Centerspace Q2 FY2020 Earnings Call

Good day, and welcome to the Investors Real Estate Trust Second Quarter 2020 Earnings Conference Call. After today’s presentation, there will be an opportunity to ask questions. Please note this event is being recorded. I would now like to turn the conference over to Mark Decker, Chief Executive Officer. Please go ahead.

Thank you, Alyssa, and good morning, everyone. IRET filed its Form 10-Q for the second quarter yesterday after the market closed. Additionally, our earnings release and the supplemental disclosure package have been posted to our website at iretapartments.com and filed on Form 8-K. It's important to note that today's remarks will include our business outlook and other forward-looking statements that are based on management's current views and assumptions on our results in 2020, including views and assumptions related to the potential impact of the COVID-19 pandemic. Our quarterly report and other SEC filings list certain factors, including those related to the pandemic, that could cause our actual results to be materially different than our current estimates. Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call. Joining me this morning is Anne Olson, our Chief Operating Officer; and John Kirchmann, our Chief Financial Officer. It's incredible how much change and disruption has occurred since we were together 3 months ago, talking about the first quarter. In preparing for this call, I was trying to come up with a good summary for our company and our team of the last 3 months, and the word that kept popping into my head was 'unwavering.' We certainly were prepared for the worst as we headed into the second quarter, and the resilience of our team, our customers, and our portfolio of communities has really shown through on an absolute and relative basis. To our entire team listening to this call, thank you so much for working to make every day better for our residents in this challenging time. Our focus remains on weathering the pandemic and the economic damage that comes with it. In operations, that means making our business as virtual as possible while maintaining and improving the customer experience, investing in simplifying our systems and solutions, and staying energetic and safe in working with our residents who are living through all of this with us. We're also working to maintain expense discipline and hold the line on our 'rise by 5' campaign. With headwinds from taxes and insurance in our noncontrollable expenses and stifled revenue growth due to the pandemic, 'rise by 5' is helping now and positions us well in the future. Zooming out to the company as a whole, we are driving improvement in our overall portfolio of assets through rigorous asset management, and on the right side of the balance sheet, we are striving for long-term improvement in our financial flexibility. To that end, in the second quarter, we issued approximately $45 million of equity through our ATM at an average net price of just under $72. This cash extends our margin of safety and gives us the ability to be opportunistic. We'll also consider select asset sales that position the company for stronger and more sustainable growth. The fundamentals of the next 12 to 24 months will be off significantly from the outlook at the beginning of the year, but capital flows and debt markets are holding pricing for apartments steady in our markets. That's our early read, and we expect that trend to continue as more capital flows into our sector. We expect to be a net buyer over the next 12 to 24 months should our cost of capital remain advantageous. We do have a large pipeline of opportunities in our target markets of the Twin Cities, Denver, and as announced in June, Nashville. We expect to accelerate our continued portfolio improvement if this environment holds. Lastly, I'll close with an exciting milestone. Last Friday, IRET celebrated 50 years in business. One P&L in the real estate business since 1970 is quite an achievement, unwavering. And we are fortunate to be positioned as we are today on behalf of our shareholders and team. However, as we've all seen, with devastating speed, longevity does not confer any special advantages. Our team is here to move the needle. We bring a start-up spirit every day, and we'll remain cautious and thoughtful as we carry out our mission to provide great homes. With that, Anne, could you please give us the operations update?

Thank you, Mark, and good morning. As we discussed last quarter, we were well positioned for the impacts of the COVID-19 pandemic at the end of a strong first quarter, and we're pleased that our second quarter results demonstrated that our vigilance in all areas of our operating platform will benefit our portfolio even in uncertain times. We achieved NOI growth of 1.1% for the second quarter compared to the same period last year, driven by a 4.3% decrease in same-store controllable expenses when compared to second quarter 2019. Notably, our NOI grew 3.4% sequentially over first quarter 2020, and year-to-date, our NOI is 2.4% ahead of the same period in 2019. Our discipline on expenses was matched with diligence on our rental revenue. Our weighted average occupancy during the second quarter was 94.6% compared to 94.3% for the second quarter of 2019. Our collections have been strong, at 99.1% during the second quarter, just a 50 basis point decrease compared to the same period last year. While we believe our positive performance is due, in part, to the relative insulation of our markets from regulated shutdowns and stay-in-place orders, we have seen increases in our bad debt where our price point is lower, specifically in Billings, Montana, where our average rent is 20% below our portfolio average rent. We do continue to see declining requests for rental assistance across our portfolio. Of the 176 total requests for deferral during the second quarter, more than 73% of those came in April. As of today, we have entered into 184 payment plans, representing $225,000 of total rent, which is $40,000 outstanding to be collected under those plans. In July, we entered into 8 deferral agreements, representing 10 basis points of our total July rent charges. Our second quarter did bring many challenges. Traffic was 24% lower across our portfolio than second quarter 2019, and new lease rates decreased an average of 1.2% lease-over-lease. We did realize renewal rate increases averaging 3.3% for leases effective during the second quarter. But keep in mind that many of these renewals would have been signed pre-pandemic. Traffic did pick up significantly towards the end of May, and our June traffic was 26% over June of 2019. Like many of our peers, we are experiencing higher retention rates, with 62.8% of our residents staying in place upon lease expiration during the second quarter. I would like to also provide some color on July. Our July collections were 99%. And in our same-store portfolio, the average renewal rate increased 10 basis points, and our resident retention was 66%. Our average new lease rates increased 1.1% lease-over-lease, and our revenue per unit is higher year-over-year, with July's revenue per unit at $1,074 compared to $1,055 in July 2019. As of July 31, we were physically occupied at 95.2%. We believe that some of the increase in new lease rates that we are seeing are the result of the traffic increases in June, which we attribute to pent-up demand from the significant lack of traffic in April and May. Our July traffic had leveled off to be on par with 2019. We expect flattening renewals and slow rent growth to impact our top line revenue through Q2 of 2021 as we carry forward the lease rates entered into during this economic slowdown, which coincided with our peak leasing season. Our operating platform will help us optimize revenue, and our increasing exposure to growth-oriented markets should provide an opportunity to perform well as the economy recovers. We are still seeing opportunities for value add in certain communities where we have high occupancy, desirable locations, and pricing power. We have continued to value-add common area and/or unit renovations within 9 communities in our portfolio, with 115 units being fully renovated during the second quarter. Of the renovated units, 78% have been leased, and we're achieving our underwritten premiums with an average return of 18.3%. Our teams are back in our communities and our offices are open. We're all getting used to the new normal of social distancing, use of digitally enabled leasing, and resident service, and the uncertainty of what the future may bring for our economy and our communities. Our teams have shown a remarkable commitment to our residents and each other. And during these difficult times, over 82% of our Minnesota-based team members participated in a third-party workplace survey that resulted in IRET being named a Top Workplace by the Minneapolis Star Tribune, based on factors including employee engagement, company leadership, pay benefits, and workplace flexibility. This is a great distinction and a testament to our key values of doing the right thing, serving others, and being one team. And now I'll ask John to discuss our overall financial results.

Thank you, Anne. Last night, we reported core FFO for the quarter ending June 30, 2020, of $0.91 per share, a decrease of $0.09 or 9% from the second quarter of 2019. The decrease in core FFO for the quarter can be attributed to lower NOI of $1.3 million and increased casualty loss of $600,000, offset by reductions in interest and G&A expenses. Lower NOI for the quarter is primarily due to the decrease of $1.2 million from 2019 dispositions, net of additional NOI from new acquisitions, as well as a $370,000 reduction in our commercial NOI due to the impact of COVID-19 on our mixed-use multifamily commercial tenants. Year-to-date, core FFO is $1.81 per share compared to $1.77 for the first 6 months of 2019, an increase of $0.04 or 2.3%. Turning to our general and administrative expenses. For the 6 months ended June 30, 2020, G&A expenses decreased 9.9% to $6.6 million compared to $7.4 million in the same period of the prior year. The decrease was driven by COVID-related cost control initiatives, as well as a $360,000 decrease in legal fees related to our successful pursuit of a recovery on a construction defect claim in 2019. Interest expense increased by 11% to $13.9 million for the 6 months ended June 30, 2020, compared to $15.5 million in the same period of the prior year. This decrease was attributed to the replacement of maturing debt with a lower rate debt and a lower average balance on our line of credit. Property management expenses decreased $100,000 to $2.9 million for the 6 months ended June 30, 2020, compared to $3 million in the same period of the prior year. The decrease was due to lower third-party management fees and compensation costs. Looking at capital expenditures, which are highlighted on Page S-16 of our supplemental, same-store CapEx for the 6 months ended June 30, 2020 was $4.6 million, a 59% increase from $2.9 million for the same period of the prior year. The increase in CapEx was related to the timing of capital replacement projects occurring earlier in 2020. Full year same-store CapEx is expected to remain in line with the prior year at $825 to $900 per door. In Q2, value-add spend was $4.1 million as compared to Q2 2019 value-add spend of $750,000. Year-to-date, value-add spend is $6.2 million versus $1.1 million for the same period in 2019. During the second quarter, we issued 624,000 common shares through our ATM program at an average net price of $71.84 per share, for total proceeds of $45 million. The proceeds from these shares were used to fund our value-add capital spend and draws under our construction loan, as well as to increase our liquidity and balance sheet flexibility. Turning to our balance sheet. As of June 30, our total liquidity was approximately $240 million, including $187 million available under our line of credit and $53 million in cash. Further information on our liquidity can be found on Page S-11 of our supplemental. Looking to the remainder of 2020 and into 2021, we have $45 million of debt maturities and $34 million remaining to fund on our construction and mezzanine loans for the development of a multifamily community in Minneapolis. We believe our current liquidity is sufficient to cover our foreseeable capital needs, as well as allowing us to invest in our target markets. On March 27, 2020, we issued a press release indicating that in light of the impact of COVID-19 on our business and results of operations, we were withdrawing our 2020 financial outlook. We continue to monitor the ongoing impact of COVID-19 closely, including the continuation of the enhanced federal unemployment benefit, which expired on July 31. And there remains a great deal of uncertainty as to the impact on our rents and occupancy. Given the ongoing uncertainty of the impact from COVID-19, we are not providing an updated 2020 financial outlook at this time. Our Q2 results are encouraging and reflect the work of our dedicated team members who demonstrate our core mission to provide great homes while proactively responding to the business challenges presented by the current environment. It is the great work of our strong team here at IRET that delivers results and instills confidence in our residents and the investment community. With that, I will turn the call over to the operator for your questions.

The first question today comes from Gaurav Mehta of National Securities.

First question that I have is on the transactions. I think, in your prepared remarks, you mentioned that you would consider select asset sales. I was hoping if you could provide some color on what you're seeing in the market and what kind of timing should we expect if you were to sell any assets.

Yes. Good morning, Rav. This is Mark. Yes. So I mean, I think as we've talked a lot a little bit over the last few months, the disruption of the pandemic has kind of opened up a little bit of window in our mind to consider some asset sales that we weren't likely to do. And I would say that, combined with what's been a pretty exceptional combination of forward-looking deterioration, combined with a lot of liquidity, has actually held up pricing. Pricing has stayed the same or better in the tertiary markets, which is a pretty unusual set of circumstances. So where we can, we'll consider sales. And I think you should think about it like we've done in the past. So I think we could be opportunistic on portfolios, but more likely, we'll be pruning portfolios to kind of work ourselves into a better portfolio, which we did in Bismarck and Minot, where we sold some older product and things like that to get ourselves to a portfolio that's newer, higher rents, better margins, more efficient, et cetera.

Okay. The second question that I have is on the market. I saw that Denver and St. Cloud were 2 markets where you have seen negative same-store revenue growth. Can you provide some color on what you're seeing in those 2 markets?

Yes, Anne, do you want to talk about that?

Good morning, this is Anne. Let's start with Denver. Denver experienced the quickest shutdown and the slowest recovery from the pandemic, as it is one of our larger cities with higher density, and our assets there are quite core. We have two downtown assets and one that is more suburban. Due to the supply in Denver and significant concessions, many projects were still in lease-up as the pandemic began, leading to substantial pricing pressure. Additionally, Denver had our only exposure to a set of about 10 leases at one of our assets in a short-term rental, which are now gone, and that rental provider is in receivership. We're addressing that and dealing with occupancy issues, which are reducing our pricing. Overall, we are maintaining well in Denver, but we anticipate continued negative lease-over-lease results and flat renewals. In St. Cloud, we saw substantial rent increases last year, as reflected in our supplementals. Last year, as part of our initiative, we also increased our ratio of utility bill-backs, making it a bit more costly for residents to live in our units to optimize our revenue. St. Cloud faced significant challenges due to high water and sewer charges from the city. There’s also a heavy student population due to the local university, and with the uncertainty surrounding schools and the university, we're experiencing pricing pressure there as well. This pressure is a result of a combination of factors, including the utility bill-backs, the pandemic, and education uncertainties in St. Cloud.

The next question comes from Rob Stevenson of Janney.

Anne, can you talk about how move-out notices and forward availability are trending, looking out, I guess, into September-ish, early October at this point? Any reason to believe that operations change much for the good or bad over the next, call it, 8 weeks?

Yes. I don't think so. I think we're going to stay pretty steady. We are seeing a lot of people that are uncertain, right? So people don't know what's going to happen, if they're going to be working from home or going back to work, if their kids are going back-to-school or not, if their job is stable or not. So we do still see people who are looking maybe to move but are not yet ready to make decisions. That is leading to higher retention rates. And if you saw our second quarter retention rate, it was above 62%, but our July retention rate was 66%. So I think we do expect that into the fall, we're going to see a little bit higher retention rates and not much real change in operations. With July traffic, it did level off to kind of on par with where it has been historically. And in our markets throughout the Midwest, our offices are open, we're taking in-person tours, we still are doing a lot of virtual touring and digitally enabled resident services. So that has become a pretty normalized part of our business. But people are starting to move around, and I don't think we're expecting a significant drop-off in kind of historical traffic or a big increase either.

How would you describe your fee stream in relation to your rent? Is the fee stream facing the same challenges as rent in certain markets? Are you managing to maintain the fees, so they are not experiencing the same pressure? In the overall context, how would you assess the current state of the fees and their outlook for the remainder of 2020 compared to rent?

Yes, I believe the fee stream is experiencing similar pressures. It has decreased by about 8% compared to our historical levels. We need to adjust accordingly, which means the pricing has to give way at some point. As we evaluate total revenue optimization, we may reduce or waive certain fees instead of making larger concessions. For instance, we have been waiving application fees or lease break fees in some cases where individuals face financial uncertainty, rather than insisting on the full amount. This allows people to transition more easily. So yes, it is facing the same pressure, and as I stated, it is down around 8%.

Okay. And what's driving the year-to-date expense growth in Rochester, which is up like 15%, and Rapid City, about the same, and then Billings, about 6% specifically. Is that capital spending? Is that taxes in those markets? What's driving that?

Yes. So it's taxes and insurance. At the end of last year, we really got our insurance renewal, and we got the taxes in and realized that most of our markets were going to take a pretty significant hit there in our noncontrollable expenses. But our controllable expenses are down. And so we feel pretty good about the overall expense growth rate given the pretty big increase that we saw in taxes and insurance. And particularly, Rochester was hit very hard with taxes.

Okay. And then last one for me. Mark, why Nashville today versus 2 years ago or whenever you did your last exercise, what brings that on to the radar screen today versus what didn't it have when you ran this exercise last time?

That's a great question. In both cases, we conducted an internal review and consulted a third-party expert to arrive at our conclusions. When we began our efforts in Denver, it was somewhat adjacent to our current regions, which made it our top choice for the Midwest or Near-West market. Now we are focusing on Nashville for a couple of reasons. Firstly, while we haven't fully established our presence in Denver, we believe we have reached a critical mass there. We will continue to develop in Denver and the Twin Cities. Additionally, Nashville has very appealing growth potential. We evaluated 60 markets using various criteria, and Nashville consistently ranked at the top across all the dimensions we considered.

How would you describe the market in Nashville in terms of the range of products you want to own, as well as pricing and competition compared to your other NFL cities, Minneapolis and Denver?

Yes, it's a bit smaller. The market is less substantial, and the volume is noteworthy. Both Denver and Minneapolis are similar in size, but Denver usually has about two to three times the volume. Nashville is roughly two-thirds the size, resulting in lower volume, although we believe there is significant merchant activity there that should benefit us. In terms of pricing, Denver, the Twin Cities, and Nashville appear to be priced similarly, with high demand for those assets influenced by various factors. Excluding the pandemic, New York was a market where people hesitated to invest due to stringent rent control regulations, leading to a lot of capital flowing elsewhere. The improvements we made in Nashville were well known, so any market analysis would likely identify Nashville as a strong opportunity. Consequently, competition will be fierce, and pricing will be challenging. This was our experience in Denver, where we anticipate growth in cash flows and value over time. I recall during our early broker meetings in Denver, we were just one of many expressing interest, but now many of those others are still talking while we have taken action. We have opted to focus on one market at a time, but this expansion increases our opportunity set by 50%, which is exciting and allows us to consider relative values. In summary, it is smaller, costly, and competitive.

And have you taken any of the options for entering that market off the table, whether it be a JV or a loan-to-own mezz or anything of that nature? Or are you looking at all those types of opportunities?

Yes. And I would say everything is on the table.

The next question comes from Alex Kubicek of Baird.

It's just quite a quick follow-up to Rob's Nashville questions. I know with the longer-term opportunity set for you guys, you're still looking, but how much capital would you need to deploy today to feel comfortable entering the market? Is this like a market where you guys are comfortable kind of one asset at a time and sitting on them for a while? Or if you want to have a more wide opportunity set ahead of you before you go get aggressive on that front?

If you have a portfolio, give me a call. We will approach this cautiously. We're trying to find the best offers in a highly active market. I believe the most promising opportunities will be in properties that are in lease-up. We've noticed that sellers in this space are more willing to accept lower prices than they anticipated back in January or February. Due to a robust leverage market, even though your forward cash flows have decreased, mortgage rates have likely dropped more significantly. This creates a distinct advantage for us as an all-cash buyer in the lease-up area. However, these deals may impact our FFO over the next 12 to 18 months, something we need to consider, even though they could be a beneficial NAV decision in the long run. We are examining all possibilities. In Denver, we have completed three individual deals, and I expect that pattern to continue. The main difference now compared to when we entered the Denver market is that we previously had to sell assets to make purchases, but now we can maintain that strategy. Alternatively, we could explore raising equity in the market to help manage our costs and increase cash flow. This strategy would bring several benefits to the company, but it must be viable on a per-share basis. This is an option we didn't have three years ago when we entered Denver.

Yes. That's really helpful color there. Anne, looking at operations, repairs and maintenance has been an expense line. You guys have seen a ton of savings this year. Can you walk through the moving pieces driving the savings? And is there any worry that there's some deferred maintenance that will eventually come through in the numbers as people kind of spend more time in their apartments and are more willing to have repairs done on their units themselves?

I believe the significant savings are primarily driven by two factors. First, we are experiencing lower turn costs due to improved retention. While this could be slightly countered by increased maintenance as residents spend more time in their units, we have not observed any notable trend of increased work orders compared to usual. There are indeed savings in turn costs. Second, our teams adapted to off-site work for a considerable period and discovered cost-effective methods to operate. For instance, we have shifted to virtual resident events instead of in-person gatherings that typically involve food and entertainment, which we have not conducted for months. Our goal is to integrate many of these new, cost-saving practices while still fostering a sense of community and making it a desirable place for people to live. Overall, the primary contributor to the operational expense savings is the reduction in turn costs.

That's helpful. And then one more quick one for me. John, I was just hoping you could share your guys' bad debt philosophy. It looks like you guys have done a pretty good job of kind of attributing people that haven't paid thus far into bad debt. How do you judge collectability from here? Just any help would be greatly appreciated.

Sure, Alex. We have a pretty easy policy in that regard. So we reserve anything that, at the end of the month, has an AR balance of 100%. So our bad debt is essentially anything we build that month that we didn't collect.

The next question comes from Jim Sullivan of BTIG.

A question for you on the controllable expenses. Obviously, a great job at the comp year-over-year. And I'm just curious, as you think about that as part of your strategy about 'rise by 5,' whether the progress you've made, and I know some of it is post-COVID, related to RM spending, but do you think you're going to accelerate the timing of achieving that 'rise by 5?' Or maybe have a more aggressive target in terms of expanding the operating margin?

I believe our target will remain unchanged. We have already tackled many of the easier tasks, but now we face some more challenging projects. There are several significant initiatives ahead, including changes to our technology. Additionally, the 'rise by 5' initiative is closely linked to our value-add program. If the market continues to weaken or if we don't identify substantial opportunities within our portfolio's value-add options, progress might slow down. As Mark mentioned, we could potentially speed things up by strategically selling off certain assets that require high capital expenditures, have lower margins, or are somewhat inefficient, allowing us to better position our portfolios in their markets. However, the operational side of our plan is time-consuming and will take some time to implement. I believe we are on track with our five-year plan, and we are currently three years into it.

I wanted to follow up on your comment about low-hanging fruit. In your prepared remarks about the value-add program, you mentioned the return you've achieved, which is quite impressive. My question is whether this return is partly due to low-hanging fruit, meaning that the initial value-add efforts focused on markets or assets with the highest potential. Additionally, as we look ahead, do you believe you will be able to sustain that level of ROI in the value-add program?

Yes, Jim, this is Mark. I think we certainly weren't the first to enter the value-add sector, which has been a successful strategy for the last six or seven years. Our success comes from focusing on specific submarkets and properties. We have succeeded in markets where we made good decisions about which projects to pursue. While we have many potential properties for upgrades, we prioritize them based on market conditions and our assessment of the best chances for success. I believe we will continue to find such opportunities. If the returns don't meet our expectations, we will halt progress. Generally, aside from certain features like clubhouses that we believe enhance value, we are focusing these efforts on property turnarounds, allowing us to adjust our investments as needed. Anne, do you want to add anything?

Yes. I would just say, our expectation on the unit renovation, so the 18.3% I mentioned is on our full unit renovations, our expectation there is north of 15%. So I do think that we'll continue to identify the best opportunities, and our expectations are high for what we want in return and how we put that capital to use.

Could you just remind us, Anne, how many units are kind of being programmed for the value-add over the next 6 quarters?

That's a good question. Probably close to 900.

Okay. Very good. And then final question for me. Obviously, you have tapped into the equity markets with your share price where it was comfortable doing so. And being able to access equity capital at fair pricing, obviously, I think, enhances your position in terms of talking with rating agencies about investment-grade rating. Maybe if you could just update us on thoughts in that respect.

Yes. We are indeed more focused on safety and caution. We are increasing our cash reserves to prepare for potential challenges and to take advantage of acquisition opportunities. We will maintain this focus on safety and liquidity until we feel ready to operate with a leaner approach, which will likely be several quarters away. Regarding investment-grade discussions, an index-eligible bond offering today is $350 million, which is 60% of our current total outstanding debt that we cannot access at the moment. The rating agencies consider us small, and relatively speaking, that is accurate. Therefore, in the near term, we are not focusing much on discussions with the rating agencies about achieving an investment-grade rating. Our priority is maintaining and expanding our access to the private placement market. As previously mentioned, we successfully completed a deal with Prudential last September, which has been a valuable partnership stemming from extensive effort. They are one of the largest purchasers of real estate private placements and are part of a select group that does substantial work beyond basic desktop underwriting. We aim to enhance our access in that market over time. I believe we are well positioned to do this, provided we continue to maintain what we refer to as investment-grade-like metrics. Ultimately, we would like to reach a stage where we can attain an investment-grade status, which depends on maintaining or improving the quality of our metrics and growing in size.

Okay. That’s alright. I have one last question. Regarding the comments about Denver and the potential challenges with development deals, could you provide some insights on where you anticipate concessions might trend in that market over the next two to four quarters?

Yes, it's currently focused on concessions. I believe they will continue to be significant. Based on our analysis of various reports, I would say that this market is the most impacted, experiencing the combined effects of COVID and supply chain issues. Anne, would you like to add anything to that?

Yes. I mean we're already seeing 2 to 3 months there from the projects that were in lease-up and that need to finish out their leasing. So I don't know if that gets any heavier given, I think, occupancy in that market has stayed relatively stable. And we're coming to the end of leasing season where there just won't be as many people moving around, but...

Yes. So to continue, I think the other thing I would add to that, Jim, that's really important is we really do believe in that market and the long-term strength, and a lot of what's happening in the world today, I think, accelerates what we like about and believe in for Denver, which is people will move there because they want to live there and they can do their jobs there. And that's true because companies are moving there or facilitating people being there, but also given everything that's happening today, if you can lower your frictional cost of living somewhere, which I would define frictional costs as taxes and time of commuting and things like that and be in a place in the foothills of those mountains, a lot of people are going to do that. And I think that trend will continue.

The next question comes from Daniel Santos of Piper Sandler.

Most of the questions have been addressed, but could you share your thoughts or high-level insights on how you're approaching the balance between rates and occupancy across the portfolio? Additionally, regarding St. Cloud, considering the challenges posed by university students, is it accurate to say that if the university does not resume on-campus classes, that market will struggle throughout the next academic year?

That's a great question. I'll begin with St. Cloud. Currently, it looks like the students will be returning. Although we don't have a large number of students in our buildings, their absence in other projects is creating vacancies in the market, which offers people alternatives. We are optimistic that they will return, allowing us to improve occupancy there. Once occupancy increases, we can then raise rents. Balancing rent and occupancy is something we manage daily, aiming to optimize revenue. Initially, during the pandemic, we concentrated on maintaining high occupancy levels so we could increase prices when the opportunity arose. We are now seeing that opportunity at some of our properties. For instance, our new lease rates saw a 1.1% increase in July, which is a positive sign. Most of these new leases are effective within the same month, while our renewals tend to lag behind. Renewal pricing is applied, but it was set 60 to 75 days ago. We feel encouraged about the prospects ahead, but we anticipate some flat months, especially with lower expirations and reduced traffic. We aim to keep our portfolio occupancy above 94% to be well positioned for the second quarter next year when leasing resumes. Next year's leasing season will be our first real test of post-COVID pricing.

The next question comes from Buck Horne of Raymond James.

I have a couple of quick questions for clarification. I'd like to revisit the bad debt accounting policy to ensure I fully understand it. You mentioned that everything past one month in accounts receivable is reserved. Are there any security deposits or other methods to recover those balances even though they are reserved, or is the reserve already accounting for those deposits? How exactly does that work?

Yes. So the reserve excludes the security deposits. The reserve would be for residents who are currently occupying our units. When they move out, the security deposit can be applied. But you can't access the security deposit in the middle of a resident residing there. That would be triggered by when they move out. I don't know, Anne, if you had anything else to add? So it's not considered at all in the bad debt provision, if that's what the question was.

Yes. It truly is the amount owed.

So that's reserved, but theoretically, there's a point where you could possibly recover the reserve with the recoverability of the deposit. Does that make sense?

Yes. That's right.

Okay. Okay. And then other one, just thinking about equity issuance from here in the usage of the ATM, I mean, would you guys consider still raising some dry powder on the ATM in advance of anything announced in Nashville? Or if you do, do something in Nashville, would that probably be accompanied by a more structured equity raise? Or how do you think about a more typical secondary versus an ATM to raise capital for entering Nashville?

Yes. I mean we certainly have a lot of firepower right now just in terms of cash relative to the size of our enterprise. So the answer is, yes, we would raise it in advance. I mean again, I think our M.O. kind of over the past couple of years has been buy, match with sale proceeds, use a little bit of leverage, tell people about it, raise capital, if needed, to get back to leverage-neutral. I would say we flipped that a little bit towards be prepared in advance, have the cash on hand, seeking opportunities, protecting our overall liquidity. So we'll continue to do that. I mean we're running kind of rich right now in terms of our cash balance, in our judgment. And so we would continue to do that, and we would raise in advance. As it relates to a traditional follow-on, I think if we had the size and we felt like the pricing made sense, we would absolutely consider that. I mean directionally, the feedback we get from a lot of institutions who are spending time with us but don't own the stock is we would love to find a way to get in with volume, that would be a way to do that. There's a big cost to that, and we have to weigh those 2 things together because we work for people who own the stock today, not the prospects. Obviously, that's a balance. We would like to attract those folks as well.

Showing no further questions, this concludes our question-and-answer session. I would like to turn the conference back over to Mark Decker for any closing remarks.

Super. Thanks, Alyssa. Thanks, everybody. We appreciate your interest in IRET, and be well and stay safe.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.