Thank you all for joining. I would like to welcome you to Centerspace Q1 2023 Earnings Call. All lines have been muted to prevent background noise. After the speakers' remarks, we will have a question-and-answer session. I would now like to hand the conference over to your host, Joe McComish. Please go ahead, Joe.

Centerspace's Form 10-Q for the quarter ended March 31, 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.

Good morning, everyone, and thank you for joining our call. With me this morning is Bhairav Patel, our Chief Financial Officer. Notably missing this morning is Mark Decker, who led Centerspace for the last six years and transitioned out of the CEO role at the end of March. Mark is a tremendous leader, who was key in building the foundation of our culture and drove a strategy that provided our team opportunities to learn and grow. Mark's accomplishments over the last six years are many, and I know Mark and the Board have confidence in the opportunity ahead for CSR. I share that confidence and I'm both humbled and excited to lead the company into its next chapter. We will miss Mark and wish him the best. Today, I have great results to share for our company. The first quarter was very strong. The stability of our markets and operations resulted in core FFO growth of 9% over the same period last year. Revenue growth is still the highlight as we capture the loss to lease from large rental increases throughout 2022. Same-store revenue growth was 10.5%, driven by increases in scheduled rent leading to NOI growth of 11% over the prior comparable quarter. The expense pressure we experienced in 2022 is leveling off. The first quarter same-store expenses were flat over Q4 of 2022, a sign of easing inflation and efficacy of our cost control measures. Our positive operational results, coupled with the impact of the CEO transition and associated reduction of G&A, give us confidence that we can reiterate our guidance for this year. Bhairav will provide more detail in his remarks. With respect to our revenue trends, in the first quarter, we achieved 2.5% increases on same-store new lease trade outs and 5.8% increases on same-store renewals. This leads us to a 3.9% blended rent increase in Q1. These trends continued in April with 4.5% increases on same-store new lease trade outs, 5.1% increases on same-store renewals which results in a 4.7% blended rent increase in April. We are experiencing broad strength across our markets, which are differentiated by our mid and Mountain West presence. As positive leasing in 2020 demonstrated, our market exposure provides good stability and consistency in times of uncertainty and we are seeing that play out again today. Hallmarks of our portfolio are lower supply, low unemployment and the affordability of rents with our average monthly rental rate in the first quarter of $1,450 and the portfolio rent to income of our resident household is just under 25%. With respect to supply, weighted average units under construction is 8.2% of inventory in our institutional markets of Denver and Minneapolis and 4.9% of inventory in our other markets. In Minneapolis and Denver, we achieved revenue growth of 9.5% and 10.5%, respectively, in Q1 compared to Q1 2022, even in light of elevated supply. As we look for external growth opportunities, we continue to like Denver and believe that the fundamentals of the Mountain West are holding up. Transaction volume in Metro Denver was down significantly at 69% in Q1 compared to Q1 2022. And though velocity has tapered, we continue seeing deep competition on well-located opportunities. We have been quiet on the acquisition front since Q3 of 2022, but we are very pleased with the disposition of nine communities that closed during the first quarter. In keeping with our strategy to improve our portfolio construction and exposure and thus our earnings quality, we disposed of these communities in the St. Cloud, Omaha, and Minneapolis markets that had lower rent and growth profiles and higher cost of operations. The nine communities had an average monthly revenue per unit of $944 in Q1 2023 compared to our post-sale portfolio average monthly revenue per unit of $1,378, and the pricing we achieved was a 6% cap rate based on 2022 NOI for those communities. Given the dearth of acquisition opportunities and our stock price trading at an implied cap rate around 7.5%, we also used $6.7 million of those proceeds to buy back our stock at an average of approximately $54.17, a price we feel confident about given our ability to execute sales of our less desirable assets at a cap rate inside of where we are trading. We believe in our portfolio, its diversity and stability and our internal opportunity to enhance our portfolio quality. For these reasons, our stock is a good investment for us at this time. Now I'll turn it over to Bhairav to discuss our overall financial results and 2023 outlook.

Thanks, Anne, and good morning, everyone. In my comments today, I will review results for the first quarter of 2023, highlight actions we have recently taken to optimize our balance sheet and liquidity, and discuss our outlook for 2023. Last night, we reported core FFO for the quarter ending March 31, 2023, of $1.07 per diluted share, which was in line with our expectations and driven by another strong quarter of operating performance with same-store NOI increasing 11% year-over-year. As Anne mentioned in her remarks, leasing trends remain positive across our portfolio, showcasing the stability of our markets. Please note that G&A expenses during the quarter included one-time expenses and charges totaling $3.2 million related to the CEO transition, which we have excluded from core FFO. Turning to our balance sheet. We took several steps during and subsequent to the first quarter of 2023 to enhance our balance sheet strength and maximize financial flexibility. First, we used the initial proceeds from the asset sales to fully repay the $100 million term loan we put in place at the end of last year. We received approximately $48 million of proceeds from the sales subsequent to quarter end, which we promptly used to pay down the outstanding balance on our line of credit. Second, we further reduced our floating rate exposure by repaying another $90 million of our line of credit balance with proceeds from fixed rate secured financing we closed last week. The financing has a term of 12 years at a fixed rate of 5.04%, which represented a spread of under 140 basis points on the then existing 10-year treasury rate. We are extremely pleased with the execution as we were able to close it ahead of schedule despite the disruption in the capital markets caused by the onset of the banking crisis. Pro forma for the impact of those actions, our floating rate exposure has been reduced to approximately $20 million or less than 2% of our total current debt outstanding of approximately $875 million. It also lowered our weighted average interest rate to 3.5% and increased our weighted average maturity to 7.2 years. We have total liquidity as of today of approximately $230 million, most of which is driven by the available amount on our line of credit, which, as I mentioned earlier, has been almost fully repaid with proceeds from the asset sales and refinancing. With less than $25 million of our total debt outstanding coming due in the next 24 months and pro forma leverage of less than 7 times net debt to adjusted EBITDA, we believe we are in one of the strongest positions we have ever been from a balance sheet perspective, and we are able to immediately leverage the strength of our balance sheet by repurchasing $6.7 million of our own stock at an average price of $54.17 per share, which we believe is a significant discount to the underlying value of our portfolio, as Anne previously discussed. Now I will discuss our financial outlook for 2023, which is presented on Page S-15 of the supplemental. We are maintaining our guidance ranges for same-store NOI and core FFO as our first quarter results have been in line with our expectations, barring the incremental G&A impact as a result of the CEO transition. As I mentioned earlier, we have excluded the incremental G&A from core FFO leading to our expectations for core FFO being relatively unchanged. Excluding the one-time charge, the impact of the transition is G&A savings of approximately $1 million for 2023, and we are currently determining how much of the potential savings may need to be reallocated as we reorganize the support functions. Our strong first quarter results and potential G&A savings give us confidence that we will be above the midpoint of our current guidance range for core FFO. We will provide an updated outlook next quarter, which comprehensively incorporates the impact of operating activity during the first half of the year and any G&A savings we expect to realize. To conclude, I would like to congratulate Mark for his many accomplishments as CEO of Centerspace and wish him all the very best in his future endeavors. I'm thankful for the opportunity to work with him over the past 1.5 years and have greatly benefited from his leadership and guidance during my time at Centerspace. As Anne said, we do have a tremendous opportunity ahead of us, and I believe we are very well positioned to capitalize on the opportunity under her leadership. I look forward to assisting her in shaping the next chapter in the evolution of Centerspace. And with that, I will turn it over to the operator to open it up for questions.

Thank you. We now have the first question from Brad Heffern of RBC Capital Markets.

Yeah. Thank you, operator. Good morning, everyone. Anne first of all, congratulations on your first call as CEO. I'm wondering if you can talk about your vision for the company and call out any potential differences in either focus or strategy versus how things were done under Mark's leadership?

Yeah. Good morning, Brad. Thank you. I think I've been here for six years and really worked closely with Mark on the strategy of the company and how we execute. And so we're not expecting a lot of huge changes. I do think that as we moved into 2023 as a team, we refocused our execution standards and accountability systems in line with some of the transformation we had done to our back office with respect to technology enhancements and investments that we had made over the past couple of years. So I do think it feels a little bit different. That was planned as part of both our 2023 goals when Mark was here and as part of the transition that we would really accelerate our focus on our internal opportunity to better the company and better the results and then also strategically really think about incremental improvements to continue to enhance both the platform and our portfolio construction. So it might feel a little bit different, but it's all kind of part of the same plan and vision.

Okay. Thank you for that. And then on the repurchase, obviously, you did a little bit in the first quarter. I'm curious how you think about doing more in the context of it either increasing leverage, if you do it on the balance sheet or potentially reducing scale if you did it through dispositions?

That's a great question. Our approach has been very careful as we monitor the balance sheet and make prudent decisions regarding its use and the best investments at any given time. As we mentioned at the start of the year, we still plan to execute a few more asset sales this year, which will affect our ability to reduce debt and ensure we have the necessary funds to seize any external opportunities that may arise.

Okay. And then finally, on the rent growth side of things, what's been the change in market rent in your market so far this year and can you talk about where that sits relative to what the expectation was in guidance?

I believe we're slightly ahead of our expectations for market rents. However, since we only have one quarter completed, there haven't been many lease expirations yet. The first quarter typically has the lowest lease expirations for us, at 16%. We’re eager to engage more fully in the leasing season. We feel positive about the results from April. As mentioned, April showed more new lease trade-outs compared to the first quarter, which is promising. However, we’ll have to wait and see, as the majority of our leasing activity occurs mid-year. This is when we'll truly evaluate the accuracy of our full-year projections. Being slightly ahead early in the year doesn’t provide a clear picture of the remainder of the year.

Thank you. We now have Barry Oxford of Colliers.

Great. Thanks, guys. Just to build on that question regarding debt paydown. You clearly have taken care of any short-term maturities. But what type of debt would you be going after in your capital stack when you guys do dispositions should you choose to pay down more debt?

Yes, this is Bhairav. As we consider our dispositions, Anne noted that we have a few more included in our guidance. We anticipate that over the year, we will have some additional floating rate debt available on our line of credit that we can pay down. This is the only type of debt we plan to reduce since our fixed-rate debt is set and doesn't offer much flexibility for paydowns. We intend to pay down more floating rate debt, which we expect to increase gradually throughout the year, aligning with the planned dispositions.

Right. Okay. Great. Anne, with the 7.5 implied cap rate, when considering acquisitions, are they approaching that level to make them seem like an opportunity, or do you see your stock as the better option for investing in your own portfolio?

I believe we aren't currently seeing acquisitions that would be beneficial. We're still observing sub-4 cap and sub-5 cap transactions in our targeted markets. I agree that the best use of our capital right now is to focus on internal investments, including our stock and our value-add program, where we are achieving the returns we expected. As the year goes on, we are hopeful that the transaction market will improve and that prices will stabilize, since there is currently a significant difference between what buyers are willing to pay and what sellers are asking. If this situation resolves, we anticipate that acquisitions may become more beneficial and that our stock price can also increase to support our strategy.

Your next question comes from Rob Stevenson of Janney.

Good morning, guys. And just to pick up on Barry's question there. How many units are there left in the portfolio that you have targeted for redevelopment today and where the numbers make sense? And what's the aggregate dollar value of those investments? I think you guys have $25 million, $26 million at the midpoint in guidance for '23. What's behind that?

We currently have several projects in the pipeline, which is continuously expanding. Four years ago, we acquired an asset built in 2010 that is now entering the value-add phase. We're on track to invest approximately $25 million this year. Our value-add initiatives go beyond unit renovations and include the integration of smart home technology, which has the potential to benefit our entire portfolio. All 14,000 units are suitable for these types of investments. Looking at our pipeline, we have a little over 1,000 units undergoing renovations, and this will keep changing and growing. Overall, we have an ongoing pipeline as our properties age and new enhancement opportunities arise for implementation in our communities.

And what's the likelihood that, that $25 million or so for this year increases dramatically if you don't see any material upward expansion in cap rates and that becomes your best source of deployment other than stock repurchases? I mean how big could that be in any given year, given your staffing, given your subcontractors, et cetera? I mean how much more can you do than 1,000 units in a year?

We would really need to increase our staffing, which would significantly raise the execution cost. We're confident about the $25 million figure. If there were to be an increase, it would have to involve a large, portfolio-wide implementation, such as part of smart home technology, and we're approaching that gradually rather than all at once. We feel good about the $25 million and where it positions us for this year's dispositions and how we'll fund those. Therefore, I don't anticipate a significant increase beyond that amount.

What is your current exposure to utility costs as you look ahead? I know you've implemented several measures over the past year. Considering the fall of '23 and into '24, should we expect a decrease in your exposure due to these programs?

Great question. Last year, we began implementing the gas component of our ratio utility billing system, which will help stabilize our expenses through corresponding revenue. By the end of the first quarter, we had completed 26% of the rollout across our portfolio. We anticipate being about 75% to 80% complete by fall, taking into account our larger lease exposure. This development will significantly assist us in generating the revenue needed to reduce the volatility in utility costs that we experienced, especially in 2022.

And how much is your exposure to water and electric or is it all basically just natural gas for the most part?

Yeah. The majority of our exposure was in natural gas. Water, sewer, trash, those things had already been part of our RUBS program across the portfolio.

Thank you. We now have a question from Baird.

Hey. Good morning, everyone and congrats, Anne. Could you talk a little bit more about your revenue management strategy over the next few months? And is the plan to continue pushing our rate or really focus more on maintaining occupancy?

That's always a balance and the argument that we have internally here just about every day on revenue management. So I think we would like to run a little bit more occupied during this time where we have heavy lease expirations. It's typical that our occupancy just slightly because we really are trying to maximize revenue overall, which means that you have to watch closely pushing rate versus occupied. And we really have to take into account this year more so than years past, the experience we had with turnover costs. As an industry, those costs have increased significantly, which really makes keeping our residents in place and the resident experience to drive retention particularly important as we balance those two factors.

We now have Buck Horne of Raymond James.

Hey. Good morning. Thanks, everyone. Wanted to get some extra color on bad debt trends. If there's been any changes recently in delinquency patterns or skips in a VIX, and was there any benefit in the quarter from lower bad debt?

Hey, Buck. This is Bhairav. Yes, we are observing stabilization in those trends. For the first quarter, bad debt was around 25 basis points, which aligns with historical averages and positively impacts us compared to last year when it was higher than 25 basis points. We are seeing some return to pre-COVID trends regarding bad debt. At 25 basis points, it's slightly better than our projections. However, bad debt can be quite volatile. Overall, we feel confident about the assumptions we've made in the numbers so far.

All right. Appreciate that. Very helpful. And post the portfolio disposition here of those nine properties, how is the CapEx profile of the remaining portfolio change? What would be a good run rate, would you say, for kind of annualized recurring CapEx for the remaining portfolio?

Well, when we guided and gave our per door number at the beginning of the year, we had estimated in those dispositions. So I think that guidance remains unchanged about $1,100, or $1,150 a door. We had already factored that in when we made our projections. It is helping getting some of those older properties off of the books.

Understood. And is the elevated level of turn cost, is that just a function of kind of a legacy effect of COVID trends or just very extended tenant days and when will turn costs kind of normalize as those units come back available?

Yeah. I think the driver of high turn cost is really the increasing inflation on services, in particular, and also cost of goods. So we really saw that last year and then also Bhairav, do you have a comment on that?

Last year, turnover costs were high because we had units from the KMS portfolio turning for the first time, many of which had been occupied for a long time. We invested significantly in turnover capital and expenses to meet our standards. Some of this has already been absorbed into our existing portfolio, so we expect the impact to lessen over time. In our guidance, we've accounted for lower churn costs this year compared to last year, primarily due to cost control measures we've implemented and the reflection of units we turned last year.

Got it. Thanks, Bhairav. I appreciate it.

Thank you. I can confirm we have had no further questions registered. So I would like to hand it back to the management team.

Well, thank you all for joining us today and a special thanks to our team who are helping us get these great results and we'll see you hopefully, all at NAREIT.

Thank you all for joining. I can confirm this does conclude today's call. Please have a lovely rest of your day and you may now disconnect your lines.