BSR Real Estate Investment Trust (HOMUN) Earnings Call Transcript

Good morning, everyone. I'm Tina, and I'll be serving as your conference operator for today's call. Right now, I'd like to extend a welcome to all of you joining the BSR REIT Third Quarter 2025 Fiscal Results Conference Call. <<operator_script>> At this point, I'll hand things over to Spencer Andrews, Vice President of Investor Relations and Marketing. Sir, the floor is yours.

Thanks, Tina, and good morning to all of you. Welcome to the BSR REIT conference call, where we'll be discussing the financial results we posted for the third quarter that ended September 30, 2025. Joining me today are our CEO, Dan Oberste; our Chief Financial Officer, Tom Cirbus; and our Chief Operating Officer, Susie Rosenbaum — all of them will be available to take your questions once our prepared remarks are done. Before we get started, I'd like to remind listeners that some statements on this conference call concerning future events are forward-looking in nature. All such information carries risks, uncertainties and assumptions that might cause actual results to differ materially. We will also reference certain non-GAAP financial measures, which we consider useful supplemental information regarding our financial performance. For further details, please see the cautionary statements on forward-looking information and the description of our non-GAAP financial measures in our news release and MD&A dated November 5, 2025. Dan, over to you.

Thanks, Spencer. For BSR, the third quarter was a real turning point: the REIT finished redeploying its capital halfway through the quarter, kept integrating the assets we recently acquired and, frankly, pushed through a leasing market that was softer than most people expected. Even with some ongoing headwinds in the macro operating environment, the REIT's capital allocation and stewardship have set our unitholders up for growth ahead. The results will speak for themselves, as they have many times before when we've made similar capital allocation decisions. The latest example is our cancellation of roughly 20 million units, or 39% of the REIT's outstanding units, since 2022. Along those lines, same-community NOI rose 2.7% in the third quarter versus Q3 of last year. Same-community weighted average occupancy came in at 94.3%. Our retention rate was 58.2% at quarter end, another 80 basis point increase from 57.4% at the close of Q2. Leasing momentum at the Austin lease-up Aura 35Fifty carried on, with occupancy hitting 86.6% at quarter end, up from 59.7% at the end of Q2. We also saw continued green shoots on the rate side. Blended same community rental rates were up 0.4% over prior leases — the first increase in blended rental rates since the third quarter of 2024.

During the quarter, we bought The Ownsby for $87.5 million. The Ownsby has 368 apartment units and sits in Celina, a Dallas suburb. Celina ranked as the fastest-growing city in the U.S. in 2023, and it added another 19% over the 12 months that ended July of 2024. Our business fundamentals cannot be disputed, even if they are taking somewhat longer to percolate than we first expected; supply will leave the picture in a meaningful way in the relatively near term. As I noted last quarter, CoStar and a number of other data providers have revised their forecasts for new deliveries between Q4 '25 and '27, and that should eventually bring more elasticity and pricing power to our apartment units. So we see this as only the start of a stretch of steady rental rate growth. Beyond rental rates, we have meaningful internal growth opportunities ahead of us, thanks to the going-in occupancy of the assets we acquired in 2025. As our team stabilizes these new properties and optimizes our existing best-in-class Texas portfolio, unitholders stand to gain. I'll now ask Tom to walk through our third quarter financial results in more detail. Tom?

Thanks, Dan. Management's expectations were met by our operational performance in the third quarter, since our blended trade-outs kept improving and, as Dan pointed out, went positive during the quarter. Blended rates rose 40 basis points in Q3, following declines of 3.2% in Q1 and 0.7% in Q2. It's clear the market's absorption of prior deliveries is now showing up in our results. On a broader level, same-community revenue for the REIT came to $26.5 million in Q3 2025, down 1% versus last year. The main cause was the negative trade-outs we saw through the third quarter, which produced a 1.2% year-over-year drop in average monthly in-place leases. That decrease was partly offset by higher other property income, which came from greater resident participation in our credit building service, more utility reimbursements, and more properties receiving valet trash service than a year earlier. We're delighted that these internalization activities are helping to drive results, and we see it as a case study of the value-add potential built into our portfolio. Notably, several such internalization activities exist, among them expansions of our valet trash and bulk Internet initiatives, and these will deliver meaningful acceleration to anticipated organic growth, starting to show up in 2026 and beyond.

For Q3 2025, same community NOI came in at $14.4 million, which is up 2.7% versus Q3 2024. The main reason same-community NOI accelerated was a 5% reduction in same-community expenses, and the biggest factors there were a $0.6 million drop in real estate taxes and a $0.2 million drop in property insurance. Below NOI, G&A got better by roughly $0.1 million, or about 5%, and net finance costs fell 2.7%, mostly because of our net paydown of debt following the disposition and acquisitions activity we did in 2025. All in, FFO for Q3 was $0.19 per unit, versus $0.23 per unit a year ago. On an AFFO basis, total AFFO per unit was $0.17 per unit, versus $0.21 per unit last year. The year-over-year drops in FFO and AFFO per unit come mainly from: one, the time lapse in redeploying proceeds from our dispositions into new acquisitions; and two, the occupancy concentration of our development and new acquisitions, which we expect to stabilize to levels similar to our same community properties in the coming quarters. Also, in the third quarter, the REIT declared cash distributions totaling $0.14 per unit, which is a 2.5% increase year-over-year. Moving to our balance sheet. As of September 30, 2025, the REIT's debt to gross book value was 51.3%.

That comes to $726.6 million in debt outstanding, carrying a weighted average interest rate of 4.0%, and 99% of that is either fixed or economically hedged to fixed rates. Turning to liquidity, total liquidity stood at $63.4 million as of September 30, which includes cash and cash equivalents of $6.6 million plus $56.8 million available under our revolving credit facility. As always, we can generate additional liquidity by adding properties to the facility's current borrowing base. In the quarter, we amended our 3.27% $105 million interest rate swap, bringing the fixed interest rate down to 3.1% and pushing the counterparty optional termination date out to January 1, 2027. Keep in mind, as I noted last quarter, we've seen some material changes to our derivative book this year, since we were called out of in-the-money swaps. So ongoing finance costs will reflect the higher cost of replacing these derivative instruments, which is particularly evident when viewed on a per unit basis. But as a reminder, when we launched this program, our use of swaps to hedge interest rate exposure was laddered by design. We continuously monitor and adjust various hedges, with the goal of achieving the best cost of capital for the REIT.

To wrap up, our operating and financial results are still being shaped by property acquisitions completed quite recently, lease-up activity, and swap replacements. Given how many elements are in motion, we are keeping our suspension of more detailed annual guidance in place for now. At this point I'll hand things back to Dan for his closing remarks.

Thanks, Tom. With the holidays nearly upon us, let me take a moment to remind everyone that for the REIT, 2025 has been a year of transformation. At highly attractive prices, we sold 10 apartment communities that were fully stabilized to best-in-class buyers, which once again underscores how accurate our NAV really is. In turn, those 10 stabilized communities have been exchanged for recently developed assets carrying greater embedded growth potential, while our relative concentration in Houston has gone up. Through the acquisitions of Ownsby and Venue Craig Ranch in Dallas, Forayna Vintage Park and Botanic Living in Houston, and the lease-up of Aura 35Fifty in Austin, we have now brought a tremendous new cohort of assets into the REIT. These new communities will help us take advantage of improving market fundamentals and produce sustained cash flow growth, which results in increased value for unitholders. Now that our 2025 disposition proceeds have been redeployed, that doesn't mean we're out of the acquisition business. As always, we keep examining acquisition opportunities in markets where the external growth environment is improving. That said, taking unnecessary risks with our investors' capital is not the business we're in. With that in mind, we want to see a future return profile that exceeds our weighted average cost of capital.

Before we finish, I want to point out that BSR was just recognized as one of the best places to work in multifamily — the fourth year in a row. That's a huge accomplishment, and it reflects the culture and the team we've built at BSR as we get ready to mark our 70th year in the real estate business. Our management platform is something we're proud of, and we strongly believe it's the secret sauce that attracts the best team in the business. That's the end of our prepared remarks this morning. Tom, Susie and I are happy to take your questions now. Operator, please open the line for questions.

<<operator_script>> Our first question comes from Tom Callaghan of BMO Capital Markets.

Perhaps to kick things off, it's good to see blended lease spreads come in positive this quarter. I was just wondering whether you could give a bit more detail on how those spreads progressed and what you observed in the market across the quarter, since I think that does suggest some slowing relative to the July levels you mentioned on the prior call.

Absolutely, glad to take that one. As you know, there are 2 levers available to us for getting the most cash flow out of the portfolio. Those levers, of course, are occupancy and rate. What we did was push rates during both July and August. Then occupancy came down a bit in September, which was expected given that kids are back in school and fewer people are out searching for an apartment. So some seasonality is mixed in there, which is entirely normal. We remain at that 94% to 96% occupancy, which, as I've mentioned previously, is our sweet spot.

Understood, that's useful. Honestly, that was going to be the very next thing I asked about, specifically around that push versus pull dynamic when it comes to occupancy and rate. What's your thinking there as we head into Q4 and 2026?

Yes. I mean, I’ll step in here, and Tom, we’re actively working through all the budgeting items right now. So let me say this: it’s one of those situations where the data providers — we could sit here and cite them to you — are all over the map. And I’m not sure that would be a productive exercise. Our top data providers and our internal team are working through it in real time. So we don’t have a strong forward-looking answer on that. What I would tell you is that at our Analyst Day in December, we plan to give you more detail there. So let me defer to then.

Alright, that sounds good, and I’m looking forward to it. Perhaps one final question from me concerns capital allocation. Dan, you noted in the press release that the 2025 disposition capital has now been fully redeployed. So in that context, how should investors view your strategy for capital allocation really over the coming 12 months? And part of that is balance sheet leverage. Are you comfortable with the current level, or do you have a kind of target in mind?

Yes, Tom, we're happy with the players we currently have on the field within our portfolio. We acquired the 5 assets mentioned in our prepared remarks, and what you're seeing is the performance and, in some cases, the lease-up expectations — in Austin, surpassing our lease-up velocity expectations. And in other cases, leasing up pretty much as we underwrote and expected. I believe the team's focus right now should be on the occupancy potential from here forward and its potential to generate revenue. That's priority #1. And our investors are fortunate because that's something we've been doing for going on 70 years. So we feel quite confident that we'll be able to obtain the revenue generated from those lease-ups. When we think about additional acquisitions, step one is we always underwrite our properties on their return on fair market value, and we rank them from 1 to 26%. If we see a rotation opportunity, I think you've seen us take advantage of those opportunities in the past. Number two, if we see there's an opportunity to deploy capital through leverage, equity or other creative means to drive a higher return for our investors. I think you've seen us work in creative and predictable patterns in the past to deliver those returns.

Returning, though, to the portfolio we hold at present — the squad we've got out there is one we're happy with. Those 5 new players added to our team this year are ones we're pleased about. From an operational standpoint, I believe we carry out what we're set up to carry out, namely serving as a manager, and that, I think, is the way we can maximize returns. We have no near-term intentions of drawing on credit to make acquisitions, and neither do we have near-term intentions to rotate, I'd say, through the end of the year. As the year gets closer or should anything shift within our portfolio, we would certainly seize rotation acquisition opportunities along with other opportunities powered by one or all means of capital.

Kyle Stanley with Desjardins is up next with a question.

Turning back to the leasing spread topic for a moment. Seeing the gain on the new leasing side in Austin was encouraging. Could you speak to what might be behind that Austin improvement? Is it the lease mix? Is it perhaps that there's less competition in the market right now? I'd love your thoughts on that.

Absolutely, Kyle. So to be precise, Austin — for the first time in some time, the overall share of properties giving concessions edged down a bit. And that, of course, explains why we could raise rates somewhat further in Austin compared with prior periods. Dallas-Fort Worth and Houston showed precisely the reverse. In Dallas and in Houston, concessions actually rose marginally when it comes to properties that offer them.

Okay, that’s great. Moving on — I believe Tom brought up the forward view and the possibility of giving us an update at the Investor Day. At that time, should we expect annual guidance for ’26 to be provided, or at least a return to giving annual guidance for the year ahead?

Absolutely, Kyle — it's definitely our plan to restore annual guidance down the road. We'll offer some forward-looking views in December, though how extensive that will be is still to be determined, but we're certainly heading that way.

Okay. Perfect. And then this is my final question. Dan, you brought up the lease-up opportunity at the assets you recently acquired and noted that it's a major focus today. On average, what would in-place occupancy be right now at those 5 newly acquired assets, or the 5 new assets in the portfolio? And how fast do you expect stabilization to happen over the coming several months or quarters?

Yes. So I’ll give it an initial try, and then ask Susie to fill in more nuance and specifics. Ordinarily, when we underwrite — well, to begin with, where do those assets stand at present? Occupancy across each of those 5 properties will be greater now than it was on September 30, when we reported those figures. We perceive upside in occupancy going forward, and we can assign a value of roughly $4.5 million of revenue in 2026 to that. As for the margin on which that revenue lands, it will naturally be higher. I mean, it stands to reason that the top end of your stack carries a substantially higher margin than the first lease you sign. Whether that margin is 65%, 75%, or 80% is what we are working through right now on an incremental basis, as you can appreciate the difficulties involved in rotating assets and then giving guidance on lease-ups. Some — well, all of them are surpassing our expectations regarding occupancy and leasing velocity. Did that address the first part of your question?

It did. I suppose there's just one thing to clarify. That $4.5 million in revenue—that comes on top of what's already being produced today once lease-up happens, right?

Right, that adds to what we're likely showing for the September figures. What we're looking at there is occupancy. I won't call it low-hanging fruit, since leasing apartments isn't easy — it takes specialized work. Still, for our team it counts as low-hanging fruit, because that's their daily job. Occupancy arrives when, as Susie said before, you've got the product. Susie, is there anything else you'd like to add to that?

Yes. Just — yes, as you mentioned, those assets finished the quarter at 90% occupancy. But like Dan said, that doesn’t mean they were at 90% throughout the whole period. So there’s plenty of upside for us to capture there. I do want to note, though, that we expect 3 of those assets to reach stabilization on the occupancy front by year-end, while the remaining 2 would get there in the first half of next year. But we have 2 chances to benefit. What’s key to keep in mind is that occupancy comes first, but after that we still need to — or get to — work through burning off concessions, and that will lift rental revenue as well.

Sairam Srinivas from Cormark Securities is the next one we'll be hearing from.

When you look at the acquisition market, you've clearly been active there. Compared with what you'd likely have seen 6 to 8 months earlier, are you now actually seeing more participants coming into these assets?

My view is that the market for acquisitions looks fairly healthy right now. The same kinds of players active 6 to 8 months ago are still the ones participating today. It's really a mix of all the usual parties coming together. Over the last 6 months, I haven't seen any meaningful shift in what kind of buyer is involved, but I'd also like to hear what Dan thinks.

No, I believe Tom covered that really well. What I'd add is that opportunities keep showing up in the acquisition market. And when you look at how the interest rate curve has moved—from a curve that was historically flat across the last year, or 18 months, or 5 years, depending on how you count it—toward some volatility when you look out on the forward interest rate curve, that volatility opens up opportunities to finance a risk against a desired return. We see a better outlook next year, the year after, and the year after that, all the way through '28, just in terms of the fundamentals of cash flow and how well properties in our business can deliver that cash flow. We don't believe—and I know our investors can share this view—we don't believe the markets are correctly underwriting the revenue potential and the net operating income upside that this sector will probably generate, and we understand that. Our private partners in the market who are trying to sell their projects right now—for the most part, those who are selling face difficulty, and they carry somewhat higher leverage—well, considerably higher leverage than we do and than other public REIT participants do.

That increased leverage, along with the heavier interest burden, definitely makes things difficult when a private developer tries to generate the cash flow they had underwritten. Beyond leverage, though, I'd say on operations — if I look at many of our operating partners, once you take interest rate out and take cap rate out of their underwriting in '21, they're seeing pro forma net operating incomes that match what they expected their developments to deliver. What I think our private sellers are running into today is the cap rate being applied to that cash flow stream, that net operating income they underwrote. It isn't that cap rates have climbed past — I think our NAV does a great job depicting the market cap rate for the market. The issue is that the expectations back in '21 and '22 for those private developers who raised private capital weren't a 5.1% or a 5.2% exit cap. They're probably closer to a sub-4 cap. So when you build a property and it operates and the trains come in on time and the revenue and occupancy and the net operating income hit your pro forma, but your reversion cap for your investment moved from a 3.9% cap to perhaps a 5% cap, that's a significant deterioration in your sales proceeds.

Like we mentioned during earlier quarters, those developers are running into difficulties, and in certain instances they've made the choice to put their properties on the market. A few of our solid partners have sold us properties that have us genuinely thrilled, both when it comes to the purchase price and on the operational side. Meanwhile, other developers and possible sellers have chosen to refinance that exposure and hold out for improved conditions — a stance I happen to share, since we've just acquired 5 properties and we're seeing the same underlying economics across our markets that those developers see. They may simply be ready to accept a considerable level of risk with the dollars from their private capital investments that, in the public markets, we wouldn't be comfortable taking on from a leverage perspective.

That’s clear, Dan. And perhaps we discussed that supply cliff before and how, basically, after it’s gone, it just drops sharply all the way down. Looking at the market today and what you’re seeing after the quarter, how much time do you think it really takes for all of that supply to ultimately be absorbed and for you to reach that edge where rents could likely begin rising sharply again?