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Centerspace (NYSE:CSR) Q3 2023 Earnings Call Transcript

Centerspace (NYSE:CSR) Q3 2023 Earnings Call Transcript October 31, 2023

Josh Klaetsch: [Call Starts Abruptly] …Centerspace's Form 10-Q for the quarter ended June 30, 2023, was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at centerspacehomes.com and filed on Form 8-K. It's important to note that today's remarks will include statements about our business outlook and other forward-looking statements that are based on management's current views and assumptions. These statements are subject to risks and uncertainties discussed in our filings under the section titled Risk Factors and in our other filings with the SEC. We cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.

Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call. I'll now turn it over to Anne Olson for the company's prepared remarks.

Anne Olson: Good morning, everyone, and thank you for joining Centerspace's third quarter earnings call. With me this morning is Bhairav Patel, our Chief Financial Officer. We're happy to be here today to discuss them with you our third quarter results, our outlook for the remainder of 2023 and an update on our investment activities. We're pleased with our results on revenue and expenses and year-to-date, we've increased core FFO by 6.8% year-over-year. Starting with revenue in our same store portfolio we achieved a 5.7% year-over-year increase. This is slightly ahead of our expectations as we realize sequential revenue growth even as new lease rental rates have moderated. With respect to revenue trends in the third quarter we executed one-third of our lease expirations.

And same store new lease trade outs we achieved 2.3% increases and 4.9% increases on renewals, resulting in a 3.9% blended lease trade out. Sequentially, market rent is declining as leasing slows into the fourth quarter. And we expect that trend to continue. In October our same store leasing trade outs look positive at a blended 0.8% which is a combination of new lease trade outs of negative 2.4% and renewable lease rental rates increasing 5.3%. This slowdown in leasing has been factored into our revenue guidance and with over 86% of our leases in the books for 2023 we’re focusing on occupancy to close out the year and maintain a strong position headed into 2024. This will capitalize on the stability of our portfolio fundamentals, with 23.8% rent household income levels, and a collection rate in the third quarter of 99.6%.

With respect to expenses with a 6.1% year-over-year increase, the largest driver of increases continue to be real estate taxes and insurance. This quarter non-controllable expenses were up 11.3% year-over-year, driven by a 21.4% increase in insurance costs. We are not anticipating that we'll be seeing any relief on the insurance run into 2024 so, we will focus on what we can control. Cost control measures implemented at the beginning of the year continue to benefit our repairs and maintenance costs. This and lower utilities expense are offsetting the impact of increased on site compensation. Our overall results also benefit from lower GNA expenses after the CEO transition earlier in the year. Our results in outlook for the remainder of the year led us to increase our guidance.

Bhairav will cover our guidance projections in more detail in his remarks. But I wanted to highlight that we reduced our estimate of 2023 value-add capital expense due to timing of projects. We have seen market specific softening and some leasing that is keeping our eyes sharp on our underwritten premiums. And we will maintain discipline and stay nimble into next year if there are projects that don't hit our expected return. On balance, we're focusing our value-add capital on our highest return opportunities, which at this time are in the smart home and smart community category. Our current plan has implementation of smart home technology and about 50% of our total communities by the end of 2024. In addition to this implementation, during the quarter we completed 350 and unit renovations as well as associated common area amenity enhancements.

A busy sky-line of a major US city, showing the wide reach of a real estate investment trust.

Moving to investment activity. Earlier this month, we announced that we had sold four communities in Minot, North Dakota, marking our exit from the Minot market for an aggregate sales price of $82.5 million. This disposition included approximately 50,000 square feet of commercial space. We also closed on an acquisition in Fort Collins Colorado, Lake Vista apartment homes was purchased for $94.5 million approximately a 5% cap rate. The acquisition included the assumption of $52.7 million in mortgage debt with an attractive interest rate of 3.4%. Our year-to-date transactions continue to benefit portfolio quality, and we are pleased with the execution of our dispositions and the addition of Lake Vista, which is a 2011 build community with 303 homes.

Our entrance into the Fort Collins MSA creates a broader geographic footprint in Colorado. And is an extension of the operating scale and efficiencies we have built in the Mountain West. We like the diverse economic base and for comps including healthcare, high-tech manufacturing and education. Cost of homeownership is high with a median single family home value of $560,000. And the market features significant outdoor amenities including being a gateway to Rocky Mountain National Park. Otherwise, transaction activity is slow as price discovery continues, and we maintain focus on strengthen our balance sheet for when activity picks up. Now I'll turn it over to Bhairav to discuss our financial results balance sheet and outlook for the remainder of 2023.

Bhairav Patel: Thanks, Anne and good morning, everyone. We are pleased to report another quarter of strong earnings with core FFO $1.20 per diluted share driven by a 5.4% year-over-year increase in same store NOI. On a sequential basis same store NOI decreased by 3.7% driving a sequential decline in core FFO as revenue was relatively flat while expenses grew due to higher spend in certain categories typical of the summer months when we have a huge chunk of our leases expiring. Our balance sheet remains in one of the strongest positions the company has experienced. We ended the quarter with no balance on our line of credit and a weighted average interest rate of 3.46%. We have a real laddered maturity schedule with a weighted average maturity of approximately seven years and minimal of debt coming due in the near term.

Our net debt to EBITDA pro forma for our Lake Vista acquisition and Minot dispositions is approximately seven times. This metric includes the mortgage we assumed as part of the Lake Vista purchase as the coupon of 3.45% on the mortgage we assumed is significantly below the current market rate, it resulted in a fair market value discount of $3.9 million on the date of acquisition. This discount will be amortized over the remaining term of just under three years at a rate of $370,000 per quarter, and will increase our interest expense relative to the coupon payment. Consistent with our past practice we will make an adjustment for it in calculating our core FFO. Historically this adjustment has decreased our core FFO per share as we have been advertising above market debt.

Now I will discuss our financial outlook for 2023. Based on our Q3 results, we are increasing the midpoint of our full year 2023 core FFO guidance by $0.02 to $4.67 per diluted share. There were no changes to the expected increases in same store NOI or revenues at the midpoints where we still expect 9.25% and 7.25% increases respectively. As revenues and expenses were generally in line with expectations during the quarter. We were able to capture a loss to lease in a bulk of explorations before we saw rental rates and demand softening towards the end of peak leasing season which is something we experienced at the same time last year, and generally aligned with historical trends for the portfolio. On the expense side, we have seen decreases in certain controllable categories that grew significantly last year and we expect the trend to continue.

Lastly, after completing our Minot dispositions and Lake Vista acquisition guidance incorporates no further transactions for the year. To conclude, we're pleased to report another quarter of strong operating results while simultaneously advancing our key strategic priorities of improving portfolio quality and market exposure through capital recycling. I want to compliment the team for their flawless execution of our plan in an extremely challenging transaction environment. And with that I will turn it back to the operator to open up the line for questions.

Operator: Thank you. [Operator Instructions]. We will now take our first question from Brad Heffern from RBC Capital Markets. Brad your line is now open. Please go ahead.

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