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

Afternoon, ladies and gentlemen, and my name is Sylvie, and I will be your conference operator for today. At this time, I would like to welcome everyone to the BSR REIT Q4 2023 Financial Results Conference Call. [Operator Instructions] Thank you. Mr. Oberste, you may begin your conference, sir.

Thank you, Sylvie, and good day, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the fourth quarter and year ended December 31, 2023. I'm joined on the call by Susie Rosenbaum, to REIT's COO and Interim Chief Financial Officer. I'll begin the call with an overview of our fourth quarter and full year performance and highlights. Susie will then review the financials in detail, and I'll conclude by discussing our business outlook. After that, we will be pleased to take your questions. To begin, 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 12, 2024, 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 another solid year in 2023, which was highlighted by year-over-year growth in all of our key financial metrics. As always, our results were supported by the strong underlying fundamentals of our core Texas Triangle markets. We reported Same Community revenue growth of 5.9%, Same Community NOI growth of 7.8%, FFO per unit of $0.93 compared to $0.86 last year, and AFFO per unit of $0.85 compared to $0.80 last year. These numbers were in line with our disclosed guidance. During 2023, we did not see the dramatic quarter-over-quarter growth in rental rates that we witnessed in the prior 2 years. When demand for housing reached unprecedented levels in our Sunbelt markets in 2021, that demand drove a burst of new development, resulting in an increase in deliveries in the second half of 2023 in certain MSAs. This is a natural market response in the U.S. to a huge surge in demand driven by strong population and economic growth in our core Texas markets that continues to stay. I would note that demand remains stable and that new supply is being effectively absorbed. Though it has resulted in some downward pressure on rental rates during the lease-up period, we expect new apartment deliveries to slow over the course of 2024 and as we depart from a peak in deliveries. So looking past the short-term effect on rental rates, the long-term outlook for these markets and our product remains very positive. I'll talk about this more when I discuss our 2024 guidance later in the call. Deliveries in the rental market did affect our performance in the fourth quarter. Rental rates for new leases declined 4.1%, while renewals increased by the same amount, resulting in no change to the blended rental rate over the prior leases. Those figures exclude short-term leases. We can't control interest rates, and we can't control apartment supply, but we continue to do a very good job of excelling at the things we can control. Despite this more challenging short-term operating environment, we still generated 1% growth in Same Community revenue in the fourth quarter, while FFO and AFFO were essentially in line with Q4 last year. Same Community NOI declined slightly due to an increase from property operating expenses, which were partly due to an increase in smart home technology fees as we expand that platform across our portfolio, which will in turn drive rent growth in the future. Real estate taxes were also higher, largely due to a timing issue we've discussed in prior quarters. Our weighted average occupancy at the end of the year was 95.3%, which was broadly similar to the 96% a year earlier. That reflects the high quality of our portfolio and our ability to attract and retain residents even during a period of expanding supply. Meanwhile, we have continued to work hard to build value for our unitholders. During the fourth quarter, we purchased and canceled more than 3.1 million shares under our normal course issuer bid and automatic securities purchase plan. The average price of these purchases was $10.65 per unit. At that sort of discount to NAV, the repurchases were a highly attractive use of our capital. We also entered into three new interest rate swaps during the quarter. Susie will provide more details shortly. I just want to note that the swaps have been a very effective tool to help us mitigate the impact of elevated interest rates over the last 2 years. Currently, 97% of our debt is fixed or hedged to fixed rates. Finally, I want to provide a quick update on management. Brandon Barger resigned from the REIT in February due to health issues. We wish him all the best for recovery. Susie assumed his duties as interim CFO back in November. As you know, she was formerly the REIT's CFO. So this has been a seamless transition. And in February, Steven Etchison was promoted to Vice President of Accounting from Vice President of Accounting to Chief Accounting Officer. This was consistent with our succession plan. Steven is a valuable member of our team, and I have no doubt that he will do a terrific job with his new responsibilities. 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 1% in Q4 2023 to $40 million compared to $39.6 million in Q4 last year. The improvement primarily reflected a 1.3% increase in average rental rate for the Same Community properties from $1,475 per apartment unit as of December 31, 2022 to $1,495 as of December 31, 2023. Total portfolio revenue for the quarter increased 1.1% to $42.1 million compared to $41.6 million in Q4 last year. This primarily reflects the $0.4 million organic Same Community rental rate. NOI for the Same Community properties was $21.2 million compared to $22 million in Q4 2022, reflecting an increase in property operating expenses of $0.7 million that was due to higher payroll cost, additional repair and maintenance expenses, including increased smart home technology fees and higher insurance costs. Real estate taxes also increased $0.5 million compared to Q4 2022 due to the timing between quarters when adjustments are made for tax settlements and changes in tax assessments. These negative impacts were partially offset by higher revenue. NOI for the total portfolio was $22.5 million compared to $23.2 million in Q4 last year, reflecting reduction in Same Community NOI. FFO for Q4 2023 was $13.3 million, similar to Q4 last year. FFO per unit increased to $0.24 from $0.23 last year. The increase in FFO per unit was primarily due to the repurchasing of approximately 3.5 million trust units during 2023 under our NCIB and ASPP programs. AFFO for Q4 2023 was $12.4 million or $0.22 per unit, similar to $12.5 million or $0.22 per unit in Q4 last year. The REIT paid quarterly cash distribution of $0.13 per unit in Q4 of both years, representing an AFFO payout ratio of 58.3% in Q4 2023 and 59.6% in Q4 of 2022. All distributions were classified as a return of capital. Now I'll review our results for the 12 months ended December 31, 2023. Same Community revenue increased 5.9% in 2023 to $159.6 million from $150.6 million in 2022. The increase reflected a contribution of $7.9 million from sequential average rent increases, an increase of $0.6 million from improved average occupancy and an increase in termination and notice fees of $0.5 million. Total portfolio revenue was $167.8 million, an increase of 5.9% from $158.5 million in 2022, reflecting the higher Same Community revenue and a contribution of $0.3 million from a non-stabilized property. Same Community NOI increased 7.8% to $86.8 million from $80.5 million in 2022. The increase reflected higher [ Same ] Community revenue and a $0.5 million reduction in real estate taxes, primarily due to revised 2023 tax assessments and tax refunds related to prior years. This was partially offset by the increase in property operating expenses of $3.2 million, reflecting higher cost for insurance, payroll and repair and maintenance. Total NOI increased 6.5% to $91.1 million from $85.5 million in 2022, reflecting the increase in Same Community NOI, partially offset by a reduction in NOI from Non-Same Community properties of $0.7 million due to real estate tax refunds received during Q4 of 2022. FFO for 2023 increased 9.5% to $52.6 million or $0.93 per unit compared to $48.1 million or $0.86 per unit in 2022. The increase in FFO reflected the higher NOI, partially offset by a $0.8 million increase in finance costs associated with higher interest rates as well as higher debt due to repurchase of units during 2023. AFFO for 2023 increased 8.3% to $48.4 million or $0.85 per unit compared to $44.7 million or $0.80 per unit in 2022. The increase in AFFO reflected a higher FFO, partially offset by an increase in maintenance capital expenditures of $0.7 million, which was primarily due to roof replacement and balcony restoration projects. The REIT paid as distribution of $0.52 per unit in 2023 and 2022 with an AFFO payout ratio of 60.7% in 2023 and 65.2% in 2022. All distributions were classified as a return of capital. Turning to our balance sheet. The REIT debt to gross book value as of December 31, 2023, was 44.5% or 42.3% excluding the convertible debentures. Total liquidity was $123.4 million, including cash and cash equivalents of $6.7 million and $116.7 million available under our revolving credit facility. During Q4 2023, we repaid $38 million of mortgage debt on the property referred to as Hanger 19, which is now unencumbered as well as repurchased 3.1 million shares under our ASPP for an average price of $10.65 per unit as previously noted by Dan with our revolving credit facility. We have the ability to obtain additional liquidity by adding properties to the current borrowing base of the facility. As of December 31, we had total mortgage notes payable of $459.3 million with a weighted average contractual interest rate of 3.5% and a weighted average term to maturity of 4.4 years. Those figures exclude the credit facility and the construction loan from investment properties under development. Total loans and borrowings at year-end were $763.3 million with a weighted average contractual interest rate of 3.7%, excluding the debentures and the construction loan and 88% of our debt was fixed or economically hedged to fixed rates. The outstanding convertibles debentures were valued at $39.7 million as of December 31 at a contractual interest rate of 5%, maturing on December 30, 2025, with a conversion price of $14.40 per unit. During the fourth quarter, we took further steps to increase our proportion of fixed-rate debt and reduce our interest rate risk. We entered into two interest rate swaps in early November and an additional one in early December. The swap have notional value s of $65 million $60 million and $40 million, respectively, with fixed rate of 3.27%, 3.537% and 3.178%, respectively. The $65 million swap takes effect on July 1, 2024, and matures on January 31, 2031. The $60 million swap took effect on January 2, 2024, and matures on January 2, 2031. The $40 million swap took effect on February 1, 2024, and matures on February 3, 2031. And each of these swaps the counter party has an optional early termination date in early 2025. As a result of the two new swaps that have gone into effect and other debt management activity, approximately 97% of our debt is currently fixed or economically hedged to fixed rates. I'll now turn it back over to Dan for closing comments. Dan?

Thanks, Susie. The outlook for our three core Texas Triangle markets remains highly robust. We are seeing continued high levels of migration from other parts of the country as these economies boom and corporate relocations continue to happen. These markets offer a low-cost, low-tax, pro-business environment, and they will continue to look attractive compared to higher-cost jurisdictions. I would also note that while the U.S. population increased by 1.7 million people in 2023, more than half of that growth was in just Texas and Florida. For residents, one key benefit of our markets is the cost of living. Annual rent as a percentage of [ median ] income averages less than 25% in our core markets compared to 35.3% in the country as a whole. We expect housing affordability and median income growth to become increasingly popular topics as we enter an election year in the U.S. Our markets relative affordability and job growth record should provide our investors with comfort that the REIT has positioned its investments to navigate most any economic or political environment. Of course, when you get a tremendous amount of population growth over a short period of time, it's going to inevitably drive new housing development. We saw the impact of this new development in the second half of 2023 as new apartment housing came on stream and impacted rental markets. But the pace of development slowed last year as interest rates increased and created higher debt service obligations for the developers. We anticipate that new apartment deliveries have peaked or will peak in early 2024. When we look ahead to the next few years, we see few, if any, significant deliveries coming on-stream. So we are gradually moving back into a position where rental rates could resume a strong growth trajectory. We fully expect that '25 and '26 will be stronger years as the new supply levels off and the strong underlying fundamentals of our rental markets reassert themselves. I would now like to review our guidance for 2024. We currently expect growth in the Same Community revenue of an NOI of 1% to 3% each. Growth in property operating expenses and real estate taxes of 1% to 3%. FFO per unit of $0.91 to $0.97 compared to $0.93 in '23 and AFFO per unit of $0.84 to $0.90 compared to $0.85 in 2023. So we continue to expect solid financial performance even in this more challenging near-term environment of elevated interest rates and rising supply. The guidance does not include any potential impact from acquisitions or dispositions. As we have noted before, cap rates have not adjusted in line with interest rates in our core markets, reflecting strong investor demand for the kind of high-quality, well-located properties we like to acquire. So we will be patient. We expect spreads between credit cost and cap rates will expand later in '24. Until such time, we will continue to be disciplined and carefully evaluate opportunities that enable us to grow cash flow per unit. In the meantime, we're pleased with our current position. We have an outstanding property portfolio and strong liquidity. We are generating solid financial performance, and that financial performance should improve significantly as the fundamentals underlying our markets inevitably drive stronger rent growth in the future. That concludes our prepared remarks this morning. Susie and I now will be pleased to answer your questions. We'd like to respect everyone's time and complete our call within 1 hour, while giving all of our analysts the opportunity to ask the question. With that in mind, please limit your initial questions to one and then rejoin the queue if you have additional items to discuss. If we don't have time to address all of your questions, we're happy to respond to additional questions by phone or e-mail afterwards. Sylvie, if you could please open the line.

Thank you, sir. [Operator Instructions] And your first question will be from Sairam Srinivas at Cormark Securities.

Thank you, operator. Good afternoon, everybody. Dan, just going back to your comment on apartment deliveries peaking in your markets, are there specific markets that you expect to recover faster than others?

Yes, Sairam, that's a good -- great question. We'll start from the beginning. I think supply, while less than originally anticipated last year was in excess of the absorption in each of our core Texas markets. Q4, the Q4 '23 probably marked the highest deliveries in history. Now with that said, overall supply, while it's still elevated, looks to be outpaced by absorption in each of our three Texas core markets. We think that it may take a quarter or two to absorb the existing deliveries, but we're fairly optimistic about what we're seeing in the back half of the year. The bright slot here continues to be Houston side, where we expect to see an earlier pickup in absorption characterized by lower deliveries in this cycle than historical norms compounded by continued elevated population growth. I think Dallas should follow Houston as both markets experienced peak deliveries sooner than Austin, where we see deliveries [ peaking ] between November of '23 through Q1 of '24. With all that said, CoStar continues to project net rent growth in Austin in '25. So I would say in that order, I would say, we saw peak deliveries in Dallas or Houston occur first. And in Houston's case, the asterisk to those peak deliveries is those peak deliveries were still below the historical -- the average delivery annually in Houston. And we saw those peaks first. The next peak we saw was Dallas. And Dallas continues to generally absorb what it produces in the market. And then we expect that Austin is kind of peaking between Thanksgiving and we'll call it, St. Patrick's Day. We think it's peaking between November and March of this year, and we would expect similar absorption figures, actually elevated absorption figures coming out of Austin towards the tail end of the year. It's just from a percentage standpoint, more percentage of Austin is exhibiting a higher percentage of population growth in the other two markets.

Awesome. That's great color. And I'll turn it back.

Next question will be from Kyle Stanley at Desjardins.

Just on your 2024 guidance, I think you've given a lot of color there. But just you likely can't comment on what your peers are expecting, but just on average, it does look like the main difference to your more favorable outlook versus there is on the OpEx side. Just wondering, is this based on portfolio geography, your portfolio geography versus theirs? Or is there something that you think your [ team ] is doing to allow more effective cost controls?

That's a huge complement. Thank you. Yes, I mean, it's hard to say, right? We feel like we're the most effective, but we've done a number of things to control cost and at the same time, spend a little more money on our operating expenses to improve revenue. So we don't think that, for instance, we've had all kinds of projects, smart home technology that's increasing our OpEx because there's subscription fee attached to it. We have a new credit builder subscription which allows us to generate more revenue through a fee with our residents to allow them to improve their credit scores. We're using a new application for our maintenance team which allows them to reduce the turnover time when we're [ preparing ] units for move-in. And this of course, allows us to increase revenue because we have our apartments ready faster for someone to move into. We've also -- we're also spending a little bit of money on leasing and after hours leasing services, which now allows us to have less misleads in order to rent apartments faster in a better rate. So I'm pleased that we're able to control our expenses, but at the same time allocate our money to places where we think we can make a better return as well.

Okay. Great. That's it for me. I'll turn it back. Thanks.

Next question will be from Brad Sturges from Raymond James.

Just to follow on Kyle's question on the guidance. Just given the commentary around supply, potentially peaking, I guess, maybe around the second quarter in some of the markets anyways. How would you break down the guidance between the first half and the second half? And generally speaking, does the guidance assume kind of more stable occupancies and margins?

Yes. Let's first talk about the fourth quarter where we had a record amount of deliveries in our markets and despite the fact that there was this record amount of deliveries, we were still able to keep our blended rate increase flat, basically. And I think the first quarter of 2024 is going to look the same. There's going to continue to be pressure into the second quarter and the third quarter on the leasing spreads and trends. Fourth quarter, we start to expect it to turn around. In the fourth quarter, we have less deliveries coming online and then that's going to continue to abate in 2025. So then I guess the natural question is how are we getting to our increase in revenue based on our guidance, if we're expecting more pressure on our revenue related to deliveries through the first half of the year, and that comes through the investments we've made in our properties in the second half of 2023 and what we're doing in the first half of 2024 related to smart home technology. Also it relates to us putting in extended yards and installing washers and dryers, which will allow us to continue to increase rents marginally.

Brad, Susie answered that question perfectly because she's a lot smarter than me and she knows the details more than I do. I think of it like a football reference. We started in 2023, spotting the other team 28 points in the supply and demand scenario and set up. And we ended the half, as depicted by our financials, tied. So started the game down by 28, ended at halftime tied. And our expectation is to take the lead probably in the second quarter and to continue to produce kind of a dominant compound return similar to what you've expected from us, driven by just natural absorption and natural economic numbers in the back half the year.

Yeah, that's great. I'll turn it back. Thanks.

Next question will be from [indiscernible] at PB.

Just a question from my end on the acquisition front. What are you seeing in the market today from sellers? And maybe how is [ that brand ] going to change from a couple of months ago in Q3?

Yes, it's a great question. What we continue to see is that cap rates are sitting right at, I'll say, 5.5% to 5 -- 4.75% to 5.5% for the kind of product that we own in our market dependent. And the cost of -- I would say the cost of debt is 5.5% or higher. So I think about cap rates as it's simple. That's just an unlevered return, right? And historically, the unlevered return that we buy is about 150 basis points above the 10-year U.S. Treasury. And it makes sense today that kind of the targets of, what are the 15 properties that we looked at in the last quarter, the [ $1.1 ] billion of aggregate value, the $79 million average purchase price. The targets we track in Q1, those sellers were demanding something like 100 to 150 basis points on top of the 10-year U.S. Treasury, and that makes sense for them. Some of those transactions were completed. We look at that environment as we live in about a 2-year period where we're sitting on an inverted curve. And that is to say that the short-term interest rates are 5.5%. And that's the Fed central bank rate. Now the borrowing costs short term might be 6.5%. Now if you choose to fix it over the long term, you might be looking at a 5% to 5.5% fixed rate. So at BSR, we're not in the business to finance somebody else's liability. And at BSR, we're not in the business to acquire a loss. We're in the business to acquire compound annual growth. And when it comes to single property acquisitions, we always like 100 to 175 basis points. We'll call it, 150 basis points on top of our cost of credit. So I think we haven't seen transactions pull out into that cost of credit spread that I just discussed in the first quarter. We hadn't seen them do it in 2023 either. We'll remain patient and disciplined stewards of our investors' capital, and we'll deploy when we see that occur. I think one more incidental note that you didn't ask it, but when I think of why are cap rates staying so low? And the answer is, I think it's apparent. We're in the middle of a shift in capital flows into real estate from the historical sectors of popularity into, in my view, multifamily or industrial and logistics. That's where the private capital is flowing into and there is a mountain of private capital, $200 billion, $800 billion, [ one trip ] we hear these words all the time. There's an absolute mountain. And so anytime a seller of a quality property decides to sell their asset in this environment, that mountain chases that asset. And it's going to put a lid on cap rate expansion of assets and well, I'll say, quality assets with quality residents and quality markets. And so in BSR's case, we've built an envious portfolio and an impenetrable capital stack by making great decisions to deploy capital when we can make a return. And by deciding not to acquire assets when we don't see the return happening. And we're happy to let someone else pick up that -- we'll say -- I'll say it this way. We're happy to let somebody else in this wall of capital decide to finance a seller's liability or decide to break even on a cap rate to credit cost. That's just not what we do.

Next question will be from Mike Markidis at the BMO.

Good afternoon to BSR. I just want to focus back on the question on OpEx. I guess, obviously, a great number of things that you're kind of investing in that increase the OpEx, but maybe just focusing on the 1% to 3% increase, like was there anything abnormal in 2023 that's coming off in 2024 that is helping you control the cost? Is it lower turnover that you're seeing? Just again, trying to get a better sense of what's keeping the number so low?

No. No. In fact, there's not anything abnormal in 2023. And in fact, some of the things I listed are going to increase our OpEx in 2024. However, I also mentioned we're expecting an increase in revenue based on those costs as well.

Okay, I get one question, so I'm going to stop.

Sorry, Mike. One other point there, too. The guidance also includes real estate taxes in that line. And so that might be what's throwing off the percentage wise in your...

Yes, and I'll jump in as well. And when I think about it, Mike, '23, I think the market in general saw a pretty incredible real estate tax increases. We were able to enjoy a relatively flat year, and we continue to expect a flat year next year. I think the other anomaly in '23 that you saw with expense increase was a massive increase in the cost to insure properties, specifically apartment businesses or apartment properties in the United States. I want to say the average insurance increase on a year-over-year basis in '23 was 37% for a multifamily operator. I mean to the extent you own properties in coastal regions or in flood plains, 37% was a pipe dream. You were looking at a double to triple on your rate cost increase. BSR wouldn't immune that. Last year, we -- I think our rates increased on insurance by about 33%, 32%. And I think what we're seeing in the insurance market this year is maybe a little bit of a leveling off and a little bit less of a tight market for insurance I'll say, owners of quality products and quality locations that operate their properties as well. And so there could be a little bit of flatness in those two big numbers that make up a ton of OpEx that were not there from a year-over-year basis last year that make up, I'd say, an outsized portion of your total OpEx, and that's probably driving the 1% to 3% down a little bit lower from other OpEx expenses to numbers.

Next question is from Matt Kornack of National Bank.

Just a follow-up to an earlier question on the acquisition outlook. I think in your prepared remarks, Dan, you mentioned that your anticipation is that spread will return. Is that predicated on your thought that cap rates move higher or in anticipation that interest rates ultimately move lower? And then can you speak to that in the context of capital allocation and your decision to buy back stock under the NCIB in Q4?

Yes, sure. To the extent you're asking me to talk about future interest rates. I'll give you the same answer I've given every year, which is if I knew where they were going, I'd be sitting underneath a shade tree right now drinking a corona. I simply don't. But what I can do is talk about three constructs, Matt. I mentioned earlier in the call about how -- what we buy in real estate, we call it a cap rate, right? What it really is, it's an unlevered return over a historic benchmark rate. And the unlevered return or the benchmark rate has historically been the 10-year U.S. Treasury. And the unlevered spread has been about 150 basis points, right? And now let's look at where we are today before I get into share repurchases. I think we think of it, I would say, in three scenarios. If the 10-year increases, then we anticipate we will be able to obtain more accretive acquisitions, and we might deploy capital into acquisitions. If the curve -- if the interest rate curve maintains its existing inversion, which has been the case for the last 2 years, you have a dysfunctional market, and I don't think it's likely that we will grow with -- that we will acquire external growth through acquisitions. And if the curve normalizes, where it costs less to borrow for a month than it does to borrow for 10 years, then I think you'll see us play more offense and acquire more assets. So I think of it in this way, there's three examples. If the 10-year increases, if the curve maintains its existing inversion. And then number three, if the curve normalizes. Those are three examples. And example one and three, I think you can see us play offense and acquire whether cap rates expand or contract, we will be able to finance and acquire under those metrics that we've always discussed, which is about a 1.5% spread over our cost of credit for stabilized. It's about a 2% spread over our cost of credit for a lease-up and it's about a 2.5-plus-percent cost are spread over our cost of credit for a development property. So in two of those three setups in the future, you see us play offense in the existing setup, in the second setup, where the curve maintains its existing inversion. Now that's just an abnormal environment. And if that exists, I think that you can continue to see us deploy capital into share repurchases or the like, where, as I've said in the past, we're buying a seven cap. I mean we cannot find that kind of a spread anywhere in the market. If we did, we would buy acquisitions. So I call that defensive. So in two of the three setups in the future, we can play offense and we can play it well. In one of the three, we can play defense, and I think we showed you in the fourth quarter, as well as 2022 and '23 that we are willing and able to perform defense effectively in a market that exists like the one that's existed in the last 2 years. Now we did bought 3.1 million shares back in Q4. I think you'll continue to see if that setup continues to exist that management and the Board are prepared to continue to preserve and defend the value of our investors' investments in these properties.

Our next question will be from Dean Wilkinson at CIBC.

Good afternoon, everyone. Dan, I'm going to cheat a little with a flea flicker. On the new supply, how does the construction cost of that stuff that's coming into the market compare to, say, your, call it, $200,000 [ a door ] And the flicker part, how do the rents on that new stuff compare to your 1,500 or so a month there? I'm just trying to get a gauge of the economics of new development and if it's sort of getting [ strained ] here?

Oh, man, that's like a flea flicker to a wide open receiver gain. I think with our NAV sitting at $17. Our NAV sits at about 205 a door. I don't have -- I can't do the numbers in my head, but we're probably at $11 to $12, we're probably traded at $140 a door. I think if you're building anything in Dallas and Austin right now, you're paying 30% more on a per unit basis just to construct and carry the debt internally. So call that $260,000 a suite. That's the simple cost to construct. I mean, as we're building a property right now, we pay close attention to the cost of construction. I don't think the problem is the cost of construction. I think it's the market's view of the public market, in particular's view of the value of Sunbelt assets. So yes, the cost to construct is 30% higher than our NAV new product. And then number two, I think that the rent spread on new construction against our average effective rent is probably sitting at about a 25% to 30% number gross, knowing that those new construction developers are going to concess probably 8% to 15% off the rent. So net-net, let's say it's about 20% to 25% higher than our $1,500 a month.

Okay. So they're flowing in a little more strain than, say, the stuff that's in place, that makes sense.

Oh, my goodness. It's a tough spot. It's a perfect spot for BSR and the type of product we own to compete in. It does create diminished economics for the developer. Really, the developer right now Dean, take interest out of the equation, interest is a toxic pill and what's prohibiting from turning into deliveries in '25 and '26. It's a fantastic setup for the existing owner of stabilized properties in these markets. But if you're a developer right now, if Dean and Dan are trying to put together a development deal in these markets, and we're looking at $260,000 a suite to build. We're looking at rent numbers upon stabilization of about $2,200 to $2,300 a month. Even those numbers on a traditional spread generating NOI, you're going to have a tough time paying 8.5% carry interest rate on your construction debt. And so I mean, it makes sense that you're just not seeing any development or deliveries in our market, even though you're seeing robust population growth.

Perfect. That was my one, two parter.

Next question will be from Himanshu Gupta at Scotiabank.

So on interest expenses, what is the quarterly run rate we should assume for the interest expenses? And I know you did a bunch of swaps that comes effective this year. I'm not sure if we should assume some costs related to these swaps as well. I mean you're getting these low 3% fixed rates in this environment. So I just want to have some color on that?

Yes. Himanshu, that's a good question. I think the effective run rate for interest in BSR right now, given the swaps is about 3.8% for the year. I think existing is probably sitting at about 3.7%. So as I mentioned in my comments, the team has done a fantastic job of managing risk in an elevated interest rate environment and our investors have enjoyed the benefit of that risk.

Okay. Awesome. No, I think that helps and I'll turn it back.

[Operator Instructions] And your next question will be from Ananthan Vijayakumar at RBC.

Hey, everyone. Just quick question on the [ Aura ] development. When do you expect that to reach stabilized occupancy? And what do you think the development yield would be?

That's a good question. So the Aura development to remind our investors it is 253 suite Phase 2 development that we announced in August of, I want to say, '22. It takes -- as we said, it takes about 18 to 22 months to build a product. We expect that project to begin leasing up in May of this year. We -- I think we announced that it cost our investors about $60 million to construct the project. We announced last year that we hedged to that cost with a swap at an effective all-in interest rate of 4% last year, which swap takes effect in October of this year. We probably won't bring it on board until the end of the year, online to the -- well, let me say that differently. We probably won't expect lease-up stabilization in Q4 of '24. But what we will expect is I'd say anywhere between 6 to 14-month lease-up stabilization plan. And I think in 2026, the shareholders and the unitholders will be able to experience the full benefit of the stabilized return. I think that in the fourth quarter of '25, you'll start to really see what that stabilized return looks like. We've announced in the past that we're developing to a 6.5% yield. So that turns into, I would call it, about $3.5 million to $4 million of NOI. And again, we've fixed our debt service on that 60 or about 4%, so call it, 2.4%. As a result, with -- after deducting the share repurchases in Q4, we see stabilized benefit of the -- I'll call it, embedded value at this point of, call it $0.02 to $0.04 a share as a result of that development.

Perfect. Thank you. We'll turn it back.

Next question is from Sairam Srinivas at Cormark Securities.

Dan, just a clarification on your point of 20% to 25% rent spread to new development. Is that 25% after taking out the concessions on current market rent or pre-concession?

Yes, that's a good question. I'll call it net of concessions. So I think the gross asking rent probably sits between 20% and 35% higher than our current effective and then [concessed ] that gross asking, you had -- I'd say 25% is a fair number for new leasing spreads on new construction above our effective rent currently.

That's awesome. And probably just a quick follow-up on this one. Given in Houston last year, we're kind of [chatting ] about these concessions. And if you kind of look at historical spreads, we saw a bit of weakening towards Q4 of '22, and then it's been weak since. The question is, are you actually seeing some of these concessions roll off now when you see your competitors in the market? Or are they kind of just kind of doubling down on these concessions?

Yes, that's a good question. Yes. So are we seeing some of those initial Q4 '22 concessions roll off? Well, the first thing I would say is we don't have anything that we developed and delivered in Q4 of '22. So we're not seeing it inside our portfolio, right? Because we use a stabilized owners model of establishing revenue that doesn't use concessions whatsoever. So in other words, when our investors are seeing our average effective rent, we don't use concessions. That's the rent -- that's the cash rent that our residents are paying each month on average for their units. Are we seeing some of those Q4 '22 concessions on new deliveries roll off in our markets? Yes, the answer is yes. And you can see how that looks a little bit inside of our Q4 numbers where we saw renewals increase about 4.1%. So how a developer's financial who concessed in Q4 of '22, what they would be looking at right now is those concessions would burn off and they would see probably an effective revenue number climb similar to ours on any renewals that they have in the market.

That's really good color. Thanks, Dan. I'll turn it back.

And at this time, Mr. Oberste we have no other questions registered, sir. Please proceed.

Thanks, Sylvie. That concludes our call today, and thank you all for joining us. We really appreciate you so much. We look forward to speaking with you again after we report our 2024 first quarter results this spring. Thank you all.

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