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

Good morning. My name is Joanna, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR REIT Q2 2022 Financial Results Conference Call. [Operator Instructions] Mr. Oberste, you may begin your conference.

Thanks, Joanna, and good morning, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the second quarter ended June 30, 2022. I'm joined on the call by Susie 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 second-quarter performance. Susie will then review the financials in detail, and I'll conclude by discussing our business outlook. After that, we'll be pleased to take your questions. To begin, I want to remind all listeners that certain statements about future events made on this conference call are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. Please refer to the cautionary statements on the forward-looking information in our news release and MD&A dated August 9, 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 meetings 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. Our financial performance in recent quarters has been outstanding, and I am pleased to say that this trend continued in Q2. We again generated very strong growth across all of our key financial measures. Same-community revenue increased 11.5% compared to the second quarter last year. Same community NOI increased 16.7%. FFO per unit rose 61.5%. AFFO per unit increased 26.7%. And net asset value per unit rose 51.4%, inclusive of the units issued in the April 22 offering to $22.35 as of June 30, 2022, compared to $14.77 as of June 30, 2021, and also increased 1.7% sequentially from $21.98 as of March 31, 2022. Going into '22, we had high expectations for our financial performance. However, our operating performance in the first half still exceeded those expectations. This reflects very strong rental market conditions in our core Texas markets, Austin, Dallas, and Houston. Strong population growth and economic performance in these MSAs continues to drive robust demand for rentals in our communities. Weighted average rent for our portfolio as of June 30 was $1,412 per apartment unit, an increase of 17.1% compared to $1,206 a year earlier and accelerating at a faster pace than each of the prior 3 quarters. We expect these strong -- very strong leasing conditions to continue through the second half of 2022. Accordingly, we revised our same-property revenue and NOI guidance upward for the year. I'll speak more about that a little later in the call. We also continue to pursue attractive growth opportunities. We did not announce any new acquisitions in the second quarter. However, subsequent to Q2, we entered into an agreement to jointly develop Phase 2 of Aura36Hundred in the Austin, Texas MSA, with a projected total cost of $60 million. The development will be funded with contributions of $21 million and a $39 million construction loan guaranteed by our development partner. Finally, I'm proud to note that DSO was recently named one of the Best Places to Work in Arkansas by Arkansas Business in the Best Companies Group. This was the sixth consecutive year that we received this honor. I believe it is a testament to the strong culture we have developed at BSR. We have an outstanding team that is fully engaged in making our company successful. They have done a tremendous work amid the challenges created by the pandemic over the last 2.5 years. I'll now invite Susie to review our second quarter financial results in more detail. Susie?

Thanks, Dan. Same community revenue increased 11.5% in the second quarter to $23.2 million compared to $20.8 million last year. The improvement primarily reflected a 12.6% increase in average rental rate for the same community properties from $1,160 per apartment unit as of June 30, 2021, to $1,307 as of June 30, 2022. This underlines the strength in the Texas rental market conditions that Dan outlined. Total portfolio revenue for Q2 2022 increased 38.3% to $38.8 million compared to $28 million in Q2 last year. This reflected $2.4 million of organic same-community rental growth as well as contributions from property acquisitions and nonstabilized properties, which added $11.4 million and $0.2 million of revenue, respectively. Property dispositions reduced revenue by $3.3 million compared to Q2 2021. As a reminder, nonstabilized 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 $12.7 million, an increase of 16.7% from $10.9 million last year, reflecting higher same-community revenue. This was partially offset by an increase in property operating expenses of $0.6 million. NOI for the total portfolio increased 46.1% to $21 million from $14.4 million in Q2 2021. Same-community NOI growth boosted total NOI by $1.8 million, while property acquisitions and nonstabilized properties increased by $6.3 million. Dispositions reduced NOI by $1.3 million. FFO for Q2 2022 increased 66.2% to $11.6 million or $0.21 per unit compared to $7 million or $0.13 per unit last year. The increase reflects the higher NOI, partially offset by increases of $0.4 million in G&A expenses and $1.6 million in finance costs. AFFO increased 33.4% to $10.5 million in Q2 2020 or $0.19 per unit from $7.9 million or $0.15 per unit last year. The increase primarily reflected the higher FFO, partially offset by the escrowed rent guarantee realized in the prior year of $1.5 million and an increase in maintenance capital expenditures of $0.5 million related mostly to seasonal projects. Net asset value increased 69.1% year-over-year to $1.3 billion from $769 million at the end of Q2 last year. NAV per unit was $22.35 at the end of Q2 '22, an increase of 51.4% from $14.77 a year earlier, driven by the compression in cap rates and higher NOI; and 1.7% sequentially from $21.98 of Q1 2022, driven by higher NOI. Net income and comprehensive income of Q2 2020 increased $160.8 million compared to $36 million in Q2 last year. The positive variance was primarily due to an increase in the fair value adjustment to derivatives and other financial liabilities of $178 million, primarily related to the reduction in the liability recorded for [indiscernible], partially offset by a decrease in the fair value gain to investment properties of $63.2 million. The REIT paid quarterly cash distributions of $0.13 per unit in Q2 this year and $12.5 last year, representing an AFFO payout ratio of 71.8% in Q2 2022 compared with 82.6% last year. All distributions were classified as a return of capital. Turning to our balance sheet. The REIT's debt to gross book value as of June 30, 2022, was 36.2% or 34%, excluding the convertible debentures. Total liquidity was $167.3 million, including cash and cash equivalents of $8.7 million and $158.6 million available on our revolving credit facility. We also have the ability to obtain additional liquidity by adding properties to the current borrowing base. As of June 30, we had total mortgage notes payable of $488.4 million, excluding the credit facility, with a weighted average contractual interest rate of 3.3% and a weighted average term to maturity of 5.6 years. Total loans and borrowings were $710.9 million with a weighted average contractual interest rate of 3.3%, excluding the debentures, and 61% of the REIT debt was fixed or economically hedged to fixed rates. We also had $41.8 million of convertible debentures outstanding at a contractual interest rate of 5% maturing on September 30, 2025, with a conversion price of $14.40 per unit. It is important to note that in July 2022, subsequent to the end of the second quarter, we entered into 3 interest rate swaps to hedge an additional $280 million of variable rate debt. The first 2 swaps of $150 million and $65 million or a fixed rate of 2.163% and 2.178%, respectively, taking effect on September 1, 2022, and maturing on August 31, 2029. The third swap is $65 million at a fixed rate of 2.087% and takes effect on January 3, 2023, and matures on July 27, 2029. Once these swaps commence, 100% of the REIT's debt will be fixed or economically hedged to fixed rates at a weighted average contractual interest rate of 3.4%. Investment properties were valued at approximately $2.1 billion as of June 30, 2022, compared to $1.9 billion as of 2021 year-end. We've recorded a fair value gain of $139 million in the first half of 2022, driven by a decline in capitalization rates and higher NOI. I will now turn it back over to Dan for some closing comments. Dan?

Thanks, Susie. Our business continues to display momentum. Our focus on high-quality properties in the building rental markets of Austin, Dallas, and Houston is driving outstanding financial performance. We fully expect that trend to continue through the remainder of 2022 and into '23. Back in March, we provided earnings guidance for '22. It was the first time we provided annual guidance forecasting our expected performance for the year. Based on the continued growth we are experiencing in our core markets, we announced yesterday that we're increasing that guidance. We now anticipate same-community revenue growth of 10% to 12% compared to our prior guidance of 8% to 10% and same-community NOI growth of 12% to 14% compared to our prior guidance of 11% to 13%. We're maintaining our guidance for FFO per unit of $0.86 to $0.90, and AFFO per unit of $0.80 to $0.84. While our NOI expectations have increased, we expect this to be offset by the increase in units outstanding following the April offering. We also continue to anticipate that property operating expenses will increase 4.5% to 6.5% year-over-year, which is well below the projected growth in revenue. These numbers are based on our current portfolio and do not take into account any acquisitions or dispositions. As I noted earlier, we are continuing to pursue external growth opportunities in our core markets that would further expand and upgrade our portfolio. Our portfolio is performing extremely well, and we will patiently pursue those opportunities most accretive to our investors. Another example of such opportunity is the Phase 2 development discussed earlier in this call. Overall, we're pleased that our strategy is driving strong financial performance. We believe that sticking to it will generate further strong returns for our unitholders in the second half of 2022 and beyond. That concludes our remarks this morning. Susie, Blake, and I would now be pleased to answer any of your questions you may have. Joanna, please open the line for questions.

[Operator Instructions] First question comes from Kyle Stanley at Desjardins.

So just looking for a little bit more information on the development agreement that you were talking about. I'm just wondering, could you talk about the structure of the agreement and maybe what the mechanism for acquiring the remaining interest would be?

Sure. Kyle, this is Dan. I'll try my best here. So what the REIT did was acquire 97.5% interest in the development. The remaining 2.5% is owned by our development partner. Our development partner is guaranteeing the debt associated with the development. And right now, it's our intention to acquire the remaining 2.5% when the property is right and ready to be bought.

Okay. Makes sense. I wasn't sure if it was a 50-50 JV or. So that's very helpful. Could you speak to the thoughts on the projected yield on that $21 million contribution you mentioned?

Yes, sure. And I'll back up a bit. We've always said that we -- stabilized acquisition yields at somewhere between 100 and 150 basis points north of where we see fixed debt in the market. And then we like development sitting at 100 and 150 basis points north of that. In this situation, we're seeing development opportunities with outsized yield growth relative to stabilized acquisitions. So we continue to see compressed cap rates in our markets for stabilized acquisitions as evidenced by our, among other, trade-outs over the last quarter on NAV cap rate of about 3.9%. Where we're seeing the opportunity here is on that 2024 development that we anticipate begin leasing in '24. We like that outside development yield to still sit at, call it, 300 basis points on top of our under related average cost of debt.

Okay. And maybe just one last one with regards to the development agreement. How did this first deal come to be? I mean given that it's in aura, you've worked with the developer in the past, I think on Phase 1. But just wondering how this is the deal that you chose? And do you see either opportunities, whether it be with the same developer or another developer you work with?

Yes, sure. So I think that -- I mean when I think about the evolution of this transaction, the relationships that were built in order for us to partner up with the developer started nearly 5 or 6 years ago. Michael Squires, who leads our Acquisition and Development team, continues to cultivate these relationships as well as our senior operators who work hand-in-hand with these development partners. Aura Phase 1 provides us a pretty intimate look at what we think the economics of Phase 2 will look like when it's ready. So we already own that product. But in addition, that development partner has been an upstream seller to us on 2 or 3 other properties located in our core Texas markets. So we like their product. We feel pretty comfortable with the economics of the development, mitigates any risks, and relationships aren't built overnight. Great developer, I mean, prolific fantastic developer, and a repeat seller of ours. I would say this is precisely what we telegraphed last quarter when we talked about Phase 2 development growth. And you can probably look to continue to see BSR [indiscernible] for these opportunities on a look forward with these same types of partners.

Next question comes from Sairam Srinivas at Cormark Securities.?

Susie, Blake, congratulations on another strong quarter. Firstly, I just want to appreciate the disclosure on the spreads that you guys included in this quarter, everything like that. Dan, my first question for you is on the capital allocation opportunity that we see ahead. Considering the environment we earned right now with higher rates, and obviously, you guys have kind of fixed that on the financing end, but how has that changed your outlook in terms of the opportunities you're seeing in terms of acquisitions versus buybacks?

BSR's priority in external growth since we went public has always and always will be acquisitions of stabilized assets, suite renovations, co-development opportunities, or acquisitions of properties that -- and taken a little bit of a lease-up risk, so acquisitions of new properties and taking a lease-up risk on improving our returns. We found one or more of those ingredients to the recipe of growth, very accretive to our investors over the course of the last 5 years. And on a look forward, we see -- I think we see probably stabilized acquisitions at compressed yields right now. We see opportunities for sweet renovations within our portfolio, and we'll continue to mine those throughout the course of this year and next year. Development partnerships like the one we announced yesterday and the one we discussed in the call seem to be an opportunity for an outsized return generated by our management platform and the REIT for our investors on a look forward as are acquisition of unstabilized properties on a look forward. So 3 of those 4 ingredients to the recipe of external growth exists in the market today. The opportunities are vast. And we will continue to mine with the highest and best opportunity to deploy and allocate our capital on a look forward. The one that we don't see, I'll say, a significant outsized opportunity in right now is acquisition of stabilized NOI. In those scenarios, it seems like cap rates are aggressively compressed to take into account the level of mark-to-market rental growth that's contained in some of these stabilized acquisitions. So until that scenario plays out a bit, we're going to call the pitches of co-development similar to what we announced yesterday of acquisition of assets and taking a lease-up risk on them in sub-markets that we are intimately familiar with. And then are deploying some of our investors' capital into some suite renovations as the end of '22 plays out and into '23.

That makes sense, Dan. Just for digging back on acquisitions, are there specific markets where you see the impact of higher rates or probably increase the opportunities in terms of acquisition opportunities?

Yes, that's a good question. And the way I think of it is -- are the macro pressures in our markets applying some -- creating some challenges or creating some opportunities? And just to reflect on that again, Sairam, I'd say, certainly, macro pressures right now are compressing cap rates for stabilized assets. And for good reason. I mean, the mark-to-market in these assets and especially the ones that are in the right locations and the right side of the street want that premium cap rate, which generates negative leverage and I'll say, can be troubling and a risk for investors. However, we see the opportunities right now and developments and lease-up of new product. When faced with choosing between a challenge and an opportunity, we'll pick the 2 opportunities, and we'll continue to monitor that challenge to see when it comes into opportunity range. And again, I want to reiterate that these dynamics are super healthy. I mean when I think about who's leading the nation in job growth since our job creation or regrouping since the beginning of the pandemic point right to Austin and Dallas. When I look at Dallas, Houston, and Austin, each of the 3 rank in the top 4 MSAs for population growth in the MSA. 6 of the 15 fastest-growing cities in the U.S. are located in our Texas MSAs. The top 2 fastest-growing cities in the U.S. are located in Austin and Round Rock. Vacancies in all of our BSR markets, as you can expect, remain below historical trends. When we look at Houston, units under construction have fallen for consecutive quarters since the second quarter of 2021. When we look at the fastest-growing cities by percent of population, we look at Georgetown and Leander, both cities that are in the Austin MSA. When we look at the fastest-growing cities in the country by numeric increase of population, #3 is Fort Worth, #8 is Wisco, #10 is Georgetown, #12 is Leander, #14 is Denton, #15 is McKinney. Each one of these cities is located in Austin and Dallas. The fastest-growing MSAs in the country right now, #1, DFW, #3 is Houston and #4 Austin. So when we look at those dynamics, I mean, all of those stats are fantastic. We can understand why those stats warrant compressed cap rates for stabilized acquisitions for multifamily apartments in those markets. It makes complete sense to us. We're enjoying the benefits of it as a landlord, and we're mining the opportunities for those acquisitions out in the market right now, where we see the opportunity for outpaced yield is in a co-development like we announced yesterday or alternatively, an acquisition of an unstabilized lease-up brand-new construction project in the right submarket of these MSAs.

That's fantastic color then. Probably just my last question. Looking at the acquisition from the other angle and the disposition, are you looking at -- are you seeing any opportunities in the portfolio for recycling?

I'm sorry, Sairam, you cut out there. Could you repeat?

I was just going to say, looking at the portfolio, are you looking at -- are you seeing any opportunities for recycling?

Yes, external market growth. Is that what you're referring to?

No. In terms of dispositions, like are there markets where you see you've kind of reached the potential in terms of rent growth and occupancy and you feel you could probably cycle out of this?

Yes, you would think, and Blake is happy to jump in and pile on here. You would think there would be, but our economics that we're seeing in Oklahoma City and Little Rock continue to play in the same playground as those same leasing trends that we're seeing in our Texas markets. They're healthy. With that said, if we see an outsized return generated by cap rate compression in any of our markets or on [indiscernible] properties, we'll take advantage of that as it's an opportunity to maximize our investors' returns. We constantly monitor each of our properties, not just our markets but each of our properties. All the 5 of our markets are extremely healthy. Dallas, Austin, and Houston, which account for, I think, roughly about 94% of our NOI are among the healthiest if not the 3 healthiest markets for multifamily in the country. And Little Rock, Oklahoma City, which accounts for, I want to say, about 6% of NOI, continue to hum along. Our product in those markets is located in the right submarkets of those Little Rock and Oklahoma City markets and continues to exhibit outpaced growth. So long as we see a return generated by owning above that generated by selling, we pick -- if we think we can sell an asset and maximize our return relative to owning, then we'll look to rotate.

Next question comes from Jenny Ma at BMO Capital Markets.

I want to ask about the ongoing positive trajectory in rent, it's nice to see. Were there any specific markets that really led the path? Or would you say it's broad-based across your different markets?

This is Blake. It is across all markets. Our rental income when you look at it sequentially, Q1 to Q2, Austin, Dallas, and Houston were right in line with each other. It's not one, in particular, pulling the whole freight as Dan just alluded to, all of our markets are showing growth.

When you think about rent renewals with your tenants, do you have some sort of self-imposed limit in terms of how much you raise it? Or do you try to push it as much as possible? How do you measure that? And basically, how do you maximize your rental renewal rates with your tenants who choose to stay a little longer?

Well, I think on the last call, I discussed our new system that we have bought and implemented in our whole portfolio, which is called the AO revenue management program. And this program has really -- they're always hard to quantify programs when you buy. And this one over the first quarter-over-quarter, and this is -- I'm going to get to the answer, but I want to give you a little background here. Over the first quarter from Q1 to Q2, our sequential growth in rental rate is evident. And what it does for us is it balances out and in our groups meet twice a week, our senior portfolio managers and our investment group. And they go over all of these renewals, new rates. And what they do is they balance out and this program helps us to balance out what we're seeing in the market today, what we think we'll see in the market in the future, and what our new and renewals are going to be coming up. So it's a very -- and I've said this in each of the last calls, it is a very intensive really -- you have to really look at each market, each property and actually look at a property within -- you take like Frisco, where we've got multiple properties. You can have a renewal rate that's different than another property in Frisco. So it's almost -- it's submarkets and markets within submarkets. So that's how we determine the growth in renewals and the growth in new. But no, we don't put any caps on it.

Do you consider a tenant income when you're thinking about those? Or does this program just take a look at the data of all the assets around and kind of sit out a market number that's agnostic to who the tenant is and what their profile is?

Yes. Tenant income is always looked at in terms of on qualification basis, but also in what we're seeing in each individual market. I mean one of the things that's really jumping out and in every quarter, I give you an update on this, but I'll give it right now is that what we're seeing in the markets is I'm dovetailing on to what Dan just discussed as far as the move-ins in each of these main markets, people moving into it. You look at our main markets, the migration second quarter -- the first quarter or the second quarter, 20% of our new leases came from 43 states. That's 18% -- that's compared to 18% in the first quarter. When you look at that, Austin, Dallas, and Houston had 3% to 4% growth in people moving in. Now, what does that mean? Well, these people that are moving into our areas are coming with our for high-income jobs as the median income in all of these Texas markets continues to grow on a sequential basis. So we're looking at median incomes right now in Austin in that portfolio of $99,000; in Dallas, $91,000; Houston in $90,000. So all of this plays into the affordability of the houses in the area that people can buy. And when you're looking at the median income for a house in Dallas, for instance, a $400,000 house right now with interest rates where they are, you're going to be paying $3,415 and you have a $1,400 payment in apartments. So Houston is at $2,504 and $1,200 rental rate. Austin, you go to $4,200 -- the median price on a house in Austin is $562,000. I mean that's a $4,200 payment and average BSR rental rate is $1,572. So all of this goes into the fact that you're having a lot of people with really, really high median income that are looking for a product in our areas. And thus, that factors into the programs that we're using in order to increase rental rates on renewals and new. And a lot of people are going the renewal rate right now with the [indiscernible] and everything that's happening in the economy. So that's playing in our favor offer.

Just want to switch to discussing a bit about the supply side on development completions in your markets. Are you starting to see any changes in the pace of completions? And how would you compare them across the different markets that you're dominating?

Sure, Jenny. This is Dan, and I'll see if I can't tackle that one. We pay attention to a couple of things when we talk about supply. It's not just gross supply, it's also net absorption. So I'll hit the absorption issue first. We're seeing the pace of absorption in the first 6 months of the year in Dallas, Austin, and Houston at around the same pace as we saw in 2021, which was double the supply scenario for '21. We are seeing in some pickup in deliveries this year relative to last year, and that's natural, and we anticipated that, and we've talked about that. Where the supply pickup is concentrated right now that we see is Austin, Texas with -- we're paying attention to that current inventory change relative to the, I'll call it, the 2015 to 2021 average annual inventory change. And in Austin, it's generally been able to handle about 5% to 6.5% inventory increases a year, and to absorb that 5% to 7% number. I'll say in the last 6 years on average. It's been fair to say. What we're seeing this year is a slight drop of assets under construction. Well, a slight drop, I mean about a 0.1% drop in assets under construction. We see the deliveries that have taken place so far this year being fully absorbed at the same pace that they were absorbed at last year, which somewhat emboldens our thesis in this market because as you recall from the prior 2 quarters, we were specifically concerned about supply and absorption net of supply metrics in Austin. So that's healthy. The supply environment in Houston continues on track as we anticipated in the prior quarters and at the beginning of this year. And that is to say assets under construction right now are down about 31% year-over-year, and deliveries in place this year seem to be on track to be about -- I'll say, about 12,000 to 13,000 units. And that's about 2,000 to 3,000 units below the Houston average. Assets planned is that -- I think the new construction planned in Houston is something that we find intriguing right now, which is about 4,900 units or suites to be developed. And those are assets that anything that's planned, we would expect to be delivered in 2025. And anything under construction, those 19,000 units, we would expect to be delivered over the course of the next 24 months, 18 to 24 months. These are all favorable dynamics. They continue to -- I mean these markets continue to embolden our operating strategy, and we're happy to see that supply of -- well, I mean, I'm sorry, we're happy to see that the absorption figures continue to sit tight on pace as those exhibited in these 3 markets last year.

Any commentary on Dallas?

Yes, sure. So it's fun to talk about relativity here. We've said last year, Dallas looked to absorb about 40,000 suites against a backdrop of about 20,000 suites delivered. We expected this year for Dallas to deliver about 20,000 suites and to absorb 20,000 suites. And I will say this far into the year, those delivery and absorption numbers look to remain on track, which is fair. I think what we see that's positive is going back to that average annual inventory change. In Dallas, what we've seen in the last 6 years is about a 3.6% annual inventory change per year for the delivery of multifamily apartments. And Dallas has done a remarkable job of continuing to absorb that inventory. What we're seeing now are about 26,000 to 27,000 units under construction, right? So those are units that are going to be delivered over the course of the next, I'll say, 24 months. That's about half the pace or about 60% of the pace that we've seen in 2021 and in the first 6 months of '22. In addition, now and I'm saying it is an inverse to Houston, the assets that are planned, and that is to say those assets that we think will be delivered in the back half of '24 and into '25 are about 37,000 suites. So that looks to keep on pace with the expected absorption in the market for '24 and '25. I guess if we're digesting all of that -- all of those fun facts, what it looks to me like right now is that the landlord won by 20,000 units of absorption last year. It looks like this year, the party continues with rent growth and occupancy acceleration. Blake remarked just the other day how in Frisco, where we have a high concentration of assets, quarter-over-quarter, deliveries actually dropped, which was -- that was a pleasant surprise for us. And then when we look forward into '23 and then right now into the beginning of '24, it looks like that the asset deliveries may be on track with our original expectations. So historically, supply has diluted the net migration positive metrics that have come into these markets, and I'll say the '80s and the '90s, and the early 2000s. It doesn't necessarily look to be the case right now. It looks like the fundamental housing issues and the high demand and the high occupancy and rate increases continue to sustain well into next year, which gives us comfort for our guidance this year.

Next question comes from Bradley Sturges at Raymond James.

Just to follow on the new supply there, a couple of questions. One, so it sounds like from the data that you're providing there, it's more of a '24, '25 kind of increase in the supply, and you may not see a headwind from new supply, I guess, in '23. Is that the way you're seeing it right now, particularly in like Austin and Dallas?

Yes, that's absolutely correct, Brad. And it makes a lot of sense you think about it. I mean land prices are going up, construction prices and labor costs are going up. And then I think we've got that funnel gift from central banks in the last quarter and that the cost to borrow has gone up in the last 3 months. So the combination of those 3 factors should yield no surprise that a developer might be a bit timid to build a new project at a higher cost.

And the type of product that is in the pipeline right now, is that more garden south suburban assets similar to the product that you have or in the submarkets you might be in? Or could that be more like mid to high-rise, more urban with a differentiation in location, the type of product could be delivered?

Yes, I'd say it varies, Brad. I would say it varies, but we're seeing more and more urban wrap, urban mid-rise and high-rise being developed in these markets, particularly in Houston, but also in Austin. And that's a factor of -- I mean, it makes sense. It's a developer trying to maximize their return on their land purchase. The economics you just buy fewer acres of land and try your best to build the same number of units you've got to build up. Now we think that puts BSR as a strategic advantage. There are fewer and fewer apartments under construction in these markets with ground-up parking. That is to say the resident parking in the parking lot, parking in a covered spot or with their own personal garage and spending about 30 seconds walking up to their apartment unit, taking their groceries with their kids in tow. That resident wants to live in that suburban garden 3 story or that suburban garden walk-up that match and build with ground-up access to parking. That's the most desirable asset right now. It's also the cheapest to construct. However, because of land prices, because of the labor costs and the construction costs, and most recently, the soft cost of financing an asset, I think we've seen a pullback in deliveries and in new plant constructions of suburban garden 3-story and 4-story elevator product, and we're seeing more concentration of these high-rise assets. Now to provide just a little bit more perspective on that, if you're going to build a high-rise asset in one of these markets, it's going to cost you about $500,000 to $600,000 a suite to construct it. Imagine the rent that you're going to have to collect in order to break even on that development. If you're going to build an urban mid-rise, it's going to cost you about $350,000 to $375,000 a suite in hard cost to construct your asset. An urban wrap is going to cost you about $300,000 a suite in hard costs. This is before the cost -- I mean, this is also before the cost of the land to build. So, while we're seeing more concentration of these, I'll say, more these high-rise units, they're also costing those developers more to build. We wish him the best of luck. And right now, we think that we would rather own our garden sell properties and our 4-story mansion builds over just about any product in the market, including single-family rental.

Okay. And then just to go back to leasing for a second. Based on what you've done so far in Q3 and what you're seeing so far, has there been much moderation in the leasing spreads you're achieving what you got in Q1, Q2? I'm assuming that's still the expectation towards the back half of the year that we could see some moderation. But just curious to get your thoughts in terms of what you're seeing on the ground today.