BSR Real Estate Investment Trust

Good afternoon. My name is Regina, and I will be your conference operator today. At this time, I'd like to welcome everyone to the BSR REIT second quarter 2025 financial results conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you'd like to ask a question during this time, simply press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press star one a second time. I would now like to turn the conference over to Dan Oberski, President and Chief Executive Officer of BSR REIT. Please go ahead, sir.

Thank you, Regina, and good day, everyone. Welcome to BSR REIT's conference call to discuss our financial results for the second quarter ended June 30, 2025. I'm joined on the call today by Tom Service, our Chief Financial Officer. Suzy Rosenbaum, our Chief Operating Officer, is also with us and will be available to answer your questions after our prepared remarks. I'll begin the call with an overview of our Q2 performance and other quarterly highlights. Tom will then review the financials, 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. 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 which we believe are useful supplement information about our financial performance. 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 6, 2025 for more information. Our second quarter results reflect the growing positive momentum reinforcing our business fundamentals. Our solid operating performance accretive acquisitions and dispositions activity, and absorption of supply are moving us toward a renewed period of sustained growth and value creation for unit holders. On the operating front in the second quarter, same community weighted average occupancy was 95.6%, an increase of 20 basis points compared to Q2 last year. Our Q2 same community blended releasing spreads of negative 70 basis points reflected 200 basis point acceleration relative to Q1 2025. And perhaps most importantly, in July, our same community blended tradeouts actually turned positive for the first time since Q3 of 24, growing 1.1%, a very exciting development. The REITs retention rate was 57.4%, a 300 basis point year over year increase, and another 50 basis points sequential acceleration from Q1 2025. We believe our rental rates are poised for significant growth as the burst of new rental supply that came online from 2022 to 2024 continues to be absorbed. Moreover, recent CoStar revisions, which reduce the expected new deliveries in Q4 25 through Q4 20 or through 2027, should ultimately yield additional elasticity and pricing power for our partners. Meanwhile, Q2 is a very busy period for us on the external growth front. As we mentioned on our last call on April 30, we completed the second tranche of our two-stage strategic disposition by selling six stabilized properties in the Dallas MSA for $431.5 million. We received $193 million in cash, and the balance was settled through the cancellation of 15 million Class B units, which represented approximately 75% of the then-outstanding total Class B units. When we first announced the strategic disposition of nine properties back in February, we made it clear that we expected to rapidly redeploy proceeds into higher growth properties in our core Texas triangle markets that thereby would offer our unit holders higher potential returns. I'm pleased to say that we have done exactly that. On May 14th, just two weeks after we completed the strategic disposition, we purchased two recently constructed apartment communities in the Houston MSA for $141 million. Verano Vintage Park is located in the Vintage Park development in Northwest Houston and comprises 350 apartment units, while Botanic Luxury is located in Spring, Texas and comprises 288 units. Both communities were built in 2023 and are well positioned to benefit from the BSR operating platform. During the second quarter, we made significant progress on our lease-up project at Aura 3550 in Austin. Despite all the headline deliveries in that Round Rock sub-market specifically, our occupancy increased over 24 percentage points from 35.3% to 59.7% in Q2 alone. Between the two new property acquisitions in Houston, the Aura 3550 lease up in Austin, and the acquisition of Venue Craig Ranch in Dallas that we completed in the first quarter, we have a tremendous new cohort of assets with which to build value for unit holders. And looking forward, We are in an outstanding position to pursue further strategic acquisitions in the beginning of an improved environment for property transactions in Texas. We are continuing to pursue acquisitions of attractive, relatively new construction properties from which we can drive value through our best-in-class team and operating platform. Let me summarize our year-to-date investment activity this way. In 2025, we have sold 10 high-quality, fully stabilized 95.8% occupied apartment communities at extremely attractive pricing, almost entirely to one of the most well-respected apartment owner operators in the world, which we believe is a ringing endorsement of our platform and our NAB in and of itself. In turn, we have traded those 10 communities for similar, if not better, quality assets, increasing our relative concentration to Dallas and Houston. Our acquisitions, which are 88.1% occupied as of June 30th, and our lease-up property, which was 59.7% occupied, highlight the leasing and implied growth opportunities ahead of us as we move forward through the remainder of 2025 and 2026. What should that tell you? BSR has once again found a way for our unit holders to trade stabilized yield for growth-oriented opportunities. and that's to say nothing for the cleanup of our capital structure, which we accomplished through the transactions as well. While this all may make our results a little choppy in the interim, I'm excited about the position we are in today and the outlook for our company going forward. I'll now invite Tom to review our second quarter financial results in more detail. Tom?

Thanks, Dan. Let me quickly recap our property portfolio, given that there has been a great deal of change in recent months. Our portfolio currently consists of 25 properties comprising 6,802 apartment units in five markets. A total of 89% of our NOI is being generated from Houston, Dallas, and Austin. We expect that number to increase in the coming months as we drive further value from our recently acquired properties, complete the lease up at ORA 3550, and deploy more capital into high-quality property acquisitions in our core markets. Our operational performance in the second quarter was in line with our expectations, despite the short-term impact on rental rates from elevated supply in our poor Texas market. The reached same community revenue was $26.6 million in Q2 2025, essentially flat to Q2 last year. Lower average monthly rent was effectively offset by higher occupancy and an increase in other income driven by enhanced resident participation in credit building services, higher utility reimbursements, and an increase in properties receiving valet trash service. Recall that the increase in valet trash in particular was a revenue potential we discussed in prior quarters and is a good example of internalization activities we actively explore every day. Dane Community NOI was $14.3 million, a decline of 4.9% compared to Q2 2024. The reduction reflects an increase in operating expenses of $0.4 million related to higher utility and repair and maintenance, partially offset by lower insurance costs. It also reflects a $0.3 million increase in real estate taxes due to higher tax assessments and fewer refunds received in Q2 2025 compared to the prior year quarter. Net finance costs were $6 million, a decrease of $1.5 million from Q2 last year, primarily reflecting the net pay down of debt in the quarter following our property dispositions and acquisitions. In total, the REIT generated FFO of $9.2 million, or 21 cents per unit, compared to $14.1 million, or 26 cents per unit, in Q2 last year. The decrease reflected the lower NOI due to our property dispositions, partially offset by the lower net finance costs I just noted. AFFO was $8.4 million, or 19 cents per unit, compared to $12.7 million, or 24 cents per unit, last year. The decrease reflects the lower FFO, partially offset by lower maintenance capital expenditures due to our property dispositions. Of note, FFO and AFFO per unit were positively impacted this quarter by the reduction in class fee units associated with the contribution transaction, which completed on April 30th. During the second quarter, the REIT declared cash distributions totaling $0.14 per unit, a 7.7% year-over-year increase. All distributions were classified as a return of capital. The REIT's AFFO payout ratio for the quarter was 73.0%. Turning to our balance sheet, the REIT's debt-to-gross book value as of June 30, 2025, was 48.9%. This amounts to $664 million of debt outstanding with a weighted average interest rate of 3.8%. All of our debt is either fixed or economically hedged to fixed rates. On the liquidity front, total liquidity was $82.5 million as of June 30th, including cash and equivalents of $21.5 million and $61 million available under our revolving credit facility. As usual, we have the ability to obtain additional liquidity by adding properties to the current borrowing base of the facility. There were also some material changes to our derivative book this quarter, so allow me to summarize. On June 10th, the REIT was called out of an $80 million swap, which carried an interest rate of 1.828%. As you can infer from this rate alone, the swap was well in the money and could never have been replaced in the current rate environment. Thus, the cancellation was expected and given The debt pay down associated with the property dispositions this year was also not necessary to replace. Nevertheless, relative to our Q2 results, our ongoing sequential and year-over-year finance costs will no longer reflect the benefit of this well-placed swap and be higher. In addition, subsequent to quarter end in early July, The REIT also had a $150 million swap canceled, which carried a rate of 2.163%, which clearly was also well in the money. As we mentioned last quarter, this canceled swap was proactively replaced with a new $150 million swap carrying an interest rate of 2.882%. Similar to the $80 million swap cancellation we just discussed, the net effect of this trade-out also results in increased annual finance costs on a go-forward basis. One other item worth highlighting is the fantastic work of our team this year on the battleground of real estate taxes. As we have said consistently for years now, real estate taxes, particularly in the state of Texas, is a hand-to-hand annual combat exercise. Once again, our team delivered better than expected results, even earlier in the year than we anticipated. As such, I want to reiterate that our real estate taxes running through our income statements to date reflect an outsized timing benefit of tax appeal receipts. To put a finer-tooth comb on it, we currently expect full-year taxes to be approximately $24 million in 2025. Finally, as we mentioned in our press release and given all the moving pieces Dan and I have just described, We have decided to continue our suspension of more detailed guidance at this point. We regularly evaluate the appropriate time to release updated guidance and will do so in due course. I will now turn it back to Dan for his closing remarks.