BSR Real Estate Investment Trust (HOMUN) Earnings Call Transcript

Good morning. My name is Krista, and I will be your conference operator today. At this time, I would like to welcome everyone to the BSR-REIT Second Quarter 2026 Financial Results Conference Call. [Operator Instructions] I would now like to turn the conference over to Spencer Andrews, President of Investor Relations and Marketing. Please go ahead, sir.

Thank you, Krista, and good day, everyone. Welcome to BSR Reads' conference call to discuss our financial results for the second quarter ending June 30, 2026. I'm joined on the call today by our Chief Executive Officer, Dan Oberstein. financial officer Tom Service, and our chief operating officer Susie Rosenbaum, who are all available to answer your questions after our prepared remarks. Before we begin, I want to remind listeners that certain statements made on this conference call about future events are forward-looking in nature. Any such information is subject to risks, uncertainties, and assumptions that could cause actual results to differ materially. In addition, we will reference certain non-GAAP financial measures that will help us to determine the future of our we believe are useful supplemental information about our financial performance. For more information, please refer to the cautionary statements on forward-looking information and a description of our non-GAAP financial measures in our news release and MD&A dated August 12, 2026. Dan, over to you.

Thanks, Spencer. Our second quarter performance reflects the resilience of our portfolio and the continued momentum in our business. Total portfolio revenue and NOI increased compared to Q2 last year. Consequentially, we generated growth in same community occupancy, total occupancy, same community revenue, total property NOI, and FFO. Blended lease tradeouts once again turned positive during Q2 and moved higher in July. We made substantial progress in our organic growth initiatives, including a significant increase in occupancy at our August 2025 acquisition compared to Q1 and continued progress on our resident amenities programs. To highlight a few selected numbers in the second quarter, same community occupancy increased to 94.6% from 94.3% in the first quarter. Same community revenue increased 35 basis points versus Q1 of this year. Tradeouts for 50 basis points positive for the quarter, with continued acceleration to a blended increase of 1% for the month of July. Our retention rate in Q2 was 60.1%, an increase of 30 basis points from the end of Q1, and 270 basis points from the end of Q2 last year. Physical occupancy at our August 2025 acquisition increased to 91% at quarter end, up nearly 20 percentage points from March 2026. And we made further progress within our resident amenities programs, including Bulk Internet and Valet Trashed, which have received a highly positive reception from our residents and are now breakeven to FFO accretion in the second quarter. The economic fundamentals supporting our markets remain strong. Four department deliveries and starts are certainly continuing their predictable decline from peaks exhibited previously in this decade. As a result, in the first half of 26, and particularly in the second quarter, we saw apartment demand outpace deliveries. As I've noted before, this process has not been as rapid as we'd hoped or expected, but you can see the tangible positive momentum in much of this quarter's results. Of course, we aren't waiting for the rising tide of market demand to drive stronger financial performance on its own. We are driving growth using our strongest asset, our talented people, to source, underwrite, and execute upon platform initiatives, including each of the initiatives we laid out in December of last year. to provide a brief update on each. First, the lease up of our 2025 acquisition class. With our August 25 acquisition approaching physical stabilization at the end of Q2, we can expect the back half of 26 to more fully reflect the concessed but occupied revenue potential of the 25 class. Our focus now turns to the second bot of the apple within this cohort of assets. The opportunity here is best highlighted by looking at our non-Sane Community NOI margin. You'll note our year-to-date non-SEN community NOI margin sits at approximately 450 basis points behind our SEN community NOI margin. Therein lies the second bite opportunity. Between collecting rent on physically occupied assets for an entire quarter or year versus just a portion thereof, off concessions and normalizing the expense picture at each of these five assets, we believe that the non-same community to same community NOI margin differential will naturally compress and present the remaining opportunity in this category. Second, on our resident amenity programs, currently highlighted by our bulk internet and valet trash initiatives. Bulk Internet is running without any issues to speak of. We are live on six of our 26 properties and ramping up ahead of schedule. in the ground on seven additional properties with the balance slated to begin in the back half of the year. As new properties come online in late Q3 and in an earnest in Q4, we expect material benefits to our other income line item to begin its ramp. On valet trash, we are now live at eight of our properties, and this resident amenity initiative is currently working to plan. Finally, platform efficiencies. We successfully implemented our assistant community manager centralization effort during the second quarter, which will generate an annualized expense savings for the rate of two cents of FFO per unit while concurrently enhancing efficiency of operations. While these initiatives are still in the early stages, we are making excellent progress, and the results so far only reinforce our confidence in the broader value creation opportunities across our portfolio. We are confident that we will achieve our targeted incremental growth of 13 to 22 cents per unit by early 28, excluding the impacts of changes in in market rents, expenses, interest rates, et cetera. All in all, our long-term growth story is fully intact. We have an outstanding property portfolio in top-tier markets that is performing at a high level. adding further value through our platform-induced growth initiatives. We fully expect our business momentum to continue to grow in the quarters ahead as rental markets steadily improve and we make further progress in our operational enhancements. We are increasingly confident that we are positioned to drive strong returns for our unit holders. I'll now invite Tom to review our second quarter financial results in more detail. Tom?.

Thanks, Dan. Our financial performance in the second quarter was, as a whole, in line with internal expectations and continued to reflect improvement on a sequential quarterly basis. While the pace of this quarter-over-quarter improvement was at the low end of our target range in Q2, primarily driven by modestly slower-than-expected top-line rental growth, the market fundamentals supporting our business recovery continue to strengthen. Beginning with leasing, effective rates on new leases declined by 2.4% in the quarter, while renewals increased by 2.9%, resulting in a 0.5% increase in blended rates. That return to positive rate growth represented an improvement of 1.5% in the blended rate compared to the first quarter and underlies the improved supply demand picture in our core Texas markets. Further, in July, rates on new leases declined by 90 basis points while renewals increased by 2.2%, resulting in a 1.0% increase in blended rates. We are encouraged by the continued momentum in tradeouts over the summer as April, May, June, and July each got sequentially better on a blended basis. Stained community revenue in Q2 was $26.4 million, a decrease of 1% compared to last year. This was primarily due to a reduction of $0.3 million from lower average occupancy, which was 94.6% versus 95.6%, and $0.2 million from lower average monthly in-place rent. The decrease was partially offset by an increase in other property income of $0.2 million. which was driven by an increase in the utility reimbursements and resident amenity programs. Concurrently, staying community revenue of $26.4 million for Q2 2026 increased 35 basis points compared to Q1, primarily due to higher average occupancy, which was 94.6% versus 94.3%, as well as higher average monthly in-place rent. Total portfolio revenue of $34.2 million in Q2 increased 1.5% compared to last year. The increase was primarily the result of $4 million of revenue generated from our 2025 property acquisitions, partially offset by the loss of $3.2 million from our 2025 property dispositions, and $0.3 million reduction from same community properties. Sequentially, total portfolio revenue of $34.2 million increased 1.1% from Q1, primarily due to the performance of the 2025 acquisitions. Same community NOI for Q2 2026 of $13.9 million decreased 2.8% from last year. This was primarily attributable to, one, the decrease in revenue I just described, two, timing related to the real estate tax funds received in Q2 of last year as Q2 last year received an outsized amount of refunds, and three, an improvement in property insurance expense of $0.1 million after another fantastic year for our annual property insurance renewal, which went effective in April. Consequentially, same community NOI decreased 1.4% from Q1 2026, primarily attributable to the lower property tax refunds received of $0.2 million. Total portfolio NOI for Q2 2026 of $17.9 million increased 0.5% from last year. The increase was the result of a $2 million contribution from our property acquisitions offset by the $1.5 million lost due to our 2025 dispositions and a $0.4 million reduction from the same community properties. Sequentially, total portfolio NOI for Q2 2026 of $17.9 million increased 1.9% from Q1 2026. The increase was primarily the result of the increase in total portfolio revenue in addition to a $0.2 million increase in prior year property tax refunds received from the property dispositions, partially offset by the decrease in same community NOI. As Dan alluded to in his remarks, total portfolio NOI will continue to improve as we graduate from a focus on physical occupancy to a focus on full economic stabilization of our non-same community properties as demonstrated by the non-same community NOI margin opportunity. Below NOI, G&A expenses were essentially flat year over year and down 6.6% sequentially from Q1. As we communicated last quarter, legal and professional costs were elevated in Q1 and normalized in Q2. Finally, Q2 net finance costs were up 35% year-over-year and 3.7% sequentially. The year-over-year comparison is extremely noisy because recall the second quarter last year was our primary transition quarter and thus the portfolio was not carrying full leverage for the quarter. So, essentially, net finance costs are up due entirely to interest rate resets which occurred in our derivative portfolio. All in all, FFO in Q2 26 was $7.1 million or $0.18 per unit compared to $9.2 million or $0.21 per unit last year. The decrease was primarily driven by three items. First, the change in same-store NOI. Second, increased finance costs, which all was partially offset by, third, the ramping momentum in our non-same-community portfolio. Consequentially, FFO in Q2 26 was $7.1 million or $0.18 per unit compared to $6.9 million or $0.18 per unit in Q1 of 2026. Once again, the slight increase in FFO was driven primarily by momentum in our non-SAME community portfolio, offset by financing costs. On AFFO, the same drivers apply that I just mentioned on FFO. However, unique to AFFO, Q2 of this year saw an outsized spend in recurring CapEx driven by a delay in Q1 spending, primarily related to the host of weather events that occurred in the first quarter and thereby delayed spending in this category. In addition, given the heavy concessionary environment we faced in the second half of 2025 for our lease-up properties, our straight-line rental revenue adjustment was positive this quarter as those concessions have released over time. On the balance sheet, the REITs debt to gross book value as of June 30, 2026 was 51.7% compared to 51.2% at the end of 2025. This amounts to $732.2 million of debt outstanding with a weighted average interest rate of 4.1%, a weighted average term to maturity of 3.9%. nine years and total liquidity of $39.7 million at quarter end. Finally, on guidance, you You'll note we updated our same community portfolio guidance to reflect the modestly slower pace of top line recovery relative to our expectations at the beginning of the year. We've also updated our expense guidance to reflect the significant savings we are experiencing in line items relative to expectations. Net-net, we do not expect any overall change in our initial same community NOI guidance. Secondly, and as we mentioned in the earnings release, while our August 2025 acquisition continued to make significant leasing progress during the second quarter, reaching 91% physical occupancy at quarter end, stabilization is occurring slightly later than originally anticipated. As a result, and given the compounding effect of being behind our initial expectations, we have revised our FFO per unit and AFFO per unit 2026 guidance ranges down slightly to reflect the operational reality at that asset. At its core, our real estate business remains very healthy and largely in line with expectations as we continue building revenue from our lease-up activity and begin experiencing the effects of the economic stabilization of our non-SAN community assets, albeit slightly later than originally anticipated at one asset. We will of course continue to update this guidance as needed throughout the balance of the year. I will now turn it back to Dan for his closing remarks.

Thanks, Tom. As we close out our prepared remarks, I'd like to emphasize the underlying message of Tom's last point. While the pace of lease up at one property, that is our August 2025 acquisition, is running approximately a month or so behind our initial 26 expectations. The remaining 96% of our portfolio remains largely on track with our initial expectations. Though rental revenue momentum is slightly behind our initial outlook for the year, there is significant momentum down the P&L. Our resident amenities programs are fueling expected growth and other income. Centralization efforts are saving operating and personnel costs. Tom mentioned the positive news related to insurance and taxes. platform efficiency initiatives are taking hold, just to name a few. So, while the top-line market improvement is obviously not yet at the level we all would like, we are as excited as we've ever been about the meaning of the long-term outlook in our portfolio. As we've said in the past, we can't control the rental market, but we can control our platform performance and the experience our residents have in our communities every day. I can tell you that the BSR team is performing as our investors expect, and we will efficiently and methodically drive the growth from this portfolio that our investors deserve. To add this visible growth to the slowly budding turnaround in rental rates resulting from improving supply demand fundamentals and the inherent economic stabilization we will experience in the coming quarters, we are well positioned to generate consistent, superior returns for our unit holders. That concludes our prepared remarks today. Tom, Suzy, and I would now be pleased to answer your questions. Operator, please open the line for questions.

[Operator Instructions] Your first question comes from the line of Jonathan Kelcher with TD Cowan. Please go ahead.

Thanks, good morning. First question just on the blended rents. If I look back I think they were positive in Q3 of last year like how confident are you that we're at the beginning of an upward trend here or do you think we may still be sort of plus or minus zero percent for for a couple of quarters?.

Hey, Jonathan. Yes, overall, at a high level, we think the market is healthy and that rents will continue to improve. You may see us in the third quarter pull back a little bit specifically to raise occupancy, which is the other level. we choose. But overall, I think that what we're seeing right now in July, things are looking good.

Okay, so it's probably pretty close to plus or minus zero in Q3 and then hopefully trending up from there. Is that how I can interpret that?.

I mean, well, if you look at it specifically at the BSR portfolio, yes, we may choose to lower rates a little bit in Q3 to bring up occupancy, but overall the net effect is more rental revenue, right? And then, yes, with a higher upswing in Q4.

Okay. Thanks. Thanks for that. And then just secondly, on... on the guidance. The expense growth came down, the midpoint came down 250 basis points, which is quite a bit. Can you maybe give a little bit more color on what's driving that?.

Sure. So, guidance-wise, the main driver is the A&C here, right, when it comes to rental revenue. Concessions are simply -- well, we expected concessions to still be in the Solana market. They didn't come down at the pace we were initially anticipating. when we issued our guidance for 2026. So what we expected was probably around eight weeks free. And what we're seeing is the equivalent of about 12 weeks free when you consider what people are throwing in, 10 weeks free and maybe a $1,500 gift card. So if you look at that, there's a four-week gap that we have to account for now that we're dealing with our competitors in the Solana market, which caused the majority of the write-down related to the own fee for the second half of the year. The other piece is much smaller related to the same-store portfolio. We still have pressure in those markets too. There's still concessions, and they also didn't come down quite as much as we expected. Though let me reiterate here, they are coming down, and that's like maybe a $14 gap when we look at net effective rent per unit for the rest of the year. Okay.

And Jonathan, this is Dan. If we, as I mentioned earlier, if we move further down the P&L and speaking specifically to OpEx, the main drivers of our OpEx reductions were real estate tax decreases and a positive insurance renewal. We are seeing some green shoots related to platform centralization that we we spoke about last quarter. We think that's worth probably a penny in the back half of the year, and it's going to continue to drive OPEX compression, which makes us feel comfortable lowering that guidance at the midpoint, as you mentioned. And then I would say there's about a dozen or two other positive variances that we're seeing, namely bad debt is sitting right around 0.5% of collected revenue. Now, traditionally in this asset class, we would underwrite 0.8%. That would be for Class A suburban multifamily. I've seen it go as high as 1.75 in Class C or B minus assets in a recessionary environment, but I haven't really ever seen it go down to 0.5. I think that's a trend that caught a lot of apartment operators by surprise this year. It's a good positive surprise that our residents are paying. And I think the macro. There's been a bunch of macro data in the last month, more or less saying, residents or individuals are choosing to which moats to pay their debts on and leaving the rest for consumer spending kind of decreases. So there's probably 12 or 13 positive variances that we're watching. Payroll, bad debt, insurance, and taxes are probably leading those positive variances in OpEx for us and instills the confidence that we can provide in lowering the expense guidance for the year.

Okay, that's helpful. Just on payroll, are you guys fully staffed on the operations right now?.

We are. And as Suzy mentioned last quarter, with the portfolio centralization efforts, the potting, this is something you're seeing kind of throughout the apartment operators. the ability to use a little bit of technology and some superior leasing efforts to kind of make your property sites a little bit more efficient on the inside, meaning your property leasing personnel. So we're like our competitors. Susie talked about last quarter how we were initiating that project in the second quarter. That's now complete. I don't think the second quarter, you know, evidence is the annualized expense savings, but the remainder of the year will. That's right.

Okay, thanks. I'll turn it back. Your next question comes from the line of Kyle Stanley with Desjardins. Please go ahead.

Thanks. Morning, everyone. Just looking at some of your leasing spread disclosure, and I'm sure you're familiar with the answer you may have already given here, but in Dallas, the new leasing spreads were actually below Austin this quarter. Just looking for a bit of color there, it does seem that there's obviously some decent strength in Austin, so maybe a bit of an update there, and then maybe what's driving that difference. Is it really kind of the Owensby as you've already talked about, is it sub-market specific?.

looking for you know what's going on in those two markets sure so often things looking great and often as you've seen each quarter on the race for new leases continue to go up and we're excited about that concessions are coming down and often while they still exist overall though they're coming down what what we're seeing right now with six to eight eight weeks free in Round Rock, where it used to be 10 to 12 weeks. We have two properties there. In the Budokai sub market, we still got eight to 10 weeks free. And in Cedar Park, there's eight to 10 weeks free. So all good things to say about the trends we're seeing in Austin. Now, Dallas, as I just spoke about, we do. We do have additional supply primarily in the northern Dallas sub markets. That's Frisco, McKinney, Prosper and Zelina. We've got three properties there. And specifically the own fee that we've talked about. There the concessions have lasted a little bit longer and still remain in about 12 weeks when you consider everything you've done.

other operators are throwing in. Okay. That, uh, that makes sense. And I mean, I think it goes to what you said in your prepared remarks about closing the, uh, the margin gap between the non-same store and the same store. But as you look into the second half and then into the, you know, maybe the spring leasing season next year, how quickly do you expect to be able to roll off the incentives? I know obviously it's incredibly difficult to forecast, but if you're at between eight and 12 weeks, depending on market today, how quickly can we see that roll off in your view?.

Yes, okay. Well, specifically with our August acquisition, that one, because the larger concessions have remained intact, that one's going to take probably another year to 14 months because we haven't started the process of burning off the concessions like we'd hoped to at this point. With the remainder, maybe a little bit shorter. Those are running right on track as we projected. Okay.

Okay, that's it for me. I'll turn it back. Thanks. Your next question comes from the line of Brad Sturges with Raymond James. Please go ahead.

Just to touch on the ancillary revenue opportunity, I wanted to understand a bit more about how to think about the ramp up or the cadence on ancillary revenue coming online. in the back half of the year and into 27 as new properties get added to your your valley trash and bulk internet programs.

Yes, Brad. It's Tom. So, I think about it this way. Just to give you an example, and as a reminder on that initiative, six of our Six of 26 assets are live today. Five of them we installed last year. One was a test asset that's been live for a while. So let's say five went live. They went live somewhere between late November and March of this year. As a blended group, that portfolio of assets is now 37% PESA. and probably ramping a little ahead of schedule. We like the pace at which that's happening. And as a reminder, it's a function of the rent roll turning, right? We don't push this amenity to every resident as in day one, we let the tenant turn or the rent roll turn for them to renew. So it just takes a function of time. That's the general pace at which you're seeing. So we've leased up a third of the portfolio over the course of the last, call it, four to five months, right, on a blended basis. I'd expect that to continue to happen. As an update on the balance of the portfolio, 16 or so properties will come live between the end of the third quarter here and the end of the year. And those will all continue to ramp going into 2027, likely on the same pace, hopefully, if not faster. Some of the assets we hope to get online sooner rather than later. Obviously, it's to our great benefit to get it online. as fast as possible. So that's how I would think about the pace of it. Okay. I appreciate that.

My other question would be just on looking at your interest rate swap schedule in terms of just thinking about the county party options where you could get called out. If you did get called out of swaps, where would be market rates today if you had to enter into new swaps?.

Yes, so that's the best thing to look at there is we have a sub event in the press release. We did a swap. late last week actually in early August here. The replacement rate, we expect to get called out of a couple in January. The replacement rate was 3.1495, so 3.15%. So we took a substantial amount of the expected cancellation, if you will, risk off the table earlier this month. If we wanted to do the same thing on the back half, the rate is very similar. and we're continuing to evaluate the best alternative there for the back half of the year swaps as well.

Perfect. Thank you. Your next question comes from the line of Himanashu Gupta with Scotiabank. Please go ahead. Thank you and good afternoon.

You mentioned no change to 13 to 22 cents of incremental FFO, what you mentioned in the sample. So that included three to four cents on the platform growth. So just wondering, are you still thinking of doing a JV or any update in that regard?.

I'll take that. The platform growth continues. We're confident in that. When we talked in December, we talked about JVs and a whole bunch of other things that we could do absolutely as it related to the platform. Where we're seeing success already rolled out on the platform side is the centralization initiative. Susie and Dan talked about earlier. I think that we expect that to do on an annualized basis, two cents of FFO savings. We also are currently negotiating in the final steps of negotiating for technology enhancements here in house, which will yield an additional similar amount of savings. 0.1, 0.2 cents of savings. So on the platform growth side, though we don't have the, the headline thing that you might have anticipated there, we're achieving it through different means. As we mentioned originally, we could achieve that. So I think we've delivered on a lot of that, albeit not having realized the full annualized impact quite yet. Got it. Thank you.

Just to be clear, so if you hit that 75 cents in 2026, so we are talking like incremental 30% FFO in the next two years to get to the midpoint of this. Incremental, I'm sorry, what? You broke up for a second. Yes. I think what I'm saying is the midpoint of that is 17.5 cents, which almost 30 higher than your 2026 ending sfo so we will see that level of growth in the next two years.

Yes, we feel great about everything we guided to in December. We're more confident today than we were in December that we're going to deliver on all prongs of those. So I've given updates on two of the three. Why don't I just round it out with a third? On the third, we said that we had about a $4.5 million revenue opportunity to put people beds to just occupy units. This is what we did. To date, we've realized, call it just south of $3 million of that revenue opportunity, 2.9. So about six six to eight cents of that has already been realized and is in the bag. Now, again, it's realized on an annual basis if you compare our September month end results to our June month end results. That does not mean it's reflected, obviously, in our full quarter results that's ramped over time. midpoint of the guidance we feel really good about in all three categories. The annualization effect will obviously take time. It's not going to happen between now and next quarter. It's going to take a year or so, which is why we had to give the horizon of guidance that we did. but we feel really good about it. Now again, the one caveat being all of that excluded the impacts of market rents and interest rates and blah, blah, blah, blah, blah, blah. But on those three prongs alone, we feel great about those drivers driving that amount of growth by early on.

early-ish 2028. Thank you, Tom. Great update and really good progress in all those initiatives. Thank you so much, and I'll turn back.