BSR Real Estate Investment Trust (OTCPK:BSRTF) Q2 2022 Earnings Conference Call August 10, 2022 11:00 AM ET
Company Participants
Daniel Oberste – President & CEO
Susan Koehn – CFO
Blake Brazeal – Co-President & COO
Conference Call Participants
Kyle Stanley – Desjardins
Sairam Srinivas – Cormark Securities
Jenny Ma – BMO Capital Markets
Brad Sturges – Raymond James
Himanshu Gupta – Scotiabank
Jimmy Chen – RBC Capital Markets
Matt Kornack – National Bank Financials
David Chrystal – Echelon Capital Markets
Chris Koutsikaloudis – Canaccord
Operator
Good morning. My name is Jovana, 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. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. [Operator Instructions]
Thank you. Mr. Oberste, you may begin your conference.
Daniel Oberste
Thanks, Jovana, 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. Susan 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 in 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 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.
Our financial performance in recent quarters has been outstanding and I am pleased to say that this trend continued in Q2. We again (ph) generated very strong growth across all of our key financial measures. Same community revenue increased 11.5% compared to the second quarter of 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 a 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 and our communities. Weighted average rent for our portfolio as of June 30 was $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 three 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 II of Aura 36Hundred in the Austin, Texas MSA with a projected total cost of $60 million. The development will be funded with contributions of $21 million and $39 million construction loan guaranteed by our development partner.
Finally, I’m proud to note that BSR was recently named one of the best places to work in Arkansas by Arkansas Business and the Best Companies Group. This was the sixth consecutive year that we’ve received this honor. I believe that it is a testament to the strong corporate culture we have developed in 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 two and half years.
I’ll now invite Susie to review our second quarter financial results in more detail. Susie?
Susan Koehn
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 $1,161 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 organic Same Community rental growth as well as contributions from property acquisitions and non-stabilized 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, non-stabilized refers to properties that we’re 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 about $1.8 million while property acquisitions and non-stabilized property 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 cost. AFFO increased 33.4% to $10.5 million in Q2 2022 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 an Escrowed rent guaranty 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 as of Q1 2022, driven by higher NOI. Net income and comprehensive income of Q2 2022 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 adjustments to derivatives and other financial liabilities of $178 million, primarily related to the reduction in a lot — in the liability reported for Class B units, 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 $0.125 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 about 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’s debt was fixed or economically hedged to fixed rate. We also had $41.8 million of convertible debentures outstanding at a contractual interest rate of 5% maturing on September 30, 2025, with the conversion price of $14.40 per unit. It’s important to note that in July 2022, subsequent to the end of the second quarter, we entered into three interest rate swaps to hedge an additional $280 million of variable rate debt.
The first two swaps of $150 million and $65 million at fixed rates 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 matured on July 27, 2029. Once these swaps come in 100% of the REIT’s debt will be fixed or economically hedged to fixed rate 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 2026 — 2022, driven by a decline in capitalization rates and higher NOI.
I will now turn it back over to Dan for some closing comments.
Daniel Oberste
Thanks, Susie. Our business continues to display momentum. Our focus on high quality properties in the booming 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 2023. 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 will continue 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.
A notable example is such opportunity is the Phase II 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 unit holders 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.
Question-and-Answer Session
Operator
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. [Operator Instructions] First question comes from Kyle Stanley at Desjardins. Please go ahead.
Kyle Stanley
Thanks. Good morning, everyone.
Susan Koehn
Hey. Good morning.
Kyle Stanley
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?
Daniel Oberste
Sure. Kyle, this is Dan, and good morning. I will try my best here. So what we did was acquired 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 ripe and ready to be bought.
Kyle Stanley
Okay. Makes sense. I wasn’t sure if it was a 50/50 JV or — and so that’s very helpful. Could you speak to the thoughts on the projected yield on that $21 million contribution you mentioned?
Daniel Oberste
Yeah. Sure. And I’ll back up a bit. We’ve always said that, that we like stabilized acquisition yields. It’s somewhere between 100 basis points, 150 basis points north of where we see fixed debt in the market. And then we like development sitting at 100 basis points 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 in the last quarter, or NAV cap rate of about 3.9%. Where we’re seeing the opportunity here is on that 2024 development that we anticipate to begin leasing in 2024. We like that outside of development yield to still sit at, call it, 300 basis points on top of our underweighted average cost of debt.
Kyle Stanley
Okay. Thanks. And maybe just one last one with regards to the development agreements. How did this first deal come to be? I mean, given that it’s [indiscernible] you’ve worked with the developer in the past on Phase I, but just wondering how this is the deal that you chose. And do you see other opportunities, whether it be with the same developer or another developer you booked with?
Daniel Oberste
Yeah, 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 five or six 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. Overall, Phase I provides us a pretty intimate look at what we think the economics of Phase II will look like when it’s ready. So we own — we already own that product.
But in addition that development partner has been an upstream seller to us on two or three other properties located in our core Texas markets. So we liked their product. We feel pretty comfortable with the economics of the development mitigates any risks and relationships are 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 II development growth and you can probably look to continue to see BSR for these opportunities on a look forward with these same types of partners.
Kyle Stanley
Okay. Great. Maybe I will turn it back. That’s it from me. Thanks.
Operator
Thank you. Next question comes from Sairam Srinivas at Cormark Securities. Please go ahead.
Sairam Srinivas
Thank you, operator. And 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, I think in net debt. Dan, my first question for you is on the capital allocation opportunity we see ahead. Concerning the environment we are in right now with higher rates and obviously you guys are kind of part on 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?
Daniel Oberste
Sure, Sai and good morning. Yeah. BSR is probably an external growth, since we went public is — has 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 five years.
And on a look forward, we see — I think we see probably stabilized acquisitions at compressed yields right now. We see opportunities for suite renovations within our portfolio. And will 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 in the REIT for our investors on a look forward — as our acquisition of unstabilized properties and look forward.
So three of those four ingredients to the recipe of external growth exist in the market today. The opportunities are vast and we will continue to mine for 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 right now is the acquisition of stabilized NOI. In those scenarios, it seems like cap rates are, I’ll say, 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 like similar to what we announced yesterday, the acquisition of assets and taking the lease up risk on them, in some markets that we are intimately familiar with. And then in deploying some of our investors’ capital into some suite renovations as the end of ’22 plays out and into ’23.
Sairam Srinivas
That makes sense, Dan. And just from the beginning back on acquisitions. Are there specific markets where you see the impact of higher rates are probably increasing the opportunities in terms of acquisition opportunities?
Daniel Oberste
Yeah. That’s a good question. In the way I think of it is, are the macro pressures in our market supplying some — applying creating some challenges or creating some opportunities. And just to reflect on that again, 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, in 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 in lease-ups of new product. When faced with choosing between a challenge and an opportunity, we’ll pick up two opportunities and we’ll continue to monitor that challenge to see when it comes into opportunity range.
And again, I want to reiterate that this — these dynamics are super healthy. I mean when I think about who is leading the nation in job growth since, job creation or regrouping since the beginning of the pandemic I’d point right to Austin and Dallas. When I look at Dallas, Houston and Austin, each of the three ranks in the top four MSAs for population growth in the MSA. Six of the 15 fastest-growing cities in the US are located in our Texas MSAs. The top two fastest growing cities in the US are located in Austin and Round Rock.
Vacancies and 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, number three is Fort Worth, number eight is Wisco, number 10 is Georgetown, number 12 is Leander, number 14 Denton, number 15 is McKinney, each one of these cities is located and Austin and Dallas.
The fastest growing MSAs in the country right now, number one [indiscernible], number three Houston and number four Austin. So when we look at those dynamics, I mean all of those stats are fantastic. If we can understand why those stats wanted to compress cap rates for stabilized acquisitions for multi-family 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 REIT’s sub-market of these MSAs.
Sairam Srinivas
And that’s a fantastic color then. And probably just my last question, looking at the acquisitions from the other angle on the disposition, are you looking at — are you seeing any opportunities in the portfolio for recycling?
Daniel Oberste
I’m sorry, Sai. You cut out there. Could you repeat?
Sairam Srinivas
I was just going to say, looking at the portfolio, are you looking at — are you seeing any opportunities for recycling?
Daniel Oberste
Yeah. External market growth, is that what you’re pointing?
Sairam Srinivas
No. In terms of dispositions, like other markets where you feel you’ve kind of reached the potential in terms of rent growth and occupancy and if you could probably cycle out of them?
Daniel Oberste
[indiscernible] and Blake is happy to jump in and pile on here. He will take or would be, but our economics that we’re seeing in Oklahoma City in 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 any of our properties we’ll take advantage of that, 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 five 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 three healthiest markets for multifamily in the country. And Little Rock in Oklahoma City, which accounts for, I want to say about 6% of our NOI continue to hum along.
Our product in those markets is located in the right sub-markets of those Little Rock in Oklahoma City markets and continues to exhibit outpaced growth. So all is we see a return generated by owning above that generated by selling, we take out. If we think we can sell an asset and maximize our return relative to earning and we’ll look to rotate.
Sairam Srinivas
That’s fantastic. I’ll turn it back.
Operator
Thank you. Next question comes from Jenny Ma at BMO Capital Markets. Please go ahead.
Jenny Ma
Thank you. Good morning. I wanted to ask — I want to ask about the ongoing positive trajectory in rents. It’s nice to see. Were there any specific markets that really lead the path or would you say it’s broad-based across pure different markets?
Blake Brazeal
This is Blake. It is across all markets. Our rental income, when you look at it, sequentially Q1 to Q2, Austin and Dallas and Houston were lie in line with each other. It’s not one in particular Poland, the whole freight as Dan just alluded to all of our markets are showing growth.
Jenny Ma
Okay. Great. When you think about rent renewals with your tenant, 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?
Blake Brazeal
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 AI revenue management program. And this program has really — they’re always hard to quantify programs when you buy them. And therefore over the first quarter-over-quarter, 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 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 in this program, helps us to balance out. What we’re seeing in the market today, well, 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 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 I actually look at a property within Frisco (ph) where we got multiple properties. You can have a renewal rate that’s different than another property in Frisco. So it’s almost it’s sub-markets and market within sub-markets. So that’s how we determine the growth and renewals and the growth in new. But no, we don’t put any caps on it.
Jenny Ma
Do you consider a tenant income when you’re thinking about those or this program just take a little, look at the data, of all the assets around during kind of set out a market number that’s agnostic to who the tenant is? And what their management (ph) profile is?
Blake Brazeal
Yeah. Tenants income is always looked at in terms of on qualification basis, but also and what we’re seeing in each individual market. I mean one of the things that’s really jumping out and in every quarter I gave you an update on this, but I’ll give it right now, is that what we’re seeing in the market is I’m dovetailing on to what Dan just discussed as far as the movements in each of these main markets people moving into it. You look at our main markets the migration second quarter, — the first quarter to the second quarter, 20% of our new leases coming from 43 states, that’s 18% more – that’s 18% — compared to 18% in the first quarter.
When you look at 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 or coming, we are for high income jobs as a median income and all of these types of markets continues to grow on schedule basis. So we’re looking at median income drive now in Austin, in our portfolio $99,000 and Dallas $91,000, Houston $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 half in Dallas, for instance, a $400,000 house right now with interest rates where they are, you’re going to be paying $3,450 and you have a $1,400 payment in an apartment.
So we’re — Houston is at $2,504 and a $1,200 rental rate. Austin is $4,200 the median price on the house in Austin $562,000. I mean that’s a $4,200 payment average of — BSR rental rate is $1,572. So all this goes into the fact that you’re having a lot of people with really, really high median rental incomes that are working for product in our areas, and that factors into the program as that were using in order to increase rental rates on renewals and a lot of people are going to the renewal rate right now the intact the everything is happening in the economy. So that’s playing in our favor often.
Jenny Ma
Great. Thank you for that fulsome color. Just wanted 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 dominant in?
Daniel Oberste
Sure, Jenny, this is Dan. And I’ll see if I can tackle that one. We pay attention to a couple of things when we talk about supply. It’s not just grow supply, it’s also net absorption. So I’ll hit the absorption issue first. We’re seeing the pace of absorption in the first six 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 some pickup in deliveries this year relative to last year and that’s natural and we anticipated that, 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 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 absorb that 5% to 7% number, I’ll say in the last six years on average has been fair to say. What we’re seeing this year is a slight drop of assets under construction — 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 that last year which somewhat emboldens our thesis in this market, because as you recall from the prior two 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 of 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 are happy to see that the absorption figures continue to sit tight on pace as those exhibited in these three markets last year.
Jenny Ma
Okay. Great. Any commentary on Dallas?
Daniel Oberste
Yeah. Sure. So let’s — it’s fun to talk about relativity here. We’ve said last year Dallas let 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 would say this far into the year, those delivering absorption numbers look to remain on track, which is player. 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 six 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, 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 are about 60% of the pace that we’ve seen in 2021 and in the first six months of 2022.
In addition, now as I 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 2024 and into 2025 are about 37,000 suites. So that looks to keep on pace with the expected absorption in the market for 2024, 2025. I guess if we’re digesting all of that — all of those fun facts. Well, it looks to me like right now is that the landlord won by 20,000 units of absorption last year, looks like this year, the party continues with rent growth and occupancy acceleration like remarked just the other day, how, in Frisco, where we have a high concentration of assets quarter-over-quarter delivery is actually dropped, which was — that was a pleasant surprise for us.
And then when we look forward into 2023 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 in the high occupancy and rate increases continue to sustain well into next year, which gives us comfort for our guidance this year.
Jenny Ma
Great. You’re in an enviable position. And I’ll turn it back. Thank you.
Operator
Thank you. Next question comes from Brad Sturges at Raymond James. Please go ahead.
Brad Sturges
Hi, there. Just a 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 new supply and you may not be a supply headwind from new supply, I guess in ’23. Is that the way you’re seeing right now particularly in like Austin and Dallas?
Daniel Oberste
Yeah. 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 fun little gift from the central banks in the last quarter and that the cost to borrow has gone up in the last three months. So the combination of those three factors should give no surprise that the developer might be a bit timid to build a new project at a higher cost.
Brad Sturges
And the type of product that in the pipeline right now, is that more garden-style suburban out similar to the product that you have or in the sub-markets you might be in or could that be more like mid to high-rise more urban with the differentiation and the location and the type of product could be delivered?
Daniel Oberste
Yeah. I’d say it varies, Brad. And 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 the land purchase. The economics make — you just buy fewer acres of land and try your best to build the same number of units, you got to build up.
Now we think that puts BSR a strategic advantage. There were a 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 coverage 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 three storey or that suburban garden walk up that mansion 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 new plant constructions of suburban garden three storey and four storey elevator product and we’re seeing more concentration of this 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 of suite to construct it.
Imagine the rent that you’re going to have to collect in order to breakeven 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 of suite in hard cost to construct your asset. And 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 are also costing those developers more to build. We wish them the best of luck. And right now, we think that we would rather own our garden-style properties and four storey mansion builds over just about any product in the market, including single family rental.
Brad Sturges
Okay. And then just to go back to leasing for a second. Brief on what you’ve done so far in the — in Q3 and what you’re seeing so far. Has there been much moderation in kind of the leasing spreads you’re achieving what you got in Q1, Q2? Or I’m assuming that’s still the expectation for 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.
Blake Brazeal
Well, actually, a lot of — I really try to look too far into the future as possible. And a lot of the reasoning for increasing guidance is based on other metrics as I talked about earlier. And when you look at July and August, we’re seeing the same incremental increases that we have been seeing in the second quarter. And in some cases, we’re seeing improvements. Now, obviously that’s preliminary numbers, but I think through the years, we all know, we’ve been pretty good at forecasting it and I’m very bullish for the remainder of ’22. Now, before anybody asks me about ’23, I’m going to say that we start a pretty comprehensive budget analysis next month. And at this point obviously, if you ask me right now, I would say that ’23 would — I don’t feel comfortable really talking about the whole line. But the third quarter definitely actually good trends and into the fourth quarter, I’m expecting that to continue.
Brad Sturges
Okay. That’s quite helpful. I’ll turn it back. Thanks a lot.
Operator
Thank you. Next question comes from Himanshu Gupta at Scotiabank. Please go ahead.
Himanshu Gupta
Thank you and good morning. So just a follow-up on the Austin development. I think, Dan, you mentioned $39 million construction loan will be provided by the developing partner. So the question is what is the interest rate there? And does the partner participate in any value upside upon completion of that property?
Daniel Oberste
So, Himanshu, to answer your first question, because it’s the developer’s loan, we don’t feel comfortable disclosing their terms. That is to say, the total cost including carried interest of that $39 million development is included in the $59 million.
Himanshu Gupta
Okay. That’s good. And does the partner develop any upside upon completion, or that’s not the case?
Daniel Oberste
Any upside upon completion, is that what you asked?
Himanshu Gupta
That’s right. Yes.
Daniel Oberste
Certainly. I mean I think our partner would expect to see the traditional upside as the development enjoys for owning 2.5% of a project that’s completed, it’s a Phase II, it’s leased up and ran by the owner of the Phase I. I know they’re eager to, at this point, to construct and complete that project and so are we.
Himanshu Gupta
Okay. Fair enough. And then, I think you mentioned the development expected yields to be 300 basis point above the cost of debt. I mean, assuming like mid-three, so are you like penciling something like mid-six developers in them?
Daniel Oberste
Well, we don’t love to quote cap rates and we don’t love to quote yields, which are cap rates, unlevered returns and our practice. What I would say, it’s fair to assume that the spreads between our stabilized weighted average cost of capital and where we see acquisition opportunity and where we see development opportunity remain intact. And that is to say, if we’re 3 to 4 and we see yields for stabilized assets and 4.5 to 5 and we’ll look to take advantage of that opportunity.
Unfortunately, we just don’t see that right now as evidenced by our NAV. And the — I’ll say, the fact that we haven’t deployed capital that’s to me representative of management team that’s extremely disciplined with its capital deployment. And where we do see the opportunity is in a co-development, similar to what we announced yesterday, and when we see the opportunity we generally say that 300 basis points north of our cost of funds.
Himanshu Gupta
Thank you. Very helpful. And then just changing gears on the occupancy trends in the portfolio. So is the management view to sacrifice some occupancy to — for continued or better event growth, is that how you’re approaching it?
Daniel Oberste
Well, I’ll start off on this and Blake has some details to add. We’ve discussed this at length. So, if you recall back in prior quarters, what we talked about from the end of last year to Q1 was we anticipated a little bit of detail — a little bit of an occupancy reduction in the first quarter of this year to enable to reach managers who are experts at leasing apartments to take advantage of these accelerated rent metrics that we see in our sub-markets in the second and third quarters. I think our numbers this last quarter reflect that end, which is a 0.5% increase in occupancy, not yet to the occupancy level, we displayed in Q4 of 2021. So we still see a little bit more opportunity there.
Now with that said, we also see some suite renovations in two of our dollar value adds coming to fruition and we’ll probably look to accelerate some suite renovations on our projects in the second half of the year. The impact of suite renovations is a direct, I’ll say a little bit of a goes to vacancy amount as it takes a bit longer to renovate an apartment than it does to turn an apartment. Blake, is there anything else you want to add on to that?
Blake Brazeal
The only thing I would add is that we discussed this in the last quarter when occupancy went down a little bit. We said it was exactly where we thought it would be and this quarter 95% is right on top of what our internal projections were. So to this point, when you look at what we had internally predicted for 2022, our occupancy has been within 0.1% to 0.2% on the first two quarters. And if I was projecting out for the third quarter right now, I think we’re going to be really close to what we projected out at the start of the year.
Himanshu Gupta
Okay. Thank you. And maybe just follow up on the occupancy front in a more broader view. I mean, in case of your recession scenario, how has occupancy responded like in the past cycles? Like, do you see a lot of occupancy in order to risk or maybe slowdown in adoption in that scenario?
Daniel Oberste
In this portfolio, no, we have it and its specifically because this portfolio the average rents are sitting right in the middle of the market. I’ll say that B plus A minus range. So when you own a portfolio and as our investors do that has rent levels situated and I’ll say on that spread it enables that owner to play defense in a recessionary environment by maximizing occupancy and it enables that owner to play offense in an expansion environment as we’ve displayed in the last two to three years. To us, we deliberately picked this type of portfolio.
Now if I was going to go back and look market-wide, and I was going to take, Houston, let’s say, Houston between November of 2014 and let’s say March of 2018, right, rather than — so let’s begin with that fracking issue in OPEC and then let’s end with Hurricane Harvey. What we saw in the Houston market over that time is about an aggregated we’ll say 13% increase in rate over that 42-month period. These markets are pumped up by job growth, and the job growth and accelerated wage growth is going to have a direct correlated effect on our ability to collect rents. Our product within these markets is going to be occupied in a recessionary environment and it’s going to generate outpaced rent growth in an expansion environment.
Himanshu Gupta
Okay. So, thank you. So the job growth environment continues to be supportive and the portfolio continues to affordable, some insurance I mean down to scenarios. Okay. No, I think that’s very helpful. And I’ll turn it back. Thank you.
Operator
Thank you. Next question comes from Jimmy Chen at RBC Capital Markets. Please go ahead.
Jimmy Chen
Thanks. Good morning, guys. So just on the development, if I look at the cost per suite, the $250,000. And when I compare that with some of the acquisitions you’ve done even the first phase. It looks like it’s north of that. So is it fair to say that assets today are trading out even higher than replacement cost? And then just kind of curious, so historically that’s been the case, I assume right?
Daniel Oberste
Yeah. Certainly, assets are traded at higher replacement costs. I think now it’s been a while of that’s slept (ph) since we bought Phase I. But I think we bought Phase I for $264,000 a suite and we’ll develop Phase II including accounting for carried interest at a projected cost of $250,000 a suite. That right there is evidence to 12 months ago an asset constructed and unleased is one of the premium over the construction costs. That trend is magnified as we talked about earlier in the call, the second you put residents in an NOI on top of that stabilized asset. So sure, assets in our markets are trading well north of their construction costs if you can find the right assets in the right markets.
Jimmy Chen
Okay. Have they ever traded below replacement costs?
Daniel Oberste
Jimmy, certain — I’ll say the answer. I don’t know. It hadn’t been for a while, but I’m sure that we can dig in and certainly find periods of time where asset sales have taken place below the construction costs. To us, it’s a fun time to buy.
Jimmy Chen
Okay. Then maybe on the swaps, the swap rates you got is quite incredibly low. I’m just kind of wondering, so is that just a reflection of the timing in which you struck those contracts? I know they’ve got options on them. So it looks like it’s more of two to three-year swaps. Maybe if you could comment on that. I guess, it’d be — my only other question is on the Austin market sort of if there is anything you’ve seen, any cracks that you’re seeing in that market on the demand side perspective, especially given what’s going on in the tech sector.
Susan Koehn
Yeah. So Jimmy, I’ll speak to the swaps. So first and foremost, the interest rate of 3.4% covers our mortgage debt and our credit facility. It doesn’t include the convertible debt or amortization of deferred loan cost and discount and premium. So I just wanted to clarify that for everyone on the call. You’re right. We got some really, really good rate. While some of that is timing, on payments related to the fact that there is started one-time call right for early termination and that also helps lower the cost. Let me emphasize again, it’s just one time. One time rates.
Daniel Oberste
Right. And Jimmy as it relates to cracks in the Austin market. We’re not seeing them right now, and we thought we would see them in Austin at the tail end of this year, but not necessarily seeing any cracks in occupancy or rate acceleration from a net dollar amount. And I mean if I was an economist, I’ll probably give you a bit of an answer, but I can tell you that I’m a subscriber to the Austin American-Statesman, and I’m looking it couple of weeks ago and I’m seeing Samsung announced plans for a $200 billion development on top of the $20 billion (ph) that they just put into the Northeast Austin sub-market over the course of the next 20 years.
And to put that in perspective, $200 billion is about half the cost of the United States interstate construction — the interstate system that’s constructed in today’s dollars. So that would dwarf the largest development project that we’ve seen in the US from a chip manufacturer ever. I think the political wins are in favor as well with the recent laws that have been passed by the Senate. It looks to be passed in the house shortly related to the chips bill. Those kinds of job creating — that will generate about 10,000 jobs, those kinds of job-creating investments by companies probably look to be the bubble gum that fill any cracks that might exist in an otherwise healthy market at this time.
Jimmy Chen
Okay. Thank you.
Operator
Thank you. Next question comes from Matt Kornack at National Bank. Please go ahead.
Matt Kornack
Just one quick one. And apologies if you already covered it in your initial comments. But the property tax figure sequentially looked like it was down based on my calculation. My calculation may be wrong by about $1 million. Is that a good run rate or should we kind of look to Q1 and average it or take Q1 as the property tax figure?
Susan Koehn
Yeah. Hi, Matt. So you’re right. Each quarter, the real estate taxes are going to be lumpy, and we did have some favorable settlement in Q2, which made up lower. So we’re looking at anywhere between $28 million and $29 million for real estate taxes in 2022 in total, but it’s hard to establish a run rate based on one quarter.
Matt Kornack
Okay, perfect. I’m looking at my model and has that number, so I’m going to keep with it, and congrats on the quarter. My brain capacity has been reached this morning.
Susan Koehn
Thanks.
Operator
Thank you. Next question comes from David Chrystal at Echelon Capital Markets. Please go ahead.
David Chrystal
Thanks. Good afternoon guys. Maybe just building on last question there on the property tax. Were there any other OpEx line items that were one-time non-recurring or lumpy in the quarter that maybe smoothed out and maybe just some guidance on NOI margin expectation for the balance of the year?
Susan Koehn
Yeah. We’re still pretty happy with what we — well, I get that. I’ve been saying the last few quarters that about 55% margins for the year as you recall, we didn’t change our guidance for operating expenses and that does include the impact of inflation that we’re seeing right now.
David Chrystal
Okay, perfect. That’s helpful. Thanks.
Susan Koehn
Sure.
Operator
Thank you. Next question comes from Chris at Canaccord Genuity. Please go ahead.
Chris Koutsikaloudis
Thanks. Hi, everyone. I’m wondering if you’re able to share the market rent growth expectation or assumption you’ve made in your underwriting for Phase II?
Daniel Oberste
Not at this time, Chris. I think that it would mirror our — the rent, the market, asking rents were Phase II would somewhat mirror our expectations. Our Phase I market rents that we’re seeing today has slightly grown over the course of the next 18 months, but let’s call it 3% to 5%. I think that’s a conservative estimate and when we underwrite organic rent increases that we’re seeing on — in Austin in particularly in Round Rock right now we’re seeing an accelerated number. So we’ll look to provide further guidance on that probably next year as we enter into, as we — I’d say, we get a little bit closer to the delivery phase of Phase II.
Chris Koutsikaloudis
Okay. That’s helpful. And just last question for me. I’m wondering if you see a lot of incentives being offered on new product being delivered in your markets to accelerate lease-up? And if so, how would those net effective rents compared to the rents you’re able to achieve on your properties?
Daniel Oberste
Right now we’re not seeing many of any incentives in our markets and on our properties. And I think Blake spoke to the 10% to 15% loss to lease number that we and then most of our competitors use. I’d like to thank that the incentive concept is moved by the wayside and operating apartment complexes, particularly in Texas now. The only ones we’re really seeing that use that are developers on lease up. Experienced property managers and landlords, generally adhere to the revenue management systems. And that to me creates — and to us creates a clear picture in depiction of where your collected revenues going over the near future.
Chris Koutsikaloudis
Okay, got it. Thanks very much. I’ll turn it back.
Operator
Thank you. There are no further questions. You may proceed.
Daniel Oberste
Thanks, everyone. That concludes our call today. Thank you for your interest in BSR REIT. We look forward to speaking with you again after we report our 2022 third quarter results in the fall. We hope you all enjoy the rest of your summer.
Operator
Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and we ask that you please disconnect your lines.
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