits us in a month, we'll hit hard. If it hits us in 3 months, we'll hit it hard. With all that being said, right now, with interest rates as volatile as they are from a day-by-day and a month-by-month basis, it takes a month, month and a half, to buy a property. From soup to nuts. We feel like this market benefits the cash buyer. The cash buyer. A finance contingent purchase price in this market creates a lot of uncertainty. Our recent equity offering enables us to compete as a cash buyer at just about all levels for single and double property acquisitions in our markets. And that's exactly what we wanted. That's exactly how well we're positioned on a look forward.

That's great color. You mentioned the 4.23 to 4.75 on the mortgage rate, and I know you guys aren't out in new market for renewal per se, but would that be an indication of where it might come in for BSR if you were looking to tap the market?

No, it wouldn't be. That's the fun part about competing. It's knowing your strengths and your weaknesses as well as your competitor's strengths and their weaknesses. So I'm using what a private buyer would approach to Fannie Mae or Freddie Mac and expect to receive on a rate spread at a leverage ratio between 60% and 80% based on a term of between the agencies are going to offer you 7, 10 and 12-year terms. So those are Fannie Mae quotes from 7 to 12. Freddie Mac is inside and out depending on the term and the tenor, the interest-only request, so on and so forth. But at fair range right now that a private buyers financing at on the spot today is that 4.25 to 4.75 number. BSR, obviously, we haven't engaged the agencies for lending on projects since last August when we refinanced the facility, I think, for 7 years at 2.6% fixed interest only. I think there's a time and a place good for a partnership there with the agencies. Right now, our syndicate relationships and our private bank relationships seem to be very, very favorable and provide, we think, a competitive advantage on our overall capital cost relative to our peers. With that said, even though we have a lower cost to capital, we remain disciplined and we haven't changed our underwriting standards and we'll continue to wait for our pitches.

Okay, great. And then, lastly, for me, your variable rate exposure is relatively high, I think it's just under half on your total debt. Any plans to take that exposure down or are you comfortable sort of riding out what we're seeing in the market over the short term?

Yes, sure. So when we think about interest rate management, we're looking at that every week and we have. It's a very popular topic right now. I think BSR would look to hedge if it's opportunistic for BSR to hedge. Right now, we see a market pricing hedging at well between, we'll say, 250 and 350 for hedging costs, and that sits well above the market expectations for the increase in LIBOR and SOFR over the course of the next 12 to 24 months. Our thought is when you're buying insurance, you don't want to pay too much for your insurance. With that said, we remain, I think, pretty comfortable with our guidance for 2022 that we kind of maintained this quarter given our current leverage profile.

[Operator Instructions] And your next question will be for Matt Kornack at National Bank Financial.

I know property taxes in Texas is a blood sport but should we think of the figure this quarter as a good run rate for the remaining quarters, assuming no change in the portfolio in terms of acquisitions. And yes, or are we expecting some appeals to come and that may bring that figure down?

Matt, yes, I think what you saw in the first quarter is a good run rate for the rest of the year assuming no, again, dispositions or acquisitions and the reason that so that is, is because you have to understand right, when you buy new properties or when your properties just increase in value, naturally that means your real estate taxes are going to go up and we've included that assumption in our guidance.

Okay. No. Fair enough. And then just around growth going forward, you had talked about potentially leveraging the platform through partnerships on that front. Is that still something, A, that you think there are partners out there that are willing to do and something that would make sense in the context of your capital structure?

Yes, I think there's 2 questions and the answers to both are, it depends. And I think the market environment for a strategic partner, when you're printing the type of top line numbers that Blake and the team are bringing in, the number of available partners is limitless. And now with that said, the rising interest rate environment is certainly going to preclude a highly levered partner from wanting to partner with BSR. That's okay. That environment will change and those partners will become more compelling. So the way we think about it is in times of low interest rates and massive revenue up upbeats, there's a half a dozen partners that are very much willing to work with the BSR platform. And in environments like this, there's a half a dozen, they're just a different half a dozen. So BSR is going to continue to look to, I'll say, lever our platform to grow a bit. I think it needs to be under the right circumstances and how we would define the right circumstances is we don't want to overcomplicate our balance sheet or our P&L, that's step number one. Number 2 has to be the correct partner that rows the boat in the same direction that we're rowing as well. And I think those 2 things, when you can get past those 2, there's, again, a half a dozen partners out there that make a whole lot of sense that can help BSR grow outside of our organic growth and our acquisition growth.

Okay. That makes sense. And the last one for me, I think when you originally put your guidance out, it contemplated that almost half of the mark to market opportunity would be captured throughout this year. Should we still think kind of that renewal spread should trend kind of from the 17% range that they're at now, to sort of something in and around the high single digits by the end of the year, or have market rents outstripped expectations at this point increasing growth into the next year?

Yes, Matt. Right now, again, we'll point back to our guidance. We feel very comfortable inside that range of growth for same sort rental and NOI growth is on a percentage basis, and then the AFO and the FFO per unit range. We want to hit that again, those comments from last quarter, we continue to see in our markets and we've reflected in our guidance that we produced in March.

Next question will be from Jimmy Shan at RBC Capital Markets.

Yes, so just to follow up on that guidance, I mean, this quarter, since the NOI was quite high 16%. And so that would imply in the second half that we should see that decelerate to maybe high single digit. Is that a fair way to think about it and is that kind of how we should think about 2023 as well, given what you're seeing in the marketplace?

Yes, Jimmy. So yes, and it's the same as last quarter where I said as we continue to true for our leases to market, right, you're going to see a decline in the revenue over the prior year, right. Because we're not going to get 20% increases on top of 20% increases year, every year. So as we shift towards the latter half of the year, that is certainly going to come down, but that also is embedded in our guidance.

Okay. And the guidance also in terms, so I might have missed that the interest rate hedging, it does not assume any interest rate hedging in 2022.

So actually, the guidance includes the increase in rates. Right? And that, okay. Sure.

Okay. Sorry. It does assume an increase in interest rate to what amount, to what level?

Yes, well, we embedded a 75 basis point increase in criminally over 12 months, but we also have had some shrinking in our spreads as well.

Okay. And so what are you paying right now on the credit facility? What rate are you paying right now?

Hey, Jimmy, this is. This is Dan. Right now, I think based on the terms of the credit facility, we're paying about 2.25%. Obviously, that's going to -- since you asked, obviously our credit facilities are going to be based off LIBO and LIBO contract rates set each month. LIBO is going to move around the US Central Bank Fed movements. So right now, what we're paying on our rates are really in line with our guidance through April, through May. Now any additional movements in the fed on a look forward. As Susie said, depending on when those movements take place, they may have a positive or a negative impact on our guidance for the year, but at this time we feel very comfortable with where we've got it to.

Okay. Sounds good. And then maybe just lastly, you provide some color on the investment market. I was just curious, so on the assets that you have underwritten, I believe you said it was something like $3 billion. When you look back and what the pricing ended up being, and again, given your comment about where Fannie and Freddie debt cost lever buy are, like what type of levered IR you think these people are getting buying in a current environment, and I presumably they're underwriting higher rents. And is it your view that the rents are just not reasonable or just too aggressive? And how do you, when you look back at your underwriting, and what sort of conclusion do you come with?

Yes, sure. There's a little bit to unpack there. If I don't answer part of your question, it's not intentional, feel free and follow up. So first things first. So we look at some of those, I mentioned $3 billion, and that's just in March and April. We wanted to provide color on March and April because it's our view that this interest rate, these rapid escalation of interest rates began as a combination of rate and credit spreads in the middle of March, really post Russia and Ukraine. So most of those deals are going to close at -- I'm going to give you a range of 3% to 3.5% on a cap rate. Yes, you're correct what those buyers are looking at is they're embedding some of the red growth that we're depicting currently. And then the mark to market leases that Blake talked about that are remaining in a rent roll. And they're going to underwrite a call it a going in cap rate of 325. But their assumption is that they're year 2 going in annualized cap rate might be a 5. So call that 175 basis point expansion between their year 1 and year 2 numbers. Now it's not that we don't believe that, it's that we think it's at $90 million a pop for an acquisition, which was the average price that we talked about. That represents maybe an elevated risk to us. Now, in the past, we've underwritten spread expansion. We feel comfortable and we talked about it on a stabilized asset to underwrite to 75 basis point cap rate expansion over a 3-year period. That's our criteria. On a lease-up, we want to feel comfortable with a little bit more year 1, year 2 spread. We just don't feel comfortable with an increase in interest rates and a compression of cap rates underwriting twice the spread for a lease-up that we would otherwise underwrite to. And then number two, you think about the spread on stabilized assets. We liked that 75 basis points, or the markets underwriting 175 right now. That's just not our pitch. We'll wait and that we believe very strongly that those numbers will come back down to normal, whether it's with a reset of prices and an expansion of cap rate, or a continuation of outsized rate increases driving volume and rate as they have driven in the last year in all markets. Now, is there anything that I missed, Jimmy?

No, that makes sense in terms of we just say, well, I would just also in terms of levered IRR that people are trying to get to try to solve, what would that number look like if you're going in stabilize 5. So you're still looking at a high single-digit, low double-digit type of levered IRR? Is that for the type of assets that you would typically underwrite?

Yes, that's a good question. So levered, historically, that's range between 11% and 15%. I think the underwritten levered IRR has remained the same, 11% to 15%. I think what's embedded in that levered IRR, it's interesting, it's probably less about the reversion cap right now and it's more about that year 1 to early year 2 to rent growth driving yield. Both of those will juice an IRR. We've talked about in the past, VSR does, when we underwrite to a very similar 10 to 15, 11 to 17 IRR on our hold on a modified internal rates of return. We've always placed less emphasis on reversion cap rates than I think our competitors, now all of our competitors are or will say all the other competitors in our markets. They can, I think we all agree, nobody's putting a whole lot of emphasis on that reversion cap rate. Where we differ is perhaps some of the victors and these $3 million in transactions that traded in the last that we saw, the qualify for it to be a BSR property to train the last 2 months. Those Victor's had probably underwritten a bit more collected revenue increases throughout the course of the next year, year and a half, than we do. The second thing is we might underwrite those rents to come in, and we certainly expect those rents to come in, and those mark to markets to come in our markets, in the properties we own. We just might expect them to come in over a traditional time period of 18 months or 24 months. Our competitors, in order to place that capital, may be underwriting that rent to come in 3 months or 9 months, which really elevates that year one cap rate. That's a pitch we're not going to swing in.

Next question will be from Chris Koutsikaloudis at Canaccord.

My question is on the quarter-over-quarter decline in occupancy. Should we think about that as being part of the strategy to drive rent growth and more of a temporary thing, or was there some other factor that drove that?

No. This is Blake. I talked to the group last quarter that was part of our internal strategy. Frankly, we ran on top of our expectations in that regard. In doing that, we also were able to increase the sequential income by dropping the occupancy. It's really made up of about 6 properties. If you really look at it, what's happened, those sequential gains and income run anywhere from 1% to 3%, on all 6 of those. What we're seeing into the second quarter is an acceleration of the rent pass and acceleration of the occupancy. You're right, it was purposed, and we've seen it come to fruition and it continues to.

Next question will be from [ Andrew Shirley at S Capital ].

I'm seeing your own implied cap rate close to 4.7%, with the stock at $17 a share now. I'm wondering do you agree with that math? If so, why not buy back your own stock at a huge discount to private market prices?

Is it [ Andrew ]?

Yes.

I'll say we don't want to speak to whether we agree or disagree with that math. I believe the company produced IFRS NAV with a blended underwritten cap rate of 3.8%. That's the cap rate that's reflective of the process and we feel comfortable with that cap rate. To your question on stock buybacks, that's not a topic that we're really prepared to discuss about in an earnings call at this time.

Okay. So you're open to share buybacks?

I didn't say that. My comment was BSR is not prepared to have a discussion about stock buybacks on this earnings call.

Okay. Can you share whether you have the ability to buy back stock or a plan in place?

I don't believe we've filed a plan. Not a current plan. I think we have in the past.

This concludes the question and answer period for today. Please proceed with closing remarks.

Thanks. That concludes our call today. And thank you for your interest in BSR REIT. We look forward to speaking with you again after we report our 2022 second quarter results in the summer.

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