BSR Real Estate Investment Trust (BSRT) 2023 Q4 法說會逐字稿

Good 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) Mr. Oberste, you may begin your conference, sir.

Thank you, Sylvie. And good day, everyone, and 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, the 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 and as 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 12th, 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 are not recognized measures and do not have standardized meanings under IFRS, please see our MD&A for additional information regarding our non-IFRS financial measures, including reconciliations to the nearest IFRS measures.

Also, please note that all dollar amounts are denominated in US currency so Reed 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 $0.8 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 two 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 this day, I would note that demand remains stable and the 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 and our product remains very positive. And 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 increased property operated 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 detail 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 two years. Currently, 97% of our debt is fixed or hedged to fixed rates.

Finally, I want to provide a quick update on management. Brandon Ribar, barter resigned from the Reed in February due to health issues. We wish him all the best for a full recovery since he assumed his duties as interim CFO back in November. As you know, she was formerly the Reed CFO. So this has been a seamless transition. And in February, Stephen Edison was promoted to Vice President of Accounting from Vice President of Accounting to Chief Accounting Officer. This was consistent with our succession plan. Stephen 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.

Thanks, Dan. Same-community revenue increased 1% in Q4 2023 to 40 million compared to 39.6 million in Q4 last year. Improvement primarily reflected a 1.3% increase in average rental rate for the same community properties from 1475 per apartment unit as of December 31st, 20 to 2022 to 1495. As of December 31st, 2023. Total portfolio revenue for the quarter increased 1.1% to $42.1 million compared to $41.6 million in Q4 last year primarily reflected $0.4 million of organic same-community rental rates. And it was 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 costs, additional repair and maintenance expenses, including increased more payment technology fees and higher insurance costs.

Real estate taxes also increased 0.5 million compared to Q4 2020 for 2020, 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 revenues. Anyway, the total portfolio was 22.5 million compared to $23.2 million in Q4 last year, reflecting reduction in pain community anyway, FFO for Q4 2023 was $13.3 million from a similar to Q4 last year. Ffo per unit increased to $0.24 from $0.23 last year. Increase in FFO per unit was primarily due to the repurchasing of approximately 3.5 million trust units during 2023 under our MPRB. and ASPP. program. Ebitda 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, we paid quarterly cash distributions 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 20 all20 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 net fees of 0.5 million. Total portfolio revenue was 167.8 million, an increase of 5.9% from 158.5 million in 2022, reflecting 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 robust 2023 tax assessment and tax refunds related to prior years. This was partially offset by an increase in property operating expenses of $3.2 million, reflecting higher costs for insurance, payroll and repair. In May, it will allow increased 6.5% to 91.1 million from 85.5 million in 2022, reflecting the increase in same community NOI, partially offset by reduction in NOI from non-same community properties of $0.7 million due to real estate tax refunds received during Q4 of 2026. 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 2020. The increase in FFO reflected the higher NOI, partially offset by a $0.8 million increase in finance costs associated higher interest rates as well as higher debt due to repurchase of units during 2023 as of today, for 2023 increased 8.3% to 48.4 million or $0.85 per unit compared to $44.7 million or $0.8 per unit in 2022. The increase in AFFO reflected the higher FFO, partially offset by an increase in maintenance capital expenditures of $0.7 million, which was primarily due to brief replacement and balcony restoration projects. Three, paid cash distributions 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, three, debt to gross book value as of December 31st, 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 refer to that tenure 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, adding properties to the current borrowing base of the facility. As of December 31st, 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 for an investment property under development. Total loans and borrowings at year end were $763.3 million with a weighted average contractual interest rate of 3.7%, leading the debentures and the construction lines and 88% of our debt was fixed or economically hedged to fixed rates. The outstanding convertible debentures were valued at EUR39.7 million as of December 31st at a contractual interest rate of 5% maturing on December 30th, 2025, with a conversion price of $40.40, are you 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 of notional value of 65 million, EUR60 million and EUR40 million, respectively, with a fixed rate of 3.27%, 3.537% and 3.178% respectively. 65 million swap takes effect on July first, 2024 and matures on January 31st, 2031, 60 million swap took effect on January second, 2024 and matures on January second, 2031. The 40 million swap took effect on February first, 2024 and mature matures on February third, 2031 in each of the swap. The counterparty 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 in these markets over a low cash, 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 US 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 US, our markets relative affordability and job growth record should provide our investors with comfort that the Rede 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 onstream 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 looked ahead, when we look ahead to the next few years, we see few, if any, significant deliveries coming onstream. 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 and 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 91 to $0.97 compared to $0.93 in 23 and AFFO per unit of 84 to $0.9 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. Suzano now would be pleased to answer your questions. We'd like to respect everyone's time and complete our call with one or more within one hour while giving all of our analysts the opportunity to ask questions. 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 are happy to respond to additional questions by phone or email after Sylvie, if you could please open the line.

(Operator Instructions) Sairam Srinivas, Cormark Securities.

Thank you, operator, and good afternoon, everybody. Then just going back to your comment on apartment deliveries peaking in your markets. Are there specific markets that you expect to recover faster thank others?

Yes. I think that's a that's a great question. Yes, 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 of 23 probably marked the highest deliveries in history. And 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 to absorb the existing deliveries, but we're fairly optimistic about what we're seeing in the back half of the year.

The bright spot here continues to be Houston site 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 speaking between November of 23 through Q1 of 24. With all that said, CoStar continues to project net rent growth in Austin 25. And so I would say in that order, I would say we saw a peak deliveries in Dallas, of course, are in Houston occur first and Houston's case, the answers to those peak deliveries as those peak deliveries were still below the historical average, the average delivery annually and used and we sell those peaks first, the next big 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, we'll call it the St. Patrick's Day. We think it's speaking between November and March of this year. And we would expect similar absorption figures actually elevated absorption figures coming out of Austin come towards the tail end of the year. It's just that from a percentage standpoint, more percentage, the Austin is exhibiting higher percentage population growth than the other two markets awesome.

Awesome. That's great color then on tying back.

Kyle Stanley, Desjardins.

Thanks. Morning, guys. And 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 theirs 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 on the call.

That's a huge compliment? Thank you. Yes. I mean, it's hard to say, right? We feel like we're the most effective but on. But we've done a number of things to control and at the same time, spend a little money more money on our operating expenses to improve revenue. So we've done things that on breast density, that all kinds of projects more and technology are not increasing our OpEx because there's some it's a question of the attached to it on their on their we have a new credit builder subscription, which allows us to generate more revenue through a fee with our readiness to allow them to improve their credit scores on reusing on a new application for our maintenance team, which allows them to reduce the turnover time on Momo bearing units for me then and on this, of course, allows us to increase revenue because we have our apartments ready factor for someone. The median team, we've all been on robust spending a little bit of money on on leasing and after our leasing services, which now allows us to have less missed leads in order to rent apartments faster and at better rates. So I'm pleased that we're able to control our expenses, but at the same time, allocating money to places where we think we can, we can make a better return as well.

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

Brad Sturges, 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 that 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 all markets. And despite the fact that there was a record amount of deliveries, we were still able to keep our blended rate increase flat basically. And I think the first quarter of 2020 was going to look the same. There's going to continue to be pressure into the second quarter and the third quarter on the leasing on the leasing spreads and trends on fourth quarter. We start to expect that to turn around in the fourth quarter, and we have less less deliveries coming online, and that's going to continue to abate in 2025 that and I guess the natural question is, how are we how are we getting to our increase in revenue based on our guidance, we're expecting more pressure on the on our revenue related to deliveries through the first half of the year and that come 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, I'll say that relates to us putting in extended York and are installing washers and dryers, which will allow us to continue just to increase France more drilling.

You know, Brad, Susie answered that question perfectly, and it's because he'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 are spotting the other team, 28 points in the supply and demand scenario and setup. And we ended the half as depicted by our financials, Tide and so started the game down by 28 ended at halftime Tide 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 expected from us driven by just natural absorption and natural economic numbers in the back half of the year.

That's great, I'll turn it back. Thanks.

[Golden Hill, TD.]

Good morning, everybody. Just two questions from my end. On the acquisition front, what are you seeing in the market today from sellers? And maybe how has that landscape changed from a couple of months ago and it is cute 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 four 75% to 5.5% for the kind of product that we own in our market market dependent and and the cost of what I would say the cost of debt is 5.5% or higher. So I think about cap rates is it 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, the 15 properties that we looked at in the last quarter, the 1.1 billion of aggregate value, the $79 million average purchase price to the targets we tracked 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 as some of those transactions were completed.

We look at that environment as we live in about a two year period where we're sitting on an inverted curve from. And that is to say that the short term interest rates are 5.5%, and that's the Fed central bank right now, the borrowing cost short term might be 6.5% 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 it be us or we're not in the business to acquire loss or 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 and into that cost of credit spread that I just discussed in the first quarter. We hadn't seen them do it in 2023, and 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 historical sectors of popularity into in my view, multifamily or industrial logistics, that's where the private capital is flowing into. And there is a mountain of private capital, 200 billion, KRW800 billion to it. 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 written that asset. And it's going to put a lid on cap rate expansion of assets and what I'll say, quality assets with quality, residents and quality markets. And so in resource case, we've built and the US portfolio and an impenetrable capital stack, but 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 on that, and we're happy to let someone else pick up that that will say, I'll say it this way. We're happy to let somebody else and this wall of capital decide to finance a seller's liability or decide to breakeven on a cap rate to credit costs. That's just not what we do.

Thanks for that color. I'll turn it back now.

Mike Markidis, BMO.

Thank you. Good afternoon, team BSRM., I just wanted to focus back on your question on OpEx, I guess you told us 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? Or is it lower turnover that you're assuming just again, trying to get a better sense, what's keeping the number sold?

No, no impact on. So there is not anything abnormal in 2023 and in fact, some of the things I listed are going to increase our OpEx in 2024. However, all as I mentioned, we're expecting an increase in revenue based on this cost as well.

Okay. I get one question. So I'm going to stop a Cadillac 20 point asset.

Sorry, just one other point on the guidance also includes real estate taxes and aligned and that might be what's driven off the percentage was in your --

Yes, 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 relatively flat year and we continue to expect a flat year next year. I think the other anomaly in 23 that you saw with an expense increase was a massive increase in the cost to ensure property, specifically apartment businesses or apartment properties in the United States. I want to say the average insurance increase on a year-over-year basis and 23 was 37% for a multifamily operator, I mean, to the extent you owned properties and coastal regions or in flood plains 37% was a pipe dream. You were looking at a double or triple on your rate rate cost increase. Visa wasn't immune to that last year.

We think our rates in Quake Freestone 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 then, you know, a little bit less of a tight market for insurance for, say, owners of quality, product and quality locations that operate their properties well and so on, would there could be a little bit of flatness in those two big numbers that make up a ton of OpEx from that that were not there from a year-over-year basis last year that make up that 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 expense numbers?

That's exactly right. Okay. Thank you.

Matt Kornack, National Bank.

And I guess just the follow-up to an earlier question on the acquisition outlook. I think in your prepared remarks, Dan, you mentioned that your anticipation Brad will return to 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 NCBNCIB. in Q4?

Yes, sure. You know, to the extent that you're asking me to talk about future interest rates, you I'll give you the same answer I've given every year, which is if I knew where they were going to be sit underneath the shade tree right now, drinking corona, I simply don't. But what I can do is talk about these three constructs.

Matt, you know, um, I mentioned earlier in the call about how on what we buy in real estate. We call it a cap rate right what it really is it's an unlevered return over historic benchmark rate and the unlevered return or the benchmark rate is historically been the 10-year U.S. Treasury and the unlevered spread has been about 150 basis points, right? And so now let's look at where we are today. But before I get into share repurchases, I think we think of it as say in three scenarios. And 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 occur if the interest rate curve maintains its existing inversion, which has been the case for the last two 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 over 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 tenure increases, if the curve maintains his existing inversion And then number three, if the curve normalizes. Those are three examples, an example one and three, I think you could 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 or spread over our cost of credit for development property. So in two of those three setups in the future, you'll see us play offense. And this and the existing setup in this in the second setup that where the curve maintains its existent inversion.

Now that's just an abnormal from 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 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 and I call that defensive so into 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. And the market that exists like the one that's existed in the last two years now we did buy 3.1 million shares back in the Q4. And I think you'll continue to see if that setup continues to exist, that management and the Board are prepared. We continue to preserve and defend the value of our investors investments in these properties.

Great. Thanks. Appreciate that color.

Dean Wilkinson, CIBC.

Thank you. Good afternoon, everyone. I'm going to cheat a little with a fleet liquor on the new supply. How does the construction cost of that stuff that's coming into the market compared 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.

Oh, man, that's like a fully flicker to a wide-open receiver. Dean. Yes, which are now sitting at 17 bucks or now sits at about two of the door? Yes, I'm I don't have that. I can't do the numbers in my head, but we're probably at 11 to 12 books were probably traded at one 40 adore. 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, as you know, I mean, which is we're building a property right now, we're we play close attention to the cost of construction. I don't think the problem is the cost to construction. I think it's I think it's the market's view of the public market, in particular, in view of the value of SunBelt assets. So yes, the cost to construct is 30% higher than our now 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 consume less probably 8% to 15% of the rents. So net-net, let's say it's about 20% to 25% higher than our 1,500 bucks a month.

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

I mean that my goodness, yes, there is a tough spot. It's a perfect spot for BSR and the type of product we own to compete and it does create diminished economics for the for the for the developer really the developer right now, Dean take interest out of the equation. Interest is a toxic bill and what's prohibiting these these developments from turn into deliveries in 25 and 26. Fantastic setup for the existing owner of stabilized properties in these markets. But if you're a developer right now, as 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. And we're looking at rent numbers upon stabilization of about 22 to 23 hundred dollars a month on 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 on your construction debt. And so I mean, it makes sense that you're just not seeing any any development or deliveries in our market, even though you're seeing robust population growth.

Perfect. That was my one two-parter. Thank them.

Himanshu Gupta, Scotiabank.

Thank you and good afternoon. So on cruises on interest, what is the quarterly run rate we should assume for the interest expenses? 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 the swaps center I mean, I mean, you're getting these low 3% fixed rates in this environment to just one have some collaterals.

Yes, you know, I mentioned that's a good question. I think the run 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 and elevated interest rate environment. And our investors have I've enjoyed the benefit of that risk.

Okay. Awesome. No focus cost of driving that helps and heighten back. Thank you.

(Operator Instructions) [Anhan Vijay Kumar], RBC.

Hey, everyone. Just a quick question on the oral development? And when do you expect that to reach stabilized occupancy? And what do you think that avenue would be?

That's a good question. So the order development, to remind our investors that it's 253 suite Phase two 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. And we I think we announced it it cost, our investors about $60 million to construct the project. We've we announced last year that we hedge 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 onboard until the end of the year on online to the to the home.

Well, let me say it differently. We probably won't expect lease-up stabilization in Q4 of 24. But what we will expect is I'd say anywhere between a six 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 where we're developing to a 6.5 yield. So that turns into, I'll call it about 3.5 to 4 million of NOI. And again, we fixed our debt service on that 60 at about 4%. So call it 2.4. As a result, with after deducting the share repurchases in Q4, we see stabilized benefit of what I'll call it embedded value at this point of a call it two to $0.04 a share as a result of that development, everything we're talking about.

Thank you.

Sairam Srinivas, Cormark Securities.

Thank you, operator. And then just a clarification on your point of 20% to 25% rent spread to do that. Is that 25% after taking out the concessions on current market rent or the concession?

Yes, that's a good question. I call it net of concessions. So I think the was the gross asking rent probably sits between 20% and 35% higher than our than our current effective. And then consider 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 Tony, just a quick follow-up on this one. You had revenue in Houston last year. You kind of chatting about these concessions and if you kind of look at historical spreads, we saw a bit of weakening towards Q4 of 20. And then it's been a big change from the question is, are you actually seeing some of these concessions roll off now when you see your competitors in the market, but 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 Downer's model of establishing revenue that doesn't use concessions whatsoever so in other words, when 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 as Q4 22 concessions on new deliveries roll off in our markets yet?.

The answer is yes. And you can you can see how that how that looks a little bit inside of our Q4 numbers where we saw renewals increased about 4.1%. So our developers financials who consist in Q4 of 22. What they would be looking at right now is is those concessions will burn off and they would see probably an effective revenue number climbs similar to ours on any renewals that they have in the market.

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

Thank you. 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.

Thank you, 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 you please disconnect your lines.