Good day and welcome to the Centerspace Q4 2021 Earnings Call. My name is Brica and I will be the event specialist today. I would now like to hand the call over to Mark Decker, Centerspace's President and CEO. Mark, you may begin.

Thank you, operator and good morning, everyone. The Form 10-K for the full year 2021 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 yesterday on Form 8-K. Before we begin our remarks this morning, I need to remind you that during the call, we will discuss our business outlook and we'll be making certain forward-looking statements about future events based on current expectations and assumptions. These statements are subject to risks and uncertainties discussed in our Form 10-K, including those under the section titled Risk Factors and in other recent filings with the SEC. With respect to non-GAAP measures we use on this call including pro forma measures, please refer to our earnings supplement for a reconciliation to GAAP and the reasons management uses these non-GAAP measures and the assumptions used with respect to any pro forma measures and their inherent limitations. Any forward-looking statements made on today's call represent management's current opinions and the company assumes no obligation to update or supplement these statements that become untrue due to subsequent events. I'm grateful to be joined this morning by our Chief Operating Officer, Anne Olson, as well as our Chief Financial Officer, Bhairav Patel. We also have a special guest, John Kirchmann, who, as most of you know, is our former CFO and is helping with Bhairav's transition. 2021 was an incredible year in the housing business and Centerspace had a fantastic year as well. Our mantra is 'Better Every Day' and we lived up to that making meaningful progress in every respect with outstanding operating results, record investment and financing activity, critical investments into our technology platform, as well as our team as we pursue our mission to be a great place to live, work, and invest. We closed the year with core FFO growth of 5.6% over 2020 and well above consensus. In 2022, the momentum should accelerate and our outlook is for core FFO growth per share of 11.5% at the midpoint versus 2021 and 3% over consensus. Centerspace is one of just a few companies in the apartment space that was able to post year-over-year growth in operations and per share FFO in each of 2019, 2020, and 2021, an outcome that reflects the quality of our business. Looking to 2022, we expect to build on our fundamentals characterized by consistency, growth, and relatively low new supply. We've made over $600 million of portfolio investment since January of 2021, improving our growth potential and quality of earnings, and we will continue to seek opportunities. Our KMS investment, which we've owned for six months now is on track and the opportunity to be optimizing the lease role in those assets is just getting started as we head into our peak leasing season. We purchased KMS to grow faster and it's working. In January and February, we are seeing nearly double the blended lease rate growth compared to our same-store portfolio in Minneapolis and St. Cloud. We're also beginning to consider the opportunities for value-add in that subset of the portfolio, opportunities we did not underwrite or price into the purchase. The work we're doing there and elsewhere should help us continue to grow revenues at better than market as we did in 2021. Our balance sheet has never been better. We closed the year with average maturities over seven years, a blended rate in the low threes and seven times debt to forward EBITDA. Our access to the private placement market was expanded in 2021 and our spreads continue to narrow and are well in line with investment-grade issuers. On the equity side, we were able to place shares through our ATM into a handful of active investors who understand our business and help us drive float in liquidity; two of which are now in our top 10 shareholders overall, and top three among active investors. As always, I want to thank our outstanding team of professionals who show up every day for our residents and for each other. Anne, please give us an operating update.

Thank you, Mark and good morning. 2021 was the year of stellar revenue growth for our company as we achieved a 4.8% increase in same-store net operating income for 2021 over 2020 and with 9.2% revenue growth in the fourth quarter compared to the same period in 2020, we believe we have a great runway for success into 2022. In the fourth quarter, our same-store new lease rates were up 5.8% over the prior leases and same-store renewals achieved increases of 7.8%. Given the seasonality of our business, it is important to note that in the fourth quarter of 2020, our new lease rates had declined 3.6% and our renewals were 2.3%. Our fourth quarter spread is 9.4% on new leases and 5.5% on renewals compared to the same period in 2020. On a blended basis, this is fourth quarter rental rate growth of 6.5%. Solid rental rate increases continued in January, with new leases increasing 6.6% over prior leases, and renewals increasing 9.6% for a blended rate increase of 7.5%. Our same-store weighted average occupancy was 93.4% on December 31st, 2021, a slight increase over the end of the third quarter, though lower than where we finished in 2020. Some of this is attributable to our value-add renovations as well as higher turnover as we've come out of COVID and experienced increasing rental rates. Optimizing revenues is our goal, through value-add renovations, revenue management, and enhancing our customer experience. While we still closely monitor expenses, we expect that the current inflationary environment will create expense pressures, particularly in labor and materials. At this time last year, we were still monitoring our collections rate and bad debt expense while working through the eviction moratoriums and regulations. 2021 saw significant quarterly volatility in our collections and we realized 101% of expected residential revenue in the fourth quarter. For the year, we collected 99.2% of expected residential revenue, which we are anticipating to be a normalized rate heading into 2022. The fourth quarter was also our first full quarter after the integration of the KMS portfolio. With respect to our acquisition capital expectations, we've begun to deploy capital to help drive the rental rates that Mark mentioned. Through December 31st, 2021, we've spent approximately $540,000 on cleaning, mechanical plumbing, and HVAC upgrades, and we've contracted for some of our larger acquisition capital projects across that portfolio. In 2022, we expect to spend approximately $21 million of the $38 million allocated to acquisition capital improvements for the KMS assets. Given the strong results of 2021, we're confident that 2022 brings us many opportunities to continue to execute on our operating platform, including integrating our non-same-store portfolio, capturing our loss to lease, and optimizing our property management technologies to enhance our customer experience. We're very proud of our team's demonstrated ability to execute on our vision and mission and are grateful for their contributions to making Better Every Day. I'll turn it over to Bhairav to discuss our financial results.

Thank you, Anne. Last night, we reported core FFO for the year ending December 31st, 2021 of $3.99 per diluted share, an increase of $0.21 or 5.6% from the prior year. For the quarter ended December 31st, 2021, core FFO was $1.08 per diluted share, an increase of $0.06 or 5.9% from the prior year. The increase in full year core FFO is primarily attributable to higher NOI, offset in part by higher G&A and property management expenses as we have grown our portfolio. Total G&A was $16.2 million for the year, an increase of $2.8 million over the prior year, primarily attributable to increases of $1.3 million in incentive-based compensation costs related to company performance and share-based compensation arrangements and $800,000 in non-recurring technology initiative costs. Property management expense, which includes property management overhead and property management fees, increased $8.8 million for the year ended December 31st, 2021 compared to $5.8 million for the prior year. The increase is primarily due to $1.2 million in non-recurring technology initiatives as well as $1.2 million in compensation costs from the filling of open positions and additional staffing related to the acquisition of communities during the year. Turning to capital expenditures, which is presented on page S-17 of our supplemental, same-store CapEx was $9.7 million for the year ended December 31st, 2021. That translates to $906 per unit, which is in line with our expectations. Looking at our balance sheet, as of December 31st, 2021, we had $205 million of total liquidity, including $174 million available on our line of credit. The re-financings we completed in the third quarter strengthened our balance sheet and added financial flexibility by increasing the weighted average maturity of our debt while reducing our cost of capital. Additionally, subsequently year end, we terminated the two remaining swap positions for a total cost of $2.4 million, further reducing our weighted average interest rate. As a result, we now pay interest on our line of credit at LIBOR plus 150 basis points. For reference, the swap interest rate on the $76 million outstanding on our line of credit as of December 31st, 2021 was 4.3% versus 1.6%, excluding the swaps. In Q4, we issued 721,000 shares at an average price of $97.51 per share net of commissions. For the full year, we issued 1.8 million common shares at an average price of $86.13 and total consideration, net of commissions and issuance costs of $156 million under the ATM program. Now, I will discuss our 2022 financial outlook which is presented on page S-18 of our supplemental. Core FFO for 2022 is projected to be $4.45 per share at the midpoint of the range, which is growth of 11.5% over the prior year and is driven by strength in our core operations. The year-over-year growth is driven by strong projected same-store NOI growth, which is expected to increase by 8% to 10%, as well as the accretive acquisition of 23 communities since the beginning of 2021. Within our same-store pool, we project revenue to increase by 7% at the midpoint as we look to sustain revenue growth we saw in the fourth quarter of 2021. We do anticipate cost increases as a result of inflationary pressures, particularly on compensation costs driven by a challenging labor market and expect total same-store expenses to increase by 4.25% at the midpoint. Our financial outlook also assumes same-store capital expenditures of $925 to $975 per home, which is slightly above last year as a result of timing differences and inflationary increases. Value-add capital expenditures of $21 million to $24 million and the January 2022 acquisition of four communities in the Minneapolis market. To conclude, we executed on several initiatives in 2021 to add scale, as evidenced by the growth of our portfolio since the beginning of 2021, while simultaneously positioning the company for future growth. We continue to deliver strong operating results, improve the balance sheet, and invest in our best-in-class operating platform. For that I thank all our team members for their unwavering commitment and continued hard work.

Thank you. We have our first question on the phone lines from Rob Stevenson from Janney. Rob, please go ahead when you're ready.

Good morning guys. Mark or Anne Minneapolis is 26.6% in terms of the same-store NOI percentage but what percentage of overall NOI as a given the recent acquisitions? And will we see some selective Minneapolis dispositions in 2022? Or are you comfortable growing that market even higher at this point? And can you talk about where the Minneapolis suburban versus urban mixes?

Hey, Rob, good morning. Looking at the same-store figures, I think we're around 36% in many areas of the Twin Cities. The suburban to urban mix is roughly 90%-10% or maybe 85%-15%. We'll do some calculations on that during our conversation and hopefully provide an update later in the call, but it's definitely skewed towards the suburbs, more so than before. Prior to KMS, our mix was about 50%-50% by NOI and around 60%-40% by number of homes, with 60% being B and 40% A in terms of homes, while cash flow was also 50%-50% due to the higher rents on the A side. Today, we're probably looking at around two-thirds B and one-third A. I'm estimating a bit here, but that seems directionally accurate.

Okay.

And to your other question on would we pair that down? So, one, we're happy to own things in the Twin Cities, we don't want to not do things that we think other people can't do because it's in a market we know really well and have a high degree of concentration. We are sensitive to that concentration and we'll be opportunistic sellers of anything and everything. But as Bhairav called out in our outlook, we don't have any sales program this year in our plan. We're always seeking disciplined buyers and there's more out there than ever. So, I would say it's plausible, but not likely we sell something in Minneapolis. And if we do sell, it'll be to fund something else, either here or elsewhere.

Okay. I guess the only other question I have is that the 18.7 million shares in the guidance, what did you guys end the year with, the weighted average was like $79 million, is that assume, like a $75 million issuance in 2022?

Yes, I mean, no issuances in 2022 are picked up in the guidance. We entered close to just a little over 18 million shares, which is what's being picked up in the shares in the guidance for 2022.

Okay, so that stock-based incentive or whatever the growths in the 700,000 extra shares or so?

Yes.

I appreciate it. Rob, regarding the OP units, there are a couple hundred thousand share equivalents from what we refer to as the Min3 acquisition, which is an OP unit arrangement.

Thank you.

Thank you. We now have another question on the line from Alexander Goldfarb of Piper Sandler. So, Alexander, your line is open.

Thank you. Hey, good morning out there. And then just to clarify, is it it's one question and then get back in the queue where we're allowed to ask a follow-up.

Fire away, we will cut you off if you get to seven questions.

Okay, Mike, that's great. My kids usually stop me after I ask about their school. So, my first question for you is: looking at 2022, how much free rent are you letting go from last year? Or is the revenue guidance primarily based on face rent?

To restate the question, are we burning off concessions?

Yes. So, we have very little use of concessions and our lease rates that we're quoting the increases on our effective rents over effective rents. But so that's a true kind of lease rate over lease rate. And we very sparingly used concessions and if you recall, our markets were pretty strong, and we didn't have as much need for concessions through COVID.

Okay, so when we're looking at, like the revenue up 25% in St. Cloud, or I guess that's really the standout one, that's really rents are up 25% in that market?

Yes, we experienced some volatility and bad debt, which could also impact collections, including late or deferred collections in that market. This is related to total revenue, not just rental rates.

Okay. Regarding the Minneapolis and Twin Cities exposure, which accounts for over a quarter of your portfolio, there have been headlines related to rent control, particularly in the city rather than the suburbs. Considering the experiences of other companies heavily invested in a single market, what are your thoughts on having such significant exposure? I understand you are gradually expanding into Nashville and other markets, but how do you assess your Minneapolis exposure in light of the rent control discussions and the overall risk of being so concentrated in one area?

Man, I knew we couldn't get off this call without a national barb. Thank you.

No, I owed it to Dan Santos to ask Nashville.

I completely agree. We are focused on our concentration. The area with the highest concentration of NOI is FX, particularly north of 40 in the Bay Area, which people seem to prefer over Minneapolis for understandable reasons. We're aware of this concentration but not particularly concerned. We believe it's less risky to own more of something that's well understood. We aim to expand into other markets, with Nashville still a focus, as our strategy there remains intact. Regarding rent control, St. Paul is the only municipality currently implementing it, and the rules are quite strict, remaining with the unit regardless of tenant changes. The Mayor has recently tried to reconsider this, and it's generally viewed as poorly crafted. We're seeing the repercussions, as many market-rate projects have halted, resulting in a significant loss of homes in St. Paul. This situation may actually help Minneapolis to some extent. To clarify regarding the legislation, what was approved allows the Minneapolis City Council to consider drafting rent control laws. The public did not directly vote for rent control; rather, they tasked the City Council to explore options. From our understanding, the City Council's stance is 8 members against rent control and 5 for it, including 4 who support the St. Paul version that we oppose. The Mayor has rejected it too. Given the current situation in St. Paul, it would be unwise to pursue rent control if the goal is to encourage ongoing development in Minneapolis. Additionally, there are other pressing issues in the city, such as law enforcement concerns, which complicate the council's priorities. We've had multiple conversations with council members who are hesitant to allocate development capital due to uncertainty, resulting in them exploring opportunities in other markets. This sentiment is being reinforced across the legislative landscape. In summary, we aren't worried about this situation; in fact, it may create more opportunities for us. If we pursue another deal like NoCo, we may have more pricing power due to fewer institutions focusing on this market, as they may not fully understand it. However, risk does exist, and it’s a reality everywhere. There are states unlikely to implement rent control, but with significant rent increases, some action may eventually be taken. Overall, while there's legislative risk in housing across the board, we have a clear understanding of the risk in Minneapolis, which may actually be less daunting. Apologies for the lengthy response.

No problem. Thank you, Mark.

We now have John Kim of BMO Capital Markets. So, please go ahead, John. I've opened your line.

Thank you. Good morning. Can you just discuss the same-store revenue growth that you have sequentially as 4%? It's not really quite evident from the occupancy loss and the 6.5% spreads you had on blended lease rates? Was this driven by resident relief funds or anything else that was sort of one-time in nature?

Yes, thanks, John. Yes, we did have, as I mentioned in the prepared remarks, some volatility in those relief funds and the timing of those. And so that that is part of what you're seeing there in those numbers sequentially, is we collected 101% of expected revenue in the fourth quarter, some of which was just timing on receipt of collections.

And contemplated in guidance as far as additional resident relief rents you have or the change in bad debt?

We expect our revenue collection to normalize, and we anticipate collecting approximately 99.2% to 99.3% of our revenue. This is included in our guidance as we aim to return to our usual collection rate.

Okay. And by us, you mentioned, the increased share count in your guidance is not inclusive of any additional equity raises? But are you assuming at all as part of any increase additional OP transactions this year?

No, we haven't projected any acquisitions and as a result, none of the additional share count is a result of OP issuances.

Great. Thank you.

Thanks John.

Thank you. We now have another question on the line from Buck Horne of Raymond James. So, your line is open.

Thank you. Good morning. I want to ask for a clarification regarding the occupancy rate you reported at the end of the fourth quarter. I understand there may be some post-COVID turnover affecting that. Is this indicative of some resistance to renewal increases or planned turnover? Additionally, could you provide insight into how you're managing and planning for occupancy as we move into fiscal 2022 and how January is looking in terms of occupancy?

Yes, thank you, Buck. Currently, our year-to-date weighted average occupancy stands at 94.4%. We have seen some progress in what we were aiming for. Several factors contributed to this in the fourth quarter, including the arrival and subsequent reduction of rent relief funds and the end of the eviction moratorium, which led to planned turnover in some locations where we needed to transition residents. Across the industry, many are experiencing pushback on rental increases. Consequently, there has been a slight rise in people renting elsewhere as we continue to raise our rents. Additionally, we recorded a value-add of about 40 basis points in the fourth quarter related to vacancies, as we want to keep those units offline for 30 days for renovations. We noticed a small increase in this area during the fourth quarter. However, we are optimistic about January, as activity is picking up, and we believe we have significant potential for both lease rate increases and improving occupancy as we approach leasing season, which typically brings increased turnover.

Got it. Very helpful. Okay, that's all I have for now. Thanks guys.

Thanks Buck.

Thank you. We now have another follow up question from Alexander Goldfarb with Piper Sandler. So, please go ahead when you're ready.

Yes. Hi, just a quick follow-up. On the two swaps that you broke, I understand the existing swap, but the forward swap, presumably that was put in place in conjunction with some planned issuance, but just sort of curious, the thoughts around was that an issuance that was pulled or just a little bit more color? And then on the one that you broke, was there no option to assign that to a different piece of debt, just curious?

I'll start and then Bhairav can finish with the details if needed. The swaps were linked to some bank debt we arranged back in 2017 and 2018. Before we had the opportunity to borrow money for a longer duration of ten years, the longest unsecured loans we could obtain were for five and seven years from the bank. So, we took out loans with those terms and hedged them using derivatives. When we refinanced last August, we restructured our five- and seven-year loans along with our credit line, which included everything originally tied to those swaps. At the time, we believed there was no downside in assigning those swaps. Rates fluctuated significantly, and I think the cost to break those swaps moved from around $8 million or $9 million down to about $3 million. Currently, we are not focused on speculating on interest rates, as it seemed like an easy decision in August but does not appear favorable now, which doesn't align with our business strategy. That was the rationale behind our decision. Bhairav, do you have anything to add?

No, I think that covers it. Yes, from our perspective, when we terminated the other swaps, there was little or no risk of holding on to these in case rates move upwards and they did so. That's what triggered the termination.

Okay, cool. Thank you.

Yes, thank you.

Thank you. We now have another question on the line from John Kim with BMO Capital Markets. So, please go ahead, John, your line is open.

Hey, I was wondering if you could provide an update on your lost lease and also what you're expecting as far as market rent growth as part of guidance?

Our current lost lease stands at just over 8% as we enter the peak leasing season, which we are optimistic about. In our guidance, we anticipate rental rate increases ranging from about 2% at the lowest end, primarily due to rent control in St. Paul, to 6% at the highest end in Denver.

Okay. And I know you guys present the new and renewal and effective lease growth rates on calls and in presentations, but I was wondering if that was something that you can provide in the supplements going forward?

Yes, we can consider that. We'll review that for the next supplement.

We're going to take all the mystery out of these calls for you, John.

We'll run out of questions.

We have to keep you listening for something.

Yes. As we mentioned in our prepared remarks, our forward debt to EBITDA is about 7.1, which reflects the strongest balance sheet we've ever had, and our maturity schedule is very favorable. While we admire the impressive balance sheets of the magnificent seven, we are pleased with our current position and have no immediate plans to change it. I believe that strategically growing our cash flow will be our best approach for de-leveraging at this time, although we remain open to asset sales. Ideally, as we've done in the past, we would like to pair any sales with a purchase to mitigate some of the dilutive effects of a straight sale. This has been our strategy, informed by lessons learned over the past five years; we've found that simply selling without a clear purpose didn't work as well as synchronizing the acquisition with a sale. That's the framework we are considering.

And, Mark can you comment on cap rates, either in your targeted markets or your non-core markets, how they've moved?

Cap rates are generally in the range of 3.25% to 4.25% across our markets, with some areas possibly a bit higher. When we examine our portfolio, average rents, and margins compared to recent sales, it's clear that Blackstone has been active in acquiring portfolios similar to ours, though in different geographic locations, which can influence growth rate assumptions and calculations. Fannie Mae and Freddie Mac assess value similarly regardless of its source, indicating a strong demand for multifamily assets across the board. The fundamentals in our markets remain robust from a supply standpoint, contributing to strong pricing. We focus on cap rates and unlevered IRRs, which currently are generally in the 5% to 6% range. We don’t see many opportunities yielding over 6% where we can be competitive, but in the range of 5.6% to 5.8%, there's a good chance of success. This assessment is based on relatively conservative assumptions, while others might expect higher IRRs based on different growth projections or assumptions about reversion, but that represents the current pricing landscape in our markets.

Great. Thank you.

Thanks John.

Thank you.

Sounds like that's a wrap. Any more questions?

We have no further questions on the line.

Excellent. Well, in that case, we'd like to thank everyone, especially to welcome Bhairav, who we're excited to have here, and thank John Kirchmann. As anyone who knows John knows, he's always one of the most interesting men in the room, and we all wish them the best of everything. So, thank you, John, and thanks, everybody.

Thank you. This does conclude today's call. Thank you for joining. You may now disconnect your lines.