BSR Real Estate Investment Trust (HOMUN) Earnings Call Transcript

Good morning, everyone. I'm Krista, the conference operator for today's call. Right now, I'd like to welcome all of you to BSR REIT's Second Quarter 2026 Financial Results Conference Call. Every line has been muted so that background noise doesn't interfere. Once management finishes its remarks, we'll open a question-and-answer session. Should you wish to ask a question at that point, just press star followed by the number one on your telephone keypad. And if you'd like to withdraw your question, simply press star one again. At this time, I'd like to hand the conference over to Spencer Andrews, Vice President of Investor Relations and Marketing. Please go ahead, sir.

Thanks, Krista, and hello everyone. It's good to have you join BSR REIT's call, where we'll go over the financial results for the quarter that ended June 30th 2026 — that's our second quarter. With me today are our Chief Executive Officer, Dan Oberste, our Chief Financial Officer, Tom Cirbus, and our Chief Operating Officer, Susie Rosenbaum; once our prepared remarks wrap up, all three will be ready to take your questions. First, though, a reminder for those listening: some of what we say on this call regarding future events constitutes forward-looking statements. That kind of information carries risks, uncertainties, and assumptions, any of which might lead actual results to come out materially different. We'll also be citing some non-GAAP financial measures, which in our view provide helpful supplemental detail on how we performed financially. Should you want more detail, please see the cautionary language on forward-looking information and the explanation of our non-GAAP financial measures included in our news release and MD&A, both dated August 12th 2026. Dan, the floor is yours.

Thanks, Spencer. The way our portfolio held up and the momentum we keep seeing in the business really come through in how we performed in the second quarter. Compared with Q2 of last year, both total portfolio revenue and NOI were higher. On a sequential basis, we grew same-community occupancy, total occupancy, same-community revenue, total property NOI, and FFO. Blended lease trade outs were positive again in Q2 and then climbed further in July. We've made meaningful headway on our organic growth initiatives, among them a big occupancy gain at our August 2025 acquisition relative to Q1, along with ongoing advancement of our resident amenities programs. A few selected figures from the second quarter: same-community occupancy rose to 94.6% from 94.3% in the first quarter. Versus Q1 of this year, same-community revenue was up 35 basis points. Trade-outs came in at 50 basis points positive for the quarter and kept accelerating, reaching a blended increase of 1% for the month of July. Retention in Q2 was 60.1%, which is 30 basis points above the end of Q1 and 270 basis points above the end of Q2 last year. At quarter end, physical occupancy at our August 2025 acquisition had climbed to 91%, nearly 20 percentage points above March 2026. We also moved further ahead with our resident amenities programs, Bulk Internet and Valet Trash, which our residents have welcomed very positively and which in the second quarter are now break-even to FFO accretion.

The economic fundamentals that underpin our markets are still solid. Apartment deliveries and starts are definitely carrying on their forecastable drop from the peaks we witnessed earlier in this decade. Consequently, during the first half of 2026, and especially in the second quarter, apartment demand exceeded deliveries. As I've mentioned previously, this process hasn't moved as quickly as we had hoped or anticipated, but tangible positive momentum is visible across much of this quarter's results. Naturally, we aren't sitting back waiting for rising market demand to lift financial performance by itself. We're generating growth through our strongest asset—our talented people—to source, underwrite, and execute on platform initiatives, including every one of the initiatives we outlined in December of last year. Here's a brief update on each. First, lease-up of our 2025 acquisition class. With our August 2025 acquisition nearing physical stabilization at the close of Q2, we can expect the back half of 2026 to reflect more fully the concessed but occupied revenue potential of the 2025 class. Our attention now shifts to the second bite of the apple within this cohort of assets. That opportunity is best illustrated by examining our non-same-community NOI margin.

As you'll notice, our non-same-community NOI margin for the year to date is running roughly 450 basis points below the same-community NOI margin. That's where the second bite opportunity comes in. When you factor in collecting rent on physically occupied assets across a full quarter or year rather than only part of one, together with burning off concessions and normalizing expenses at each of those five assets, we think the gap between the non-same-community and same-community NOI margins will narrow on its own, which represents the remaining opportunity in this category. Second, turning to our resident amenity programs, which right now are led by Bulk Internet and Valet Trash. Bulk Internet is operating with no issues worth mentioning. We're live at six of our 26 properties and ramping up ahead of schedule. We're in the ground on seven more properties, with the rest set to start in the back half of the year. As new properties come online in late Q3 and in earnest in Q4, we expect meaningful benefits to our other income line item to start ramping. On Valet Trash, we're 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 annualized expense savings at the rate of $0.02 of FFO per unit while at the same time enhancing efficiency of operations.

Even though these efforts remain at an early point, our progress has been very strong, and what we've seen so far only strengthens how we feel about the wider chances to create value throughout our portfolio. We feel sure we'll hit the incremental growth target of $0.13-$0.22 per unit that we're aiming for by early 2028, leaving out the effects of shifts in market rents, expenses, interest rates, and so on. Taken together, our long-term growth story remains completely intact. Our property portfolio is excellent, sits in top-tier markets, and is delivering at a high level, and we're adding more value through growth efforts driven by our platform. We absolutely expect business momentum to keep building over the coming quarters as rental markets improve steadily and we make additional headway on operational enhancements. Our confidence keeps rising that we're positioned to generate strong returns for our unitholders. I'll now ask Tom to walk through our second quarter financial results in greater detail. Tom?

Thanks, Dan. Overall, our second-quarter financial results came in where we had expected internally, and they kept showing sequential quarterly improvement. The rate of that quarter-over-quarter gain landed at the low end of our target range in Q2, mainly because top-line rental growth was somewhat slower than anticipated, but the market fundamentals behind our business recovery kept getting stronger. Starting with leasing, effective rates on new leases were down 2.4% for the quarter, renewals rose 2.9%, and blended rates ended up 0.5% higher. That swing back to positive rate growth amounted to a 1.5% gain in the blended rate versus the first quarter, and it reflects the better supply-demand balance across our core Texas markets. On top of that, in July new lease rates fell 90 basis points while renewals climbed 2.2%, producing a 1.0% rise in blended rates. We're encouraged by how trade-outs kept building through the summer, with April, May, June, and July each improving sequentially on a blended basis. Same community revenue for Q2 totaled $26.4 million, down 1% from a year earlier. The main drivers were a $0.3 million reduction from lower average occupancy, which came in at 94.6% against 95.6%, and $0.2 million from lower average monthly in-place rent.

That drop was partly offset by a $0.2 million rise in other property income, and the drivers there were growth in utility reimbursements along with resident amenity programs. On a sequential basis, same community revenue came in at $26.4 million for Q2 2026, up 35 basis points from Q1, mostly on the back of higher average occupancy — 94.6% against 94.3% — plus higher average monthly in-place rent. Total portfolio revenue reached $34.2 million in Q2, a 1.5% gain over last year. That improvement came mainly from $4 million of revenue produced by our 2025 property acquisitions, partly offset by the $3.2 million we lost from our 2025 property dispositions and a $0.3 million reduction from same community properties. Sequentially, total portfolio revenue of $34.2 million was up 1.1% versus Q1, largely because of how the 2025 acquisitions performed. Same community NOI for Q2 2026 was $13.9 million, down 2.8% from last year. The main reasons: first, the revenue decline I just walked through; second, timing around the real estate tax funds received in Q2 of last year, since Q2 last year saw an outsized amount of refunds; and third, a $0.1 million improvement in property insurance expense following another fantastic year for our annual property insurance renewal, which took effect in April.

Looking at the same community NOI, it was down 1.4% compared with Q1 2026, and the main driver there was that we received $0.2 million less in property tax refunds. For Q2 2026, total portfolio NOI came in at $17.9 million, which is up 0.5% versus last year. What drove that increase was a $2 million contribution from the properties we acquired, which was offset by the $1.5 million we lost from our 2025 dispositions, along with a $0.4 million reduction coming from the same community properties. On a sequential basis, total portfolio NOI for Q2 2026, at $17.9 million, rose 1.9% over Q1 2026. That gain came mainly from higher total portfolio revenue, plus a $0.2 million increase in prior year property tax refunds we received from the disposed properties, and that was partly offset by the decline in same community NOI. As Dan mentioned in his remarks, total portfolio NOI should keep improving as we shift away from concentrating on physical occupancy and toward focusing on full economic stabilization of our non-same community properties, which the non-same community NOI margin opportunity shows. Moving below NOI, G&A expenses were basically flat on a year-over-year basis and fell 6.6% sequentially from Q1. As we said last quarter, legal and professional costs ran high in Q1 and came back to normal in Q2.

And to wrap up, Q2 net finance costs rose 35% from a year earlier and 3.7% quarter over quarter. That year-over-year figure is very noisy, since, as you'll remember, the same quarter a year ago was our main transition quarter, so the portfolio wasn't carrying full leverage during that period. On a sequential basis, the rise in net finance costs comes entirely from interest rate resets that took place in our derivative portfolio. Taking everything together, FFO for Q2 2026 came in at $7.1 million, or $0.18 per unit, versus $9.2 million, or $0.21 per unit a year ago. Three items mainly explain that decline. First, the movement in same-store NOI. Second, higher finance costs, which were partly offset by third, the building momentum in our non-same community portfolio. Quarter over quarter, FFO in Q2 2026 was $7.1 million, or $0.18 per unit, against $6.9 million, or $0.18 per unit in Q1 of 2026. Again, the modest FFO increase came mainly from momentum in our non-same community portfolio, offset by financing costs. Turning to AFFO, the same drivers I just described for FFO apply. What's unique to AFFO, though, is that Q2 of this year saw an outsized spend on recurring CapEx, driven by a delay in Q1 spending tied mainly to the many weather events that hit during the first quarter, which pushed that spending into this category later on.

Also, because of the tough concession-heavy conditions we dealt with during the latter six months of 2025 on the properties we were leasing up, our adjustment for straight-line rental revenue came in positive this quarter, since those concessions have been burning off gradually. Turning to the balance sheet, BSR REIT's debt to gross book value stood at 51.7% as of June 30, 2026, versus 51.2% at the close of 2025. That works out to $732.2 million in debt outstanding, carrying a weighted average interest rate of 4.1%, a weighted average term to maturity of 3.9 years, and $39.7 million of total liquidity at the end of the quarter. Last, on guidance. As you'll see, we revised our same community portfolio guidance to account for the somewhat slower pace of top-line recovery than what we had expected when the year began. We've likewise revised our expense guidance to capture the meaningful savings we're seeing across line items versus what we had anticipated. Taken together, we don't anticipate any change overall to our initial same community NOI guidance. Second, as noted in the earnings release, although our August 2025 acquisition kept up strong leasing momentum through the second quarter, hitting 91% physical occupancy at quarter end, stabilization is arriving a bit later than we had initially expected.

So because of that, and because falling short of where we first thought we'd be compounds over time, we've nudged our 2026 guidance ranges for FFO per unit and AFFO per unit down a bit to reflect how that asset is actually operating. Fundamentally, our real estate business is still quite healthy and mostly tracking what we expected, as we keep growing revenue from lease-up activity and start seeing the economic stabilization of our non-same community assets take effect — though at one asset that's coming a little later than we first anticipated. Naturally, we'll keep updating this guidance as necessary for the rest of the year. With that, I'll hand things back to Dan for his closing remarks. Dan?

Thanks, Tom. As we wrap up our prepared remarks, I want to underscore the core takeaway from Tom's final point. The lease-up pace at a single property — the one we acquired in August 2025 — is trailing our original 2026 expectations by roughly a month or so. The other 96% of our portfolio is still largely tracking with what we initially anticipated. And while rental revenue momentum is a bit behind our original outlook for the year, there's meaningful momentum further down the P&L. Our resident amenities programs are driving anticipated growth in other income. Centralization work is delivering savings on operating and personnel costs. Tom touched on the encouraging developments around insurance and taxes. Our platform efficiency initiatives are gaining traction, to cite just a few examples. While top-line market improvement clearly isn't yet where all of us would like it to be, we're as enthusiastic as we've ever been about the medium- to long-term outlook for our portfolio. As we've noted before, the rental market isn't something we can control, but our platform performance and the day-to-day experience our residents have in our communities are within our control. I can tell you the BSR team is delivering exactly what our investors expect, and we'll drive growth from this portfolio efficiently and methodically — the growth our investors deserve.

If you combine that clear expansion with the gradual recovery in rental rates that stems from better supply-demand basics and the natural economic stabilization we expect over the next few quarters, we're in a strong position to deliver steady, above-average returns for our unitholders. That wraps up our prepared comments for today. Tom, Susie, and I would be glad to take your questions now. Operator, please open the line for questions.

Appreciate it. To ask a question, hit star one on your phone's keypad, and that raises your hand and puts you in the queue. Should you wish to take that question back, just hit star one once more. Our first question is from Jonathan Kelcher at TD Cowen. The line is yours.

Thanks. Morning. First question is about blended rents. Looking back, I believe those turned positive in Q3 of last year. How confident are you that we're seeing the start of an upward trend? Or do you think we could still be around ±0% for a couple of quarters?

Hey, Jonathan. So yeah, on the whole, from a big-picture standpoint, we view the market as being in good shape, and we expect rents to keep getting better. You might notice us easing off somewhat in the third quarter, specifically in order to boost occupancy, which is the other lever we opt for. That said, in general, I'd say that what we're observing at this moment in July is that things look good.

Okay. In Q3 it's likely right around plus or minus 0%, and from that point on, hopefully moving upward. Is that a fair way for me to read it?

Okay, so specifically within the BSR portfolio, sure, we might decide to trim rates somewhat during Q3 in order to lift occupancy. But when you step back, the overall result is greater rental revenue, correct?

Correct.

Q4 brought a stronger upswing.

All right, appreciate that. And then second, regarding the guidance: the growth in expenses declined, with the midpoint dropping 250 basis points, which is fairly significant. Could you perhaps shed a bit more light on what is behind that?

Okay, on guidance, the biggest factor there is The Ownsby, correct? That's on the rental revenue side. On concessions, we simply anticipated that concessions would remain in the Celina market. They did not decline as quickly as we originally assumed when we put out guidance for 2026. Our expectation was roughly eight weeks free. What we are actually observing is the equivalent of roughly 12 weeks free once you factor in what operators are offering — 10 weeks free plus perhaps a $1,500 gift card. Looking at that, there is a four-week gap we now need to absorb as we compete with other operators in the Celina market, and that produced most of the write-down tied to The Ownsby for the second half of the year. The remaining portion is considerably smaller and relates to the same store portfolio. We continue to face pressure in those markets as well. Concessions remain, and they likewise did not fall quite as far as we had anticipated — though let me repeat, they are falling — and that is roughly a $14 gap in net effective rent per unit for the balance of the year.

Jonathan, it's Dan. Like I said before, looking further down the P&L and focusing on OpEx in particular, the primary factors behind the reductions in our OpEx were decreases in real estate taxes along with a favorable insurance renewal. We're beginning to see some green shoots when it comes to the platform centralization we discussed last quarter. We figure that's likely worth about a penny in the back half of the year, and it will keep driving OpEx compression, which is why we feel good about lowering that guidance at the midpoint, as you pointed out. I'd note there are roughly a dozen or two additional favorable variances we're observing, particularly bad debt, which is running at approximately 0.5% of collected revenue. Historically in this asset class, we would underwrite 0.8%. That applies to Class A suburban multifamily. I've watched it reach as high as 1.75% for Class C or B-minus assets during a recessionary environment, but I've never really seen it fall to 0.5%. I believe that's a trend that surprised a lot of apartment operators this year. It's a welcome surprise that our residents are paying. I think there's been plenty of macro data over the last month or so suggesting that residents or individuals are picking which moats to pay their debts on and leaving the remainder for consumer spending, which kind of decreases.

We're likely tracking around 12 or 13 favorable variances right now. Within OpEx, the ones probably out in front for us are payroll, bad debt, insurance, and taxes, and that gives us the confidence behind the reduced expense guidance we're able to offer for the year.

Alright, that helps. On the payroll side specifically — are you fully staffed on operations at the moment?

Yes, we are. As Susie said last quarter, with what we’ve been doing to centralize the portfolio and with potting, this is a pattern you’re seeing across apartment operators generally. Being able to apply a bit of technology alongside stronger leasing work lets you run your property sites somewhat more efficiently from the inside — that is, your on-site leasing staff. So we’re picking up some expense savings from that, very much as our competitors are. Susie noted last quarter that we kicked off that project in the second quarter. It’s finished now. I don’t believe the second quarter reflects the annualized expense savings, but the rest of the year will.

You've got that right.

All right, thank you. I'll hand it back over.

Our following question is from Kyle Stanley at Desjardins. You may proceed.

Thanks. Morning, everyone. I was glancing at part of your disclosure on leasing spreads—you might have addressed this already—but this quarter in Dallas, new leasing spreads actually came in lower than Austin. I’m just hoping for a little color on that. There clearly appears to be some solid strength in Austin, so perhaps a small update there. And then maybe what’s causing that gap. Is it really the owns, like you mentioned earlier? Is it tied to specific sub-markets? I’m just trying to understand what’s happening in those two markets.

Absolutely, Austin is performing really well for us. As you can see, every quarter the pricing on new leases keeps climbing, and that's something we're pleased about. Concessions in Austin are declining. They're still out there, but on the whole they're trending down. At the moment we're seeing six to eight weeks free in Round Rock, versus the 10 to 12 weeks it used to be. We own two properties in that area. Over in the Buda-Kyle submarket, it's still 8 to 10 weeks free, and Cedar Park is also at 8 to 10 weeks free. So the trends we're seeing in Austin are all positive. Turning to Dallas, as I mentioned earlier, we do have extra supply, mainly in the northern Dallas submarkets. Those are Frisco, McKinney, Prosper, and Celina. We have three properties in that area. Specifically The Ownsby, which we've discussed before. There, concessions have persisted somewhat longer and remain at roughly 12 weeks once you factor in everything else the other operators are offering.

All right, that makes sense. I think it ties back to what you mentioned in your prepared remarks regarding narrowing the margin gap between non-same store and same store. As you look toward the second half and then perhaps the spring leasing season next year, how quickly do you expect to be able to roll off the incentives? I know it's obviously incredibly hard to forecast, but if you're at between 8 to 12 weeks depending on the market today, how fast can we see that roll off in your view?

Yes, absolutely. Regarding the acquisition we completed in August specifically — since the bigger concessions are still in place, that one will likely need roughly 12 to 14 more months, given that we haven't yet begun the concession burn-off process the way we had hoped to by now. For the rest, it may be somewhat shorter. Those are progressing exactly as we anticipated.

All right, I'm finished with my part. I'll hand things back over. Thank you.

Brad Sturges from Raymond James has the next question. Go ahead, please.

Hi there. I just want to touch on the ancillary revenue opportunity, and I suppose I'd like to get a bit more clarity on how we should think about the ramp-up, or the cadence, for ancillary revenue coming online during the back half of the year and on into 2027, as new properties get added to your Valet Trash and Bulk Internet programs.

Yeah, Brad, Tom here. Here's how I look at it. To give you an example, and as a reminder on that initiative, 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. 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% penetrated and probably ramping a little ahead of schedule. We like the pace at which that's happening. As a reminder, it's a function of the rent roll turning, right? We don't push this amenity to every resident day one. We let the tenant turn or the rent roll turn for them to renew. It's a function of time. That's the general pace at which you're seeing. We have 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 would 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.

A number of those assets we're aiming to bring online sooner rather than later. Clearly, getting them online as fast as we can is hugely to our advantage. That's the way I'd frame the pace of it.

Okay, thanks for that. My remaining question concerns your interest rate swap schedule — specifically, thinking through the counterparty options where a call could take you out. If you were indeed called out of swaps, what would market rates be today if you needed to enter into new swaps?

Yeah. The best reference point for that is a sub-event we included in the press release. Late last week — in early August, actually — we completed a swap. On the replacement rate, we expect a couple to get called in January. The replacement rate came in at 3.1495%, so 3.15%. Earlier this month, we removed a substantial portion of the expected cancellation risk, if you will, from the table. If we chose to do the same for the back half, the rate is very similar. We're still evaluating the best alternative for the back half of the year swaps as well.

That's great. Thanks so much.

Himanshu Gupta from Scotiabank has the next question — please go ahead.

Thanks, and good afternoon. Dan, you said there’s no change to the $0.13-$0.22 of incremental FFO that you talked about in December. That included $0.03-$0.04 from platform growth. I’m just wondering, are you still considering doing a JV, or is there any update on that?

Himanshu, I’ll handle that one. Growth on the platform side keeps coming, and our confidence in it remains strong. Back in December, when we spoke, we discussed joint ventures along with a range of other possibilities available to us regarding the platform. Where we’re already seeing success that has been rolled out on the platform side is that centralization effort Susie and Dan mentioned earlier. On an annualized basis, we expect that to deliver $0.02 of FFO savings. We’re also in negotiations right now — in the final stages of negotiating technology enhancements in-house — and those should produce an additional similar amount of savings, $0.01-$0.02. On platform growth, though, we don’t have the headline item you might have expected to see. We’re getting there through other means. As we said at the outset, achieving that was possible for us. Much of that, I think, we have delivered on, even though the full annualized impact hasn’t quite been realized yet.

Understood, thanks. Just so we're clear, reaching that $0.75 in 2026 means we're talking about an incremental 30% in FFO over the following two years to arrive at the midpoint of this.

Going incrementally — apologies, your audio cut out briefly there.

Yeah. What I'm getting at, I think, is that the midpoint there comes to $0.175, which works out to nearly 30%.

Yes.

That figure is above where your FFO will land at the close of 2026. Over the coming two years, we expect to see growth at that same level.

Yes. We feel really good about all the targets we laid out in December. Today our confidence is even higher than it was back in December that we will hit every one of those prongs. I have already provided updates on two of the three. So why don't I just complete the picture with the third one? Regarding that third prong, we mentioned we had roughly a $4.5 million revenue opportunity tied to filling beds and simply occupying units. Here is what we have done. As of today, we have captured, let's say, a bit under $3 million of that revenue opportunity — $2.9 million. So roughly $0.06-$0.08 of that has already been achieved and is secured. Now, again, that is realized on an annual basis, if you compare our September month-end results with our June month-end results. Obviously, that does not mean it shows up in our full quarter results. It ramps over time. The midpoint of the guidance — we feel really good about it across all three categories. The annualization effect will clearly take time. It will not materialize between now and next quarter. It will take about a year or so, which is exactly why we had to give the guidance horizon that we did, but we feel really good about it.