Flagship Communities Real Estate Investment Trust (MHCUF) Q2 2024 Earnings Call Transcript

Flagship Communities Real Estate Investment Trust (OTCPK:MHCUF) Q2 2024 Earnings Conference Call August 8, 2024 8:30 AM ET

Company Participants

Kurtis Keeney – Chief Executive Officer
Nathan Smith – Chief Investment Officer
Eddie Carlisle – Chief Financial Officer

Conference Call Participants

Frank Liu – BMO Capital Markets
Mark Rothschild – Canaccord
Bradley Sturges – Raymond James
Alexander Leon – Desjardin Capital Markets
David Chrystal – Ventum Capital Markets
Himanshu Gupta – Scotiabank

Operator

Hello, ladies and gentlemen. Thank you for standing by. Welcome to the Flagship Communities REIT Second Quarter 2024 Earnings Call. At this time, all participants are in a listen-only mode. Following the presentation, we will hold a brief question-and-answer session for analysts and institutional investors. I would like to remind everyone that this conference call is being recorded.

Today’s presenters are Kurt Keeney, Flagship’s President and Chief Executive Officer; Nathan Smith, Chief Investment Officer; and Eddie Carlisle, Chief Financial Officer. Please note that the comments made on today’s call may contain forward-looking information, and this information, by its nature, is subject to risks and uncertainties. Actual results may differ materially from the views expressed today. For further information on these risks and uncertainties, please consult the company’s relevant filings on SEDAR. These documents are also available on Flagship’s website at flagshipcommunities.com.

Flagship has also prepared a corresponding PowerPoint presentation, which encourages you to follow along with during this call.

And now I’ll pass the call over to Kurt Keeney. Kurt?

Kurtis Keeney

Thank you, operator. Good morning, everyone. Thank you for joining us today. Our performance in 2024 to date has been strong, and we continue to demonstrate the merits of our business model through the improvement of our key metrics. Rental revenue this quarter increased by 22% over the same period last year. Same community revenue was up nearly 11% over the same period last year, and our FFO and AFFO grew by 27% and 29%, respectively, over last year.

In addition to our solid results, the second quarter of 2024 was especially noteworthy, because we completed the REIT’s largest acquisition in our history during the quarter. We acquired seven MHCs, strengthening our existing footprint in Tennessee by entering Nashville, one of the fastest-growing markets in the U.S. We also formed a foothold in our new market, West Virginia, with five distinct locations within the state.

West Virginia is the eighth contiguous U.S. state where we will operate. The integration of these acquisitions has already begun and are within our expectations. Also during the quarter, Flagship raised gross proceeds of approximately $60 million, which were used to partially fund this acquisition. We are well positioned to continue executing our growth strategy by strengthening our balance sheet and maintaining a low-cost debt profile. Since going public in 2020 of October, the REIT has grown every year. We began with 45 MHCs comprising of 8,255 lots across four states.

Today, following the completion of our recent acquisition, the REIT owns 80 MHCs with over 14,000 lots across eight U.S. states as well as two RV resort communities with 470 lots. The ability to grow annually complete transformational acquisitions and generate strong financial results speaks to the strength of our business model and the fundamentals of the MHC industry, which continues to demonstrate a consistent track record of strong performance regardless of the economic cycle.

Manufactured homes remain a very appealing and cost-effective option for many Americans. Our customers enjoy homes that are detached structures that do not share walls, utilities, air conditioning or heating with any other homes. The homes include two, three and four bedrooms, typically with two bathrooms. They have a deck yard, driveway and in-home laundry facilities, all for less than the cost of renting an apartment.

Our mission is to provide affordable housing and exceptional residential living experiences in our family-oriented manufactured housing communities. We work hard every day to provide our residents with a best-in-class living experience, both from an affordability and an environmentally responsible perspective. And we are always pleased when these efforts are recognized by our industry.

In June, we were awarded the Retailer of the Year and Retail Salesperson of the Year by the Kentucky Manufactured Housing Institute. We also were honored with the Community of the Year award for the third consecutive year in Kentucky. This year’s award featured our White Pine Point community, a 345 lot community is an amazing turnaround story. In a short span of 15 months, we helped transform the community by installing a brand-new clubhouse, a municipal grade playground, pickleball court, dozens of new homes, along with street paving and new solar lighting. These awards are outstanding achievements, and we are thrilled to welcome new and diverse homeowners into the community.

I will now turn it over to Nathan to provide more details on our recent acquisitions. Nathan?

Nathan Smith

Thanks, Kurt. Good morning, everyone. Acquisitions of new communities have always been a big part of Flagship success and this quarter was no exception. As one of the Midwest regions largest MHC operators, we can leverage our nearly 30 years of operating experience to source off-market opportunities through long-standing industry relationships. And that was the case with our recent Tennessee and West Virginia acquisition. While this acquisition was the largest in our history, it is one of many that we have successfully completed in our short time as a public REIT.

We continue to grow our top line revenue, which reflects how we have successfully ramped up and integrated the acquisitions we have completed over the past number of years. We also continued to perform well on a same community basis, which shows our ability to optimize our existing portfolio. But despite our growth, our approach has remained the same. We are not interested in growth for growth’s sake, which it comes to acquisitions we stick to our plan, which is as follows: First, we’re looking for opportunities that will be accretive to our AFFO per unit. Second, we are seeking opportunities that will enable us to leverage management synergies and generate economies of scale. And finally, we’re seeking acquisition targets within our current markets or adjacent U.S. states where we currently operate with similar regulatory framework and characteristics as existing markets within our portfolio. This framework helps us achieve slow and measured growth, which allows us to establish a platform to acquire adjacent properties within our existing markets, just as we did with Nashville and West Virginia.

We have a proven operating strategy, and we are well positioned within the MHC industry, which is primarily comprised of local owner operators. The top 50 MHC investors are estimated to control approximately 17% of the 4.3 million manufactured housing lines in the United States. There also continues to be a limited supply of new manufactured housing communities given the various layers of regulatory restrictions, competing land uses and lack of land zone, which creates high barriers to entry.

I’ll now turn it over to Eddie, our CFO, to talk about our financial performance for the quarter. Eddie?

Eddie Carlisle

Thanks, Nathan. Good morning, everyone. We generated revenue of $21.2 million during the second quarter, which was up 22.2% over the same period last year, primarily due to lot rate increases and occupancy increases across the portfolio. Same community revenues of $18.9 million for the second quarter grew by approximately $1.8 million over the comparable period last year. This increase was driven by higher monthly lot rents as well as growth in same-community occupancy and increased utility revenues.

Net operating income and NOI margin were $14.1 million and 66.2%, respectively, compared to $11.6 million and 66.7% during the second quarter of 2023. Same community NOI margin for the second quarter was 65.7%, which was a decrease over the same period last year. The decrease in NOI margins were driven by increased staffing levels in 2024 as well as increased costs related to property taxes and maintenance items.

AFFO for the second quarter of 2024 was $7 million, an increase of 28.5% from the second quarter of 2023. FFO per unit was $0.29, an increase of 12% in the same period last year. AFFO adjusted, which is defined as AFFO adjusted for transactions that are not considered recurring measures of economic earnings were $6.6 million for the second quarter of 2024, a 21% increase compared to the same period last year. FFO adjusted per unit was $0.28, a 6.2% increase compared to the same period in 2023.

FFO for the second quarter of 2024 was $7.9 million, an increase of 27.4% from the second quarter of 2023. FFO per unit was $0.33, an increase of 11% from the same period last year. FFO adjusted for the second quarter of 2024 was $7.5 million, an increase of approximately 21% from the second quarter of last year. FFO adjusted per unit was $0.31, a 5.7% increase compared to the same period in 2023. We same community occupancy of 85% increase over the same period last year, which continues to reflect our commitment to resident satisfaction and ensuring our communities are in desirable locations.

As at June 30, our total lot occupancy was 83.9% and our average monthly lot rent was $447. Both of these metrics were within our expectations. We remain committed to preserving a conservative debt profile. Our weighted average mortgage term to maturity is 9.6 years and our weighted average mortgage interest rate is 4.4% as at June 30. We had total liquidity, which is comprised of cash, cash equivalents, and available capacity on our lines of credit of approximately $24 million. The REIT currently has 24 unencumbered investment properties with a total fair value of $115 million as at June 30, 2024.

With that, I’ll now turn it back over to for some final remarks. Kurt?

Kurtis Keeney

Thanks, Eddie. The recent acquisitions and our strong financial position following our refinancing measures sets us up well to have a great second half of the year. We expect to continue our growth trajectory as housing prices, high monthly rental rates and mortgage rate increases have the potential to lead more people towards manufactured housing because our homes remain at an affordable price point.

The majority of our residents have steady jobs or they are retired in receiving social security disability or pensions. The interest rates of our customers have not changed substantially and their credit underwriting remains available. We ended the quarter with rent collections of 98.7%, and we continue to grow our monthly lot rents and occupancy. All of these metrics speak to the strength and the quality of our residents and the predictability and consistency of the MHC sector.

We certainly thank you for your time today, and I will now open up the line for questions.

Question-and-Answer Session

Operator

[Operator Instructions]. Our first question or comment comes from the line of Frank Liu from BMO Capital Markets. Mr. Liu, your line is open.

Frank Liu

Thank you, operator. And good morning guys. Thank you for taking my question.

Kurtis Keeney

Good morning.

Eddie Carlisle

Good morning, Frank.

Frank Liu

Good morning guys. First of all, congrats on the strong quarter. Just wanted to touch on the expansion side. You added additional 81 lots. Are you looking to adding rental homes and gradually get back to the ownership model? And do you see similar expansion opportunities across your portfolio?

Kurtis Keeney

Yes. We were pretty pleased to add the 81 lots. We’ve always said that we do, we call this build and fill. So this isn’t a new strategy for us. We probably over the next year, we’ll add about 200 lots total in what we would call build and fill. The first 81 went online. And we’ll do this so through primarily through homeownership. We may have a little bit of increase in the home rental fleet, but I wouldn’t think that it’s going to be crazy substantial. The — we’re going to continue to sell those rental homes off as well. So you may look at the — I don’t think the rental fleet will go down, but I don’t look for it to go up by 2x or anything like that.

Frank Liu

Got it. So stay with the ownership model.

Kurtis Keeney

Yes. A little slower.

Frank Liu

Thanks for the color.

Kurtis Keeney

The quality of tenant is really good.

Frank Liu

I hear. Just on the 400,000 interest proceeds, I’m just curious with the weather-related damage limit to one community? And do you expect additional proceeds coming in the following quarters?

Kurtis Keeney

I’ll answer part of that. It was limited to one community primarily. But Eddie, you want to answer the second part of that question?

Eddie Carlisle

Yes, absolutely. So yes, we do expect some additional proceeds. So we had some damage to one of the resort communities wind damage. You’ll see more proceeds coming in Q3. And again, it’s really just the cost of replacing some of the structures that were damaged. IFRS just requires that those proceeds are recorded as other income. So that’s why you see it there and why we bought them out.

Kurtis Keeney

Frank, it was Glacier Lakes Resort — and it’s fully back up and running and people are having a great experience again. So we’re just thinking that got hurt.

Frank Liu

Got it. That’s good. I mean, is this just a cover of the — sorry, just following on the interest procedures, just cover a partially loss of income and some infrastructures.

Eddie Carlisle

So this isn’t the loss of income piece. The loss of income each runs through just normal revenue and because that’s kind of a normal course of business, obviously, we wouldn’t back that out. This is generally just the rebuilding of structures, right, and the proceeds that we received from that through the insurance company.

Frank Liu

I see. Thank you. And lastly on — just a quick modeling question on the utility recapture. I see the recapture rate came down again slightly to below 100% now. Do you expect this figure to continue to trend down to call it like low 90% range to 2025?

Eddie Carlisle

I don’t. I expect it to stay closer to 100%. We had some of the results from the — some weather where we had worked with some utility companies and tried to get some recapture that didn’t quite come through in Q2. So that was the biggest piece of the issue. But I’ll say — I’d say you will see that recover kind of through the second half of the year.

Frank Liu

Great. Thanks guys. I’ll turn it back. Thanks very much. Have a great weekend.

Eddie Carlisle

Thanks. Nice talking, Frank.

Operator

Thank you. Our next question comment comes from the line of Mark Rothschild from Canaccord. Mr. Rothschild, your line is open.

Mark Rothschild

Thanks and good morning.

Kurtis Keeney

Good morning, Mark.

Mark Rothschild

Hey, following up on just the comments regarding the site you bring online. This is separate from the 15% or so vacancy that you have from the existing portfolio, which you’ve been chipping away at over the past couple of years. Can you maybe just talk about — besides for bringing sites online, how much can you move that over the next few years? And how do they relate to each other, maybe?

Kurtis Keeney

Yes. I think our build and fill expansion is just where we have the opportunities and as we get into the high 90% of the community that we’re talking about, that’s kind of the gating item. So if the community that we’re talking about is 90% or greater, and we have the ability to expand, we’ve got about 300 acres that we can do this on over the course of time. We just don’t want to get over our skis and put too many lots on the ground.

So again, I think that will be — that’s kind of the gating item on it. And we don’t want to change the business model. But if we’re 90%, 95%, and we can expand, we will start to do build and fill expansions typically in 50-lot increments. This one was 81, because that’s what the site kind of dictated. You couldn’t just bring 50 lots on. You had to bring all 81 on at one time. And we were glad to do it. This is a nice way to build shareholder value over time, give us some additional dues.

Mark Rothschild

Good. And this is fine. Good. So I guess for some of the sites, you’ll bring on new communities have been on the site and then for some of them, you will just continue to chip away at the vacancy. So it just gives you part room for growth. Correct.

Kurtis Keeney

Right. Right. Now we’ll chip away at the vacancy and push them up to the mid-90s, and be glad to do it.

Mark Rothschild

All right. And I assume you’re still busy integrating and working on the recently acquired properties, but you did issue more equity than you needed and brought leverage down. How do you think about what your comfort level is with using the balance sheet now to grow with additional acquisitions. And we’ll use that capacity over the next year? And maybe just connected with this, you had spoken about terming out the financing or fixing your financing on the leasing the acquired properties with the move-in rates. Is that something that you would maybe push on sooner? Or is that later this year?

Kurtis Keeney

I’ll answer the first half, and then I’ll turn the back over to Eddie. I think right now, we’ve got plenty of dry powder. We don’t have any reason to issue additional equity in the foreseeable future. We’ve got nice leverage profile. So I think, again, first work of order is exactly what you said, which is fix the small amount of debt that we have floating. So Eddie, do you want to talk to that, and then we can finish the question.

Eddie Carlisle

Yes, absolutely. I mean that was always kind of the thought process when we did the bridge at time of acquisition was that we’d come back and we’d see some help in Q4 or maybe Q1 of next year on the rates. So I’ve actually already started discussions about fixing the debt on that additional $40 million rates and spreads have certainly started to move our way. I’d look for probably that to get done sometime maybe during Q4 and maybe early into Q1 of next year. But I think that we — if rates do what we expect them to do Q3 and into Q4, we’ll probably get something locked in, in Q4.

Certainly, that’s been our strategy and will always be our strategy, which is long-term fixed rate debt because of the time line of the closing of the last acquisition, we weren’t able to do that. But I think it’s actually going to play to our advantage because I think the rates are surely moving in the way that we want to see them, and we’ll be able to lock it in at a better rate.

Mark Rothschild

So maybe just lastly clarifying that point. The transaction carry with a decent amount of vacancy which meant that it wouldn’t be accretive right away. It was the moving rates, how much of that was that impact your return that you expect or maybe the timing of this transaction becoming more accretive. Do you have any numbers on that?

Kurtis Keeney

Yes. So what I’d tell you is if — obviously, depending on where we lock in. So right now, rates kind of moved enough to move that significantly from where we had modeled it. But it will really just depend on if we see the rate cuts in the Fed cuts start in Q3 and Q4 and how depos go. But any — I’ll tell you that any kind of rate that we’re able to lock in kind of more 6% certainly will increase the — how fast we can get the deals accretive. So yes, I do think it will have an impact, and I think we’ll certainly be able to get that deal more accretive sooner based on the rates moving in all direction.

Mark Rothschild

Okay. Great. Thanks so much.

Eddie Carlisle

Thanks, Mark.

Kurtis Keeney

Good talking to you.

Operator

Thank you. Our next question or comment comes from the line of Brad Sturges from Raymond James. Mr. Sturges your line is now open.

Bradley Sturges

Good morning.

Kurtis Keeney

Good morning, Brad.

Eddie Carlisle

Good morning, Brad.

Bradley Sturges

Just following up on Mark’s line of questions there. Just on integrating the new portfolios that you’ve acquired and particularly focused on the lease-up potential. I guess you’re a few months into the integration process now, but how are new home sales trending? And I think you had potentially set aside some CapEx to add some rental homes. I guess, at this point, where do you stand on using that budget for rental homes to maybe help push occupancy? Or are you feeling more confident, I guess, about new home sales that maybe you don’t need as much of a budget for the rental home fleet?

Kurtis Keeney

We just got there. We’re about two months in. And so the good news is the homes have arrived, which is a feed within itself to be that far in front of it. So we’ve actually got homes on site. So I would look for the — and Nathan has secured the licenses that are needed which we were very proud of that time line, too. So I think right now, it’s kind of as planned. And again, we’ll do a balance. We’d always love to sell the home first. A couple of the locations we needed to put some rental homes in to change some curb appeal because we needed to move the curb appeal up a little faster and kind of turn the asset a little bit. So again, I think all of that’s underway right now. I’m optimistic that we won’t need as much in the CapEx on the rental homes right now, given what we’re seeing over time. But it’s really pretty early. We’re in the first inning. But right now, what I’d say is the game is going really well. We’re really pleased.

Bradley Sturges

Okay. And maybe to circle back to the expansion discussion there, obviously, it’s at a park that had pretty high occupancy. I’m just I’m curious if what would be the assumed kind of occupancy lease-up potential or timeline? And how do you think about when you are executing on an expansion, is there a return profile that you’re expecting to achieve by making that incremental investment?

Kurtis Keeney

This particular one, Brad, was — it was a pretty low barrier to entry. We had most of the infrastructure work done here, and we have had it done for a while. And so this one has very low — it has very low expenditure to turn these lots on — so I think the truth is we turned 81 lots on, and we think that we’d probably do on average 1.5, two units a month until they’re leased up. We normally wouldn’t have put 81 on a building fill all online at one time. But again, this particular site kind of dictated that. But we’ve got really low incremental development costs to turn these lots on. So it’s really going to be pretty accretive from — just from a fill perspective, even though if it takes two or three years to kind of fully fill it up.

Bradley Sturges

Is there any challenges, I guess, because of the infrastructure in place to all already have the zoning in place as well. I’m just — I’m curious if there’s any nuances around getting incremental density in terms of — from a zoning perspective on the build and fill strategy?

Kurtis Keeney

Yes. No, that’s kind of the gift of the build and fill strategy of the zoning entitlements are normally already there. We do have a couple of sites within the portfolio that we’re working on some entitlement issues, and we look to have some nice news to result from that. But again, it’s not going to be anything different than what I’ve already talked about, but over the next year, I think there’s probably a couple of hundred lots we can put on the ground. And we can put a lot on the ground for about $20,000, and it was much lower than that in the case of the 81 lots. But when you can put a lot on the ground where you’re hitting 95%, you can put a lot on the ground for $20,000. That’s an accretive moment for the shareholders.

Bradley Sturges

Yes. Okay. Great. I’ll turn it back. Thank you.

Operator

Thank you. Our next question or comment comes from the line of Alexander Leon from Desjardin Capital Markets. Mr. Leon, your line is open.

Alexander Leon

Good morning, gents and congrats on a solid quarter.

Kurtis Keeney

Thanks, Alex.

Alexander Leon

My first question is on that 81 loss. So just curious if you could maybe identify the community in Kentucky that this is relating to?

Kurtis Keeney

It was in Southern Indiana. It was Amberley Point.

Alexander Leon

Okay. Great. Thanks for that. Just curious on the 15% same property OpEx growth this quarter. Was there anything non-recurring included in that? And maybe also the repairs associated with the insurance $400,000 insurance proceeds that you guys received this quarter. I’m just wondering if that impacted the same the R&M included in that figure?

Kurtis Keeney

Eddie, you want to jump in?

Eddie Carlisle

Yes, absolutely. So Alex, the biggest part of that OpEx growth, again, it was kind of 2 components, first being property taxes. So when we do acquisitions, depending on what state the acquisitions are in, it really depends on the rate at which it gets reassessed and revalued and then the increase in property taxes. In the case of a few of the acquisitions that were completed in 2022, they were on a cycle to get reassessed in 2024. So we saw some pretty good property tax increases in a few of those communities.

Now those are — they were all within our expectations. When we modeled it, we were doing the accretion modeling and trying to make sure that we wanted to do the acquisition, we pretty much know what that increase is going to be at time of purchase. So it wasn’t a surprise, but certainly, it did affect when you look at year-over-year because they hadn’t been reassessed when you can look at the comparable periods in the prior year. The other piece was really in staffing. As everyone knows, it’s been a challenge, certainly through 2023, just getting staffing levels back where kind of where we need them to go.

And so we’ve kind of got staffing back at a good level. Hiring is, I think, kind of back to somewhat normal in our markets — so we’ve been able to do that. So those are two kind of the bigger components. But yes, there were some repairs and maintenance expenses at the later field Points location where we had to use additional labor as part of the cleanup from the storm. Certainly, the $400,000 is nonrecurring. I’d say no. And we’ll see some additional in Q3 and maybe even into Q4. But I wouldn’t expect that obviously to continue to be on that.

Alexander Leon

I appreciate that commentary. That was great. Maybe the last one, a little bit of a nitpicky question, but it was just on the rent collections. Those were down 20 basis points year-over-year. I realize that’s not a big movement, but just curious, given the economic backdrop is softening, if there’s anything to maybe read into their or maybe said differently, if you have any thoughts on the expectations for any near-term changes to maybe your bad debt expense or bad debt reserve?

Eddie Carlisle

Sure. Yes. I mean it’s something we monitor very closely. And what I’ll tell you is I don’t think the economic backdrop really had anything to do with it. So bringing — any time you bring especially a large acquisition like we had a new community online, just getting the payment process set up, right? So getting the online payments, getting people used to using that takes a bit. If you actually look at total bad debt for the quarter and the amount we wrote off, it was no higher than normal. We just had a little bit higher balance of accounts receivable at quarter end because people were getting still struggling with getting onto our payment system at the new acquisitions was the biggest place we saw the increase. It’s something we monitor very close. We look at delinquency every kind of month in, go through it on a part-by-part basis. Certainly, no trends that concern us at this point.

Alexander Leon

Awesome. That was it for me. Thanks guys.

Eddie Carlisle

Thanks, Alex.

Operator

Thank you. Our next question or comment comes from the line of David Chrystal from Ventum Capital Markets. Mr. Chrystal your line is open.

David Chrystal

Thanks. Good morning guys.

Kurtis Keeney

Good morning, David.

David Chrystal

Maybe just building on the OpEx and maybe looking at your forecast either for the back half of the year or the year ahead. Do you expect to see any relief or if we look out a year, do you expect that that 15% year-over-year comp at least will come down meaningfully?

Kurtis Keeney

Yes. I certainly expect it will come down somewhat. Again, summertime is our kind of a place where we spend the most time doing repairs and maintenance, doing cleanups, doing, cutting grass and those things. So the wage piece of it, I certainly expect it kind of to come back in line. From a property stock standpoint, that’s probably ongoing.

Now what I’ll tell you is as we start looking at our next year and look at rate increases and how we kind of recapture some of that property taxes. I do think we’ll be able to see some recapture there. And it may show up in the top line in revenue, just recapturing the property taxes, but I think there’s an opportunity to do some of that.

David Chrystal

And in that vein, have you started to look at your 2025 rent increases, whether in the context of kind of inflation, broad inflation, social security cost allowance or just your kind of unique inflation pressures?

Kurtis Keeney

Yes. So, David. We really do that budgeting in the fourth quarter, but I’m not worried about the affordability gap between us and the multi-family rents, it’s still there. So I think from a modeling perspective, 5% is still what we would advise on the modeling side. I don’t see it’s many barrier there. But on the — I will make one more comment on the OpEx is that we are — in our climates, we really do our seasonal work from about April 1 or the end of March until about the end of October. And so in the fourth quarter, you do see relief from that because you just the weather turns against you, and you can’t do certain things anymore. So there is a little seasonality to the repairs and maintenance and things.

David Chrystal

Okay, fair. And as far as the revenue side again, you still expect somewhere in the kind of 150 basis point year-over-year occupancy gains?

Kurtis Keeney

Yes, we do.

David Chrystal

Okay. Perfect. That’s it for me. I’ll turn it back. Thanks.

Kurtis Keeney

Thanks. [Indiscernible].

Operator

Thank you. [Operator Instructions]. Our next question or comment comes from the line of Himanshu Gupta from Scotiabank. Mr. Gupta your line is open.

Himanshu Gupta

Thank you. And good morning. I’m sorry, I — sorry, I joined the call a bit late, so I don’t know if it’s been already covered. So my question is more around the NOI margins. Obviously, we saw some pressure in Q2? And how should we think about it next year? And especially in the context of as you grow your occupancy, let’s say 100 to 200 basis points, do you see that translating into opportunity for margin expansion?

Kurtis Keeney

Yes. So the hedge line for the margin decline and some of the OpEx pressures really was around property taxes, just a reassessment of some of the properties that we had bought during 2022. That was where the biggest piece of the pressure comes. And again, they were within our model, and we knew that we were going to get those increases when we did the acquisition. So it was certainly within expectations. Just when you compare it to prior year in 2023, that wasn’t there.

I don’t expect to then see a commensurate increase again next year, right? So they should flatten and we won’t see reassessments for those in the following year because of the cycle that they’re on. From an occupancy standpoint, I mean, Kurt, you feel free to jump in. But yes, because here’s the beautiful thing. As we fill up our communities and through the way we do it through our home ownership model, that absolutely helps our margins because we’re now not cutting graph there.

As we sell more rental homes, we’re not having to do the repairs and maintenance on those homes. It’s being done by the owner. And that’s why one of the reasons that the home ownership model is important to us because it does drive incremental margin. So yes, we’ll see some help there, I would say, as we continue to grow the occupancy.

Himanshu Gupta

Thank you. I got you there. And then just on the balance sheet. I mean on the bridge financing, like what rate are you expecting? Or what are you looking in the market right now?

Kurtis Keeney

Yes. I mean at the time of acquisition, the expectation was we were going to be kind of around that 6% level. I think we’ve already fallen below that, just based on where the treasury has gone over the past couple of weeks. And I’ve been in very close contact with our lenders on what the spreads are doing and the spreads are coming in as well.

So if we locked it in today, we’d be probably closer to $5.5 million, but I do feel good that we’ll be at least there or maybe even a little better when we start seeing rate cuts hopefully by the Fed in Q3 and Q4 if those happen. So my expectation is we’re going to certainly be better than the original acquisition model, which is going to be a very positive thing and help us get to accretion to those assets sooner.

Himanshu Gupta

Got it. And this mid 5%, 5.5% are we looking like 10-year fixed? And is it like insurance money or Fannie, Freddie?

Eddie Carlisle

That will be the discussion. As of now, yes, insurers money has kind of comeback online, and they are very hungry to do the deal, 5.5%. Right now, I can go get 5.5 on 20-year fixed rate deals with [indiscernible]. We’re looking at some CMBS potentially as well. So again, we’re still in the early stages of the refinance conversation, but the rates that 5.5%, whatever we end up, it could be done in a number of different ways.

Himanshu Gupta

Okay. Thank you. Last question on this expansion of 81 lots. What was the cost associated with this expansion?

Kurtis Keeney

It was low, Himanshu. It was only about $80,000.

Himanshu Gupta

In total, you mean $80,000.

Eddie Carlisle

In total $100,000 or lot.

Himanshu Gupta

Okay.

Kurtis Keeney

Under $100,000 to turn them on and just had some incremental work to do as we had to get them ready. Again, most of the infrastructure was all done here. So we were very pleased with the accretive moment there.

Himanshu Gupta

And how long do you take to lease up these lots?

Kurtis Keeney

Yes. Again, this one is a little — you had the turn on all 81 lots at one time. We normally would only do 50 at a time, but that’s not what this site dictated to all 81. And so I think this will take us two years, three years to fill up under the homeownership model.

Himanshu Gupta

Okay. Got it. Thank you and I’ll turn back.

Kurtis Keeney

Thanks, Himanshu. Good talking to you.

Operator

Thank you. I’m sure no additional questions in the queue at this time. I’d like to turn the conference back over to Mr. Kurt Keeney for any closing remarks.

Kurtis Keeney

We certainly thank everybody for joining us today and thank our team and our residents as well. Do you have any information that you additionally like, please contact us at [email protected]. Thanks. Have a great day.

Operator

Ladies and gentlemen, thank you for participating in today’s conference. This concludes the program. You may now disconnect. Everyone, have a wonderful day.