BSR Real Estate Investment Trust

Thank you, Ludy, 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, 2024.

I'm joined on the call by Susie Rosenbaum, the REIT COO and Interim Chief Financial Officer. Susie has been doing double duty for a while now, so I'm very pleased to report the appointment of Tom Cirbus as the REITs new Chief Financial Officer effective next week.

Tom joins us after 10 years at Wells Fargo where he most recently served as an Executive Director in real estate, gaming, lodging and leisure investment banking, and also worked in equity capital markets. Prior to his time at Wells Fargo, he worked at KPMG Corporate Finance as an investment banking analyst in healthcare and technology mergers and acquisitions.

We welcome Tom and his family to our BSR team and look forward to working with him as we enter another exciting chapter of BSR's growth and evolution. I'll begin the call with an overview of our Q4 performance and highlights.

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 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 5, 2025 for more information. During the call, we will reference certain non-IFRS financial measures.

Although, we believe these measures provide useful supplemental information about our financial performance. They're not recognized measures and do not have standardized meeting 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. The fourth quarter featured challenging market dynamics that were consistent with the latter stages of the absorption of an unprecedented supply of new multifamily housing.

Given this external environment, our financial and operating performance was in line with our expectations. While lease rates were down as expected, we maintained strong occupancy of 95.6% and retired another $4.5 million of long-term debt bringing the total amount retired in '24 to $8.8 million.

For the quarter, same community revenue was essentially flat compared to Q4 last year. Same community NOI decreased 2.6% which was almost entirely attributable to an increase in property tax due to timing and treatment of tax refunds received during the back half of last year.

And FFO and AFFO each declined by $0.02 per unit reflecting this tax issue as well as the timing of the recognition of health insurance expenses. Given the external operating environment in Q4 that I described, these results were gratifying and attributable to the resilient BSR platform and the strong performance of our team.

In addition, our results for the full year were in line with the guidance that we provided in November with FFO and AFFO per unit right in the midpoint of their guidance ranges. Looking at the latest national supply numbers underlines the challenging conditions that were emerging from and the opportunities ahead.

After two years in which new starts substantially outnumbered completions, the number of completions over the last 12 months has outnumbered starts by 262,000. As we get closer and closer to the full absorption of the 2022 and 2023 starts, conditions for rental increases are excellent.

And according to national data from Colliers, Austin, Dallas, and Houston are ranked first, second, and fourth respectively in forecast declines and new apartment completions in '25 versus '24. At the same time, while new supply is drying up in our core Texas rental markets, robust economic growth and continued population migration in these MSAs continues unabated.

So, as we come off the bottom of the new supply cycle in these markets, it's going to be an excellent time to be in acquisition mode. And as I indicated in our call last week, the pending sale of nine stabilized properties to AvalonBay positions us to potentially complete approximately $200 million in acquisitions while still maintaining a debt to gross book value ratio of about 45%.

That represents a lot of potential AFFO when the new assets are stabilized. I'm not going to dwell on these property sales today as we discussed them in detail just last week.

I'll simply note that we believe the transaction will be highly beneficial for unit holders and position us to create a very significant value moving forward. If investors have any questions about them that we haven't addressed, I encourage you to reach out to our team.

In December of 2024, construction was completed on Aura 35Fifty, our new 238-unit apartment community in the Austin MSA. Despite the challenges in the Austin market, lease-up is proceeding well, and we expect the property to be stabilized and contributing to AFFO by early '26.

And for the third year in a row, BSR was named one of the Best Places to Work in multifamily and Best Places to Work in multifamily for women at a multifamily innovation awards held in December of 2024. We're proud of this achievement and recognize that a great workplace is fundamental to generating great results.

In January, subsequent to the end of the quarter, we acquired the venue at Craig Ranch Apartments in McKinney, one of Dallas Fort Worth's rapidly growing submarkets. It's a Class A property with 277 apartment units, and we see opportunities to enhance operating income from it.

The purchase price was $61 million. As you know, this was our first notable acquisition in a long time, and it is evident that the market for transactions on high quality properties in the Texas Triangle markets is ripening.

Finally, we have continued to strengthen our balance sheet. During Q4, we took further action to mitigate interest costs through a $42 million interest rate swap and also extended $160 million of mortgage notes, and as I highlighted, we retired an additional $4.5 million in Q4 2024 with cash flow generated from operations.

I will now invite Susie to review our fourth quarter financial results in more details. Susie?

Thanks, Dan. Same community revenue decreased marginally in Q4 2024 to $42 million compared to $42.1 million in Q4 last year.

The decline was primarily due to a decrease in the average rent per unit from $1,503 last year to $1,488 in Q4 2024 partially offset by a $0.2 million increase in other property income related to resident credit building services and utility reimbursements. Same community NOI decreased 2.6% to $21.9 million compared to $22.5 million in Q4 2023.

This was primarily attributable to an increase in property tax expenses of $0.5 million due to higher refunds received in the same period last year as well as slightly lower revenue. FFO in Q4 was $11.9 million or $0.22 per unit compared to $13.3 million or $0.24 per unit last year.

The decrease reflected lower NOI and an increase of $0.5 million in G&A expenses due to the timing of recognition of health insurance expense and a $0.1 million increase in finance costs. On a per unit basis, FFO benefited from the repurchase and cancellation of approximately 3.5 million REIT units in 2023 under our NCIB program.

FFO in Q4 was $10.9 million or $0.20 per unit compared to $12.4 million or $0.22 per unit last year. The decrease reflected the lower FFO and a $0.1 million increase in maintenance capital expenditures.

AFFO per unit benefited from the buyback of units I referenced a moment ago. The REIT declared quarterly cash distribution of $0.14 per unit in Q4 compared with $0.13 last year representing an AFFO payout ratio of 68.9% in Q4 2024 and 58.3% in Q4 2023.

All distributions were classified as a return of capital. I'll now review our results for the 12 months ended December 31, 2024.

Same-community revenue increased 0.4% in 2024 to $168.5 million compared to $167.8 million in 2023. The slight increase was primarily due to an increase of $0.6 million and other property income related to resident, credit, building services and utility reimbursements.

Bank community NOI increased 1.3% to $92.3 million from $91.1 million last year. This was attributable to the higher revenue as well as a decrease in real estate tax expense of $0.7 million due to higher refunds and a $0.1 million reduction in property insurance expenses.

These factors were partially offset by higher running expenses of $0.4 million associated with the cost of new services to generate additional income. These include items such as Smart Home technology and the resident credit building programs.

FFO in 2024 was $51.7 million or $0.96 per unit compared to $52.6 million or $0.93 per unit last year. The dollar value reduction compared to 2023 was primarily due to a $2 million increase in finance costs, partially offset by higher NOI, the increased finance costs reflect a higher average interest rate and an increase in total loans and borrowings due to draws in 2023 to fund the REIT's unit buyback.

These repurchases resulted in a higher FFO per unit in 2024. AFFO in 2024 was $47.6 million or $0.88 per unit compared to $48.4 million or $0.85 per unit last year.

The dollar value decrease reflected the lower FFO partially offset by a $0.2 million decrease in maintenance capital expenditures. AFFO per unit increased year-over-year due to our unit buybacks.

The REIT declared quarterly cash distributions of $0.537 per unit in 2024 compared with $0.52 last year, representing an AFFO payout ratio of 60.3% in 2024 and 60.7% in 2023. All distributions were classified as a return of capital.

Turning to our balance sheet. The REIT's debt to gross book value as of December 31, 2024, was 46.5%.

Total liquidity was $136 million, including cash and cash equivalents of $8.7 million and $127.2 million available under 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 $496 million, excluding the revolving credit facility, with a weighted average contractual interest rate of 3.5% and a weighted average term to maturity of 3.7 years. In aggregate, the mortgage mix payable and revolving credit facility totaled $787.5 million at year-end with a weighted average contractual interest rate of 3.8%, excluding the convertible debentures that were then outstanding and 100% of our debt was fixed or economically hedged to fixed rates.

As Dan highlighted, during the fourth quarter, on November 1, we entered into a new interest rate swap of $42 million at a fixed interest rate of 3.13% effective February 2, 2025 and maturing on February 1, 2030, subject to the counterparty's optional early termination date of February 2, 2026. These swaps have been a very useful tool to help us mitigate interest rate risk.

Back in September, we extended $160 million of mortgage notes by 1 year to September 13, 2025 with no other contractual changes. In December, we further extended these notes to December 11, 2026, with no related contractual changes.

As of December 31, our availability under the credit facility is sufficient to refinance the $48 million of mortgage debt maturing over the next 12 months. We are also considering other options, including new mortgages.

Subsequent to year-end, in early January, we redeemed all issued and outstanding convertible debentures in the aggregate principal amount of $41.5 million plus accrued and unpaid interest of $0.5 million. This will result in interest savings for the REIT.

We funded the redemption withdrawals from the credit facility. Overall, as Dan highlighted, we retired $4.5 million in debt in the fourth quarter and $8.8 million in the full year with cash flow generated from operations.

We will continue to carefully manage our debt with a focus on maximizing our flexibility. I will now turn it back over to Dan for closing comments.

Dan?

Thanks, Susie. I can't tell you enough how proud I am of the job our team did in 2024.

Despite the temporary pressure on rents from the surge of new supply, we maintained our track record of solid financial performance. In fact, when we apply this platform, our people and capital allocation, track record and most importantly, our culture to this sector, good things happen.

Our operating performance throughout 2024 was another example of this. We knew supply would be a temporary challenge in our Texas Triangle markets.

But looking ahead, the outlook is much stronger. The rapid absorption of supply should create constraints by later this year, and I can't overstate how few new apartment buildings are on the horizon.

In 2024, apartment starts in Dallas were at the lowest level since 2014. In Austin, they were the lowest since 2013.

And in Houston, they were the lowest since 2010. As I noted last quarter, we expect deliveries to decline by more than 40% through 2026.

Meanwhile, migration into our core Texas markets continues at a very strong pace. In 2024, Texas led all states and net domestic migration and was among the highest in net international migration as its population surpassed 31 million people.

With its booming economy, affordable housing and low tax regime, Texas will continue to be highly attractive to people and corporations eager to exit higher tax areas. As new apartment deliveries in our core markets wind down and the supply is fully absorbed, we resume robust organic growth.

After completing the sale of non-properties to AvalonBay, we will have very substantial dry powder for property acquisitions. You all know how slow it was on the M&A front once interest rates started rising in early 2022.

We are finally seeing plentiful opportunities to add high-quality assets to our portfolio on an attractive basis, on an accretive basis. And once we have them, we can put our proven BSR management platform to work and really drive enhanced growth.

Finally, I just want to note that we have not provided financial guidance for 2025. We really wish that we could.

However, there's simply too much short-term variability as we work to complete the property sales to AvalonBay and then redeploy the proceeds into other assets. We will look to provide guidance once the dust settles a bit and we have more certainty regarding our results.

That concludes our prepared remarks this morning. Susie and I would now be pleased to answer your questions.

We'd like to respect everyone's time and complete our call within an hour while giving all of our analysts the opportunity to ask a question. So 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 everything, we can respond to additional questions by phone or e-mail afterwards. Ludy, please open the line.

It looks like in the fourth quarter, there was a definitive focus on occupancy. I'm just curious, has that continued so far in the first quarter?

I mean, would you be able to disclose maybe where we sit today versus the 95.6% occupancy level at year-end?

Sure, Kyle. I think that there's a little bit of a seasonality component to the Q4 that we're seeing.

So Q4 has historically been the lowest kind of leasing months in U.S. apartment leasing.

May through August generally tend to be high velocity months? So what we were thinking about and what we talked about in November was an operator with a superior portfolio of properties can better set up occupancy in November and December, better create rate in November and December through occupancy.

And that sets us up nicely to attack rate in May regardless of where the organic market sits. So I think that I'm proud of our team and their ability to increase occupancy in a supply heavy environment.

That's pretty amazing. And I do think that, that positions us to take advantage of the high leasing months in May through August with -- I'll say attacking from a position of strength.

Just looking back at the transaction that was announced last week, how are the assets picked for that?

Jonathan, that's a good question. So there was a process that was conducted.

We reviewed several assets before both parties are identified the portfolio that was announced. The REIT intends to file a material change report on the transaction as early as tomorrow, Friday afternoon.

And I would think that a more detailed description of the process conducted by the special committee and the Board here would be disseminated in that MCR. So one thought here is let's review the MCR.

It's going to be incredibly accurate in detail. And then we're happy to entertain any questions following the review of the MCR.

Okay. Fair enough.

And then just to follow up on that. You obviously have some cash to deploy.

How should we think about going in cap rates for the roughly $200 million that you need to do in the next little bit?

Yes. I think it's a fair range is 5 to 6 going in.

And our -- the one thing that hasn't changed about the way we acquire assets as we talked about it before, we like to drive NOI years 1 to 3. We did it in a value-add market when we went public, and we did it with new lease-up construction between '19 and '21.

We like to see that 75 basis point look back cap rate on year 3, regardless of what going in cap rate we buy. And I think going in cap rates right now look to be 5 to 6 for the kind of product that we want to see, probably airing closer to 5.

I do want to note here that an economic cap rate for an internal manager looks a little bit different. So if I'm quoting a 5.25 cap for an acquisition, I want to remind everybody that we have an internal manager.

So we do not have to pay a management fee to anyone other than our shareholders in order to operate our properties. That generally creates a competitive advantage for us in the marketplace.

And if the REIT through cap is 5.25, our shareholders might enjoy a 5.40 on account of us not having to pay anybody to manage the asset.

Just to, I guess, follow on to Kyle's questioning just on the leasing side of things. Given what you experienced in Q4 and prioritizing occupancy be in the best position for the spring and summer.

Just how should we think about your leasing rent spreads would Q1 be more similar to Q4? And then where do you think the spreads can recover to into the stronger spring and summer leasing season?

Yes. Brad, so you're right.

Q4 -- well, Q1 right now is looking very similar to Q4. And as Dan just spoke about, we've chosen to push occupancy in Q4 to set ourselves up to take advantage of the leasing season coming forward.

Now with that being said, things are still going to be tough. We still have a lot of supply to absorb not as much new not coming online now, but you still have to absorb what is there.

And so that's still going to continue into the second quarter and even into the third. I'm not expecting the rates to start going up of any significance probably to the latter half of the year, maybe starting in October.

I'm speaking about all transaction primarily day.

And that -- like how we should compare -- versus new leasing spreads in that manner, would you see a quicker recovery on either -- on renewal versus the new leasing spreads?

Right. So obviously, right now, our mark-to-market is flat, which is good because it was slightly negative last quarter.

And that -- yes, that point tipping is getting better though, of course, we'd love to see it roll positive again. Again, I don't think that's going to be -- I don't think that's going to happen until around Q4 of this year.

Thank you, and good afternoon. So based on the commentary so far on fundamentals, do you think 2025 full year is likely to look very similar to 2024?

And we should expect kind of recovery in 2026?

Are you talking specifically to net operating income, Himanshu?

Dan, I'm talking about the rental spread. If you look at the same-store revenue growth was almost flat this year, 2024.

And how should we think about that in 2025?

Yes. Again, we're still absorbing a lot of the supply.

And so it's still going to look pretty flat throughout most of the year. However, when we get to the back half of the year, that's when I expect it to start to turn, where we'll start seeing blended positive spreads again for the portfolio in 2026.

And Himanshu, I think another critical factor to our deliberate decision to focus our investments in Dallas, Austin and Houston, are the stats that those three cities put up last year. When you think about supply, you also have to think about demand in the equation.

Dallas, Houston and Austin in that order led the nation in absorption last year. Right?

I think Dallas and Houston were the only two cities last year, here afford to grow by more than 100,000 people. I think it's our view this year, as Susie mentioned, that the apartment that was delivered in September of last year as part of that massive supply wave, that apartment complex might be 40% occupied.

It's still going to need to be leased up and that's going to create a little bit of slack in the rate market. Ultimately, the -- I would say the injured party in this supply wave is the B, the B minus and the C owner, the value-add owner.

The operator that has the superior product generally takes it on the chin early in a lease-up cycle similar to what you saw from, I'll say, the 2024 numbers, our look forward is somewhat insulated by the fact that we are in the three highest absorbing markets in the country right now. So even though supply was an issue in '24, I think that headline starts to go away on a look forward as we move further into the year.

And the issue kind of reverts, Himanshu, it becomes one of an undersupplied market and I got to tell you, our investors should be happy that our three largest markets are the largest markets for net absorption in an undersupplied market. So we like what we look on what looks to be a good short, medium and long-term run for the Texas Triangle.

Dan, just going back to your comment on recovery expected towards the back end of the year. Are you seeing that reflected as well in asset pricing?

And secondly, do you see a bit of a cap rate differential between some of the repositioning assets versus more class and you’re add something similar to what you saw in 2019, 2020?

A gap between the repositioned assets that we bought in '19 and '20, is that what you said, Sai?

No. Basically, if you remember like back in '19, '20 when BSR made the effort to actually get into Class A, you did see a differential in cap rates, right, between older assets and newer ones.

Do you see something similar happening right now?

Yes, we do. I'll tell you what we're not seeing is compression of value-add cap rates on the street.

That is a phenomenon that we saw in 2019. We saw what we thought was an irrational compression of the value-add assets in '19.

And we obviously sold value-add portfolio into that market. We were fortunate that at the same time, we saw an irrational expansion of cap rates in new construction lease-up that ended up being a very good investment decision for our investors that the platform made as is evidenced in '19 to '21.

What we're seeing now is probably a little bit less of an appetite for the value-add or the older asset. And that makes a lot of sense, driven by no liquidity in the marketplace.

And if it's available, high interest rates. So a high interest rate, low liquidity market does not necessarily favor a value-add underwriting regardless of whether that property is a good investment or not.

So we're not seeing that phenomenon take place right now, but what we are seeing is probably a little bit of a fair market discount for a really good asset that's owned by a developer that's not an experienced manager. So we do see an opportunity to pick up assets at less than their construction value or their below replacement costs for new, let's say, '22, '23 all the way up to the end of Q4 '23 constructed assets.

We see there's a bit more of a willingness of a developer to let go of an asset that may be 60% to 80% occupied to really hand it off to a permanent apartment manager like BSR who is skilled at the lease-up and the stabilization that last quarter, that last 1/3 of the occupancy to stabilization that's needed to create a product. So we're seeing that phenomenon exist much like we saw in '19 to '21 on the buy side.

What we're not seeing is a compression of cap rates on the value add. It's quite the alternative or quite the opposite.

Just wanted to get your sense on expense growth, given your commentary on the revenue side, obviously, I think there's more inflation creeping into the system. And then maybe also just on demand growth.

I think the expectation was hopefully for a more business-friendly administration or thing the less business-friendly stuff upfront, but are you seeing any impact on demand as a result of that?

Matt, I'll take the first part of the question regarding operating expenses. And so for everything except for real estate taxes, I think that's pretty much in check.

And I'm thinking anywhere between 2% to 3% growth next year. Now real estate taxes are a different story.

I'm looking at more like 6% growth in real estate taxes, primarily related to the fact that we got a lot of refunds, frankly, in 2024 that won't replicate themselves again in 2025.

Yes. And Matt, as it relates to new administration, old administration handoff, I'm assuming you mean the recent presidential election.

And I think it's our view that both administrations saw -- they see a need for housing in the United States. They're not looking at the fourth quarter of '24, the third quarter of '25.

What both administrations we're looking at are the massive undersupply of housing in the United States, particularly in fast-growing markets that will exist in '25, '26, '27, '28, '29, I can go on and on. What neither administration can do is to control the 10-year treasury to control the borrowing costs that a private developer has to pay to build a new project.

And what we're seeing shape out is an increase to building costs so where we might see certain municipalities be more favorable towards zoning and acceleration of permitting for development of build to rent or multifamily or any other high-density or low-density housing product, that's nice, and that's a great sweet dress here by the municipality, but it's simply not going to overcome an elevated interest rate yield and a massive increase to the uncertainty now related to the hard building cost to construct the project. Both of those issues are going to create, I think, headwinds would be a nice way to say it.

I think a hurricane of headwinds on new housing starts in the United States is probably the more appropriate way to say that.

Dan, I don't know if you can get this granular, but on the leasing, was there a marked difference between the portfolio that is proposed to go to AvalonBay versus what you're keeping kind of just going to the sort of the new lease renewal spread the minus 8.3 number?

Yes, that's a good question, Dean. So it is a granular question.

We can go as deep into the weeds as you want to. But I don't think I'm prepared today to parse out any impact of potential future dispositions on the AvalonBay transaction.

I would say that the AvalonBay transaction represents a cross-section of our portfolio, and we try our very best to be very fulsome and detail with our disclosures in our MD&A. And I think at this time, we don't expect any impact to our expectations of performance in Dallas, Houston or Austin as a result of any inflow or outflow of any acquisitions or dispositions.

All that to say, we're very happy about the announcement last week. We think it validates the value of a cross section of our portfolio.

And we -- I, for one, love repatriating capital into the REIT and putting it in the hands of my partners in Susie and our team to deploy that capital and earn cash flow per unit for our investors.

Yes. The markets are the markets and even selling certain assets in those markets don't change the nature of the assets we still have there because our portfolio is pretty homogenous.

But with that being said, we do have some great ideas for ways to increase organic rent growth while we're in this the sort of flat period, and we started rolling out bulk Internet. Dan, do you want to talk about that a bit?

Yes, happy to talk about bulk Internet. So I think the fun thing about, Dean, as you know, and you all follow this for a while, the BSR platform, pre and post public has been owned and operated just about every piece of real estate under the sun.

We deliberately picked this portfolio. And what we like about newer construction, suburban Class A path to growth is that they're less capital intensive.

And that is to say we don't necessarily have to take 3,000 suites in this apartment business down every year to generate organic revenue increases in line with our peers. It's a very transparent balance sheet.

But what we can do is take advantage of increased resident demand for certain items. Susie referenced the bulk Internet initiative that we're doing in our company.

It's simply thinking of Internet as a utility in the United States and the fact that our residents, all of them want Internet, taking advantage of the scale of a platform to negotiate lower bulk Internet rates and then passing on some of those savings to our customers, and then passing on some of that profit to our investors. That is an initiative that it doesn't cost any money or relatively any money for any apartment owner but what Class A can take advantage of is driving really to us 100% margin-driven revenue growth by rolling these initiatives out to our brand-new properties to our entire portfolio, we think there's going to be an impact, a positive impact to our revenue -- again, 100% straight down to the margin on NOI in 2025, and we expect the full impact to be a 2 to 3 to 4 magnitude of the '25 impact, and that should roll in '26 as well.

And I want to reiterate, we don't have to take any units down for 3 months. We don't have to non-recur CapEx to do this.

We just have to apply this concept to our portfolio. Susie and the teams originated this idea and bank tanks with some of our other colleagues in the United States and our partners last year, and we look forward to rolling that out this year and seeing the benefit this year and next year in our NOI margins and our cash flow for our investors.

Thank you once again. So just for dry powder.

I think $190 million of cash available. Just clarifying, is that equity component?

So technically, you can buy $340 million to $350 million of acquisitions, layer some debt as well.

Yes. That's one way to think about it, Himanshu.

I think the way we're currently thinking about it is we're going to use proceeds from a disposition to retire debt. And then we're going to use debt to lever up to acquire assets.

I got to tell you, I wish that we had equity availability, but it doesn't look -- I mean given the print of last week and we're still miles away from, I think, really making a risk-based decision to lever the portfolio over and above the single-digit debt-to-EBITDA that Susie and I like, and the mid-40s on leverage. So if you infer from that answer, a dry powder number, we have plenty of dry powder to buy 2 or 3 $100 million, $350 million worth of assets.

I think our intentions right now are not to catch falling knife and to make measured acquisitions in our markets of between $155 million and $200 million between now and, let's say, the end of May. And after those are completed, we'll have another opportunity to speak to you and the investors to talk about any additional acquisition or disposition plans.

That concludes our call today. Thank you all for joining us.

We look forward to speaking with you again in the spring following the release of our first quarter results. Goodbye.