Good morning, everyone, and welcome to today's conference call regarding Centerspace's Q2 2023 earnings. My name is Ellen, and I will be coordinating the call today. I would now like to turn it over to Josh Klaetsch to begin. Josh, please go ahead whenever you're ready.

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.

Good morning, everyone, and thank you for joining our call. With me this morning is Bhairav Patel, our Chief Financial Officer. We're pleased with our second quarter results, and I'm happy to be here this morning to discuss them with you. Revenue growth has been strong. Our occupancy is steady and expenses have moderated significantly from 2022. Jumping right in on revenue, we are seeing consistent strength, achieving 7% to 10% revenue increases across our markets in the same-store portfolio over the same quarter last year. This is heavily driven by leasing. With respect to our revenue trends in the second quarter, we moved through 30% of our portfolio lease expirations. And on same-store new lease trade-outs, we achieved 5.2% increases and 7% increases on same-store renewals. This results in a 4.9% blended rent increase. These trends continued in July with 4.6% increases on same-store new lease trade-outs and 4.1% increases on same-store renewals, resulting in a 4.3% blended rent increase. With respect to expenses, we can see our efforts to mitigate expense increases are working. We continue to see tax pressure in Denver, where we had higher expense growth and are working diligently on insurance costs. But our focus this year has been on what we can control, what we do internally versus outsourcing, our vendor relationships, and leveraging technology to provide efficiencies. Our team has been doing an excellent job. It takes all of our team members working together to achieve these results, and I'm grateful for their dedication. Our overall operational performance drove core FFO growth of 10.8% over the same period last year. And year-to-date, we have increased core FFO by 10% year-over-year. These results give us confidence that we can raise our guidance as we look to the remainder of this year. Bhairav will cover our guidance projections in more detail in his remarks, but I wanted to highlight a few key assumptions. Our initial 2023 guidance included the projected sale of 11 communities. We have sold 9 and currently anticipate selling 4 more, bringing our total dispositions to 13 for 2023. We're pulling forward value-add renovation work, and our guidance includes an increase to our projected spend from $26 million to $33 million at the midpoint. We have a deep value-add pipeline, and this is the most accretive use of our capital. We have not previously assumed any acquisitions, but our updated guidance includes investment of $100 million. And lastly, we expect normal seasonality in our leasing and revenue trends and continued discipline on expenses. While the transaction market is still slow for institutional quality products in our target markets, we are seeing significant demand in our treasury markets for our well-located and stable product where buyers can obtain positive leverage. These conditions led us to identify additional potential sales for this year, and we believe that using this dynamic as a catalyst to advance portfolio composition initiatives will help keep our balance sheet flexible, fuel our value-add pipeline, and fund opportunities to expand our Mountain West portfolio in a manner that delivers consistent and growing cash flow. Now I'll turn it over to Bhairav to discuss our overall financial results and 2023 outlook.

Thanks, Anne, and good morning, everyone. We are pleased to report another quarter of strong earnings with core FFO of $1.28 per diluted share, fueled by strong operating results with NOI increasing 12.1% year-over-year and 7.2% sequentially. The growth in NOI was driven by strong leasing activity during the first half of peak leasing season, leading to a year-over-year increase of 8.5% in same-store revenues during the second quarter, far outpacing the growth in same-store expenses, which grew by 3.3% compared to the same quarter last year. Furthermore, same-store controllable expenses grew by just 1.4% year-over-year due to decreases in the utilities costs and repairs and maintenance expenses, mainly driven by a sharp reduction in churn costs because of cost control measures we implemented at the beginning of the year. Also contributing to earnings is lower G&A expense as a result of the recent CEO transition. Lastly, we recorded a loss on litigation settlement of $2.9 million during the second quarter due to a monetary judgment against us in the lawsuit filed by the owner of our neighboring property. We have excluded the amount of the settlement from core FFO along with approximately $300,000 of legal expenses incurred specifically related to this portion of the trial. Our claim for injunctive relief remains under dispute in this matter, which may lead to additional expenses, which we are unable to estimate at this time. Our balance sheet is as robust as it has ever been. As I discussed last quarter, we took many steps to strengthen our financial position early in the second quarter, such as paying down debt, extending maturities, and locking in rates to minimize volatility and interest expense. As a result, we now have total liquidity of over $245 million, less than 5% of our debt maturing between now and the end of next year, and leverage at an all-time low of 6.5x. We ended the quarter with a weighted average interest rate of 3.54% and a weighted average maturity of 6.9 years, providing us with ample flexibility to expand our portfolio when opportunities arise. Now I will discuss our financial outlook for 2023. We are raising the midpoint of our core FFO guidance range to $4.65 per diluted share, which is an increase of $0.23 from the previous midpoint. Most of the increase was driven by the strong operating results we experienced during the first half of this year and our expectation that those trends will persist through the rest of the year. We expect same-store NOI to increase by 9.25% at the midpoint, an increase of 1.25% from the previous midpoint. We now expect to sell 2 additional properties, increasing our targeted disposition activity to approximately $225 million from $165 million included in our previous guidance. And as Anne mentioned, we now expect to invest approximately $100 million in new acquisitions. Another key driver of the increase in our core FFO guidance is that we expect our G&A cost to be lower by approximately $1 million compared to our initial guidance because we do not expect to fill the COO position that was vacated due to the CEO transition. To conclude, we are extremely pleased with our progress through the first half of this year and are optimistic that the positive trends will continue through the rest of the year. The entire team has worked extremely hard to execute the operational priorities we set out at the beginning of the year while undergoing a significant change in executive leadership. It is a testament to the culture of commitment that defines our company. And with that, I will turn it back to the operator to open up the line for questions.

We will now take our first question from Brad Heffern from RBC.

Looking at the new guide, it seems like you're reading a portion of the second quarter outperformance into the second half of the year, but not all of it. So I'm curious what are the things that were boosting the second quarter results that you don't expect to be as recurring.

Brad, this is Bhairav. You're right. I mean, we are expecting some of the trends we saw in the second quarter to continue, although we are kind of building in some room for any changes as we kind of go through the third quarter, mainly where we had heavy expirations. For example, on turn costs, although we saw a dramatic decline in per turn costs in the second quarter, in the third quarter, we have built in some room, about 10% more than what we saw in the second quarter, just to account for heavy expirations as well as some use of contract labor, which is typical during the third quarter. So that's one of the line items where we built in some room. And the same with utilities, we do expect utilities to continue decreasing on a year-over-year basis. But we did build in some room for some increases in the second half because the increase we saw in the second quarter was pretty dramatic. Hopefully, that helps you bridge the gap.

Yes, that's perfect. And then in the July leasing stats that you talked about in the prepared comments, it seemed like there was a decent-sized reduction in renewals in July. Is that what you would typically see on a seasonal basis? Or is there something else driving that?

Yes. It's important to note that those renewals are priced 60 to 75 days before the new lease rates take effect. Therefore, the lower renewal rates reflect the lease rates at the end of the first quarter. These rates tend to lag behind the new leasing rates. I anticipate that we will see those rates stabilize and possibly experience a slight increase as we move into the fall.

Our next question comes from Barry Oxford from Colliers.

Great. On the acquisitions that you're looking at, would you look at any new markets? Or are you going to limit it to the markets that you guys are currently in, as you indicated on the remarks the second year areas?

Yes. Barry, that's a great question. I think one of the things that we are really working on with respect to our portfolio recomposition is expanding our Mountain West portfolio. And so as we look at new acquisitions, we're more heavily targeting Denver than we had targeted Minneapolis in the past. And I think the markets surrounding Denver and along that Mountain West corridor is really where you might see us pick up some activity. So short answer is, yes, we would like to expand, which would mean new market presence.

Okay. Perfect. Perfect. When I look at the same-store expense increase of 3.3%, a lot of other companies have talked about insurance increases. Have you guys already experienced that? And therefore, throughout the rest of the year, you shouldn't really see a jump until renewals come? How should I be thinking about insurance costs over the next couple of quarters?

Yes. Over the next couple of quarters, I expect our insurance costs to remain stable. Our renewal is scheduled for November 15, so it will take place towards the end of the year. We are beginning to receive some feedback on our renewals, and while we have a smaller portfolio renewing in September that is seeing a significant increase, it accounts for a relatively small portion. Looking ahead to next year, we anticipate a notable rise in costs, in line with industry predictions, which suggest an increase between 12% and 20%, and possibly even higher at the upper end. Therefore, for this year, we don't expect much disruption or increase in insurance costs over the next couple of quarters. However, next year is expected to be quite different.

The next question comes from Connor Mitchell from Piper Sandler.

So just going back to the guidance and the large increase. I guess I was just wondering if the primary difference is the driver of the large increase now versus maybe not having any increase after the first quarter is maybe the stronger same-store NOI, same-store revenue that you may have been anticipating. I know you guys mentioned that increased demand is stronger. But yes, I guess I was just curious about what the primary driver was to really increase the guidance now versus maybe not have any impact in the previous quarter.

Yes. Thanks, Connor. I think this is a cumulative increase. So we did not increase after the first quarter, even though we had a good NOI experience and really I'd say, outperformed where our original guidance was for the first quarter as well. But due to the CEO transition, we that disruption, we were uncertain of the impact not only on our G&A, but also just operationally, how that would play through? And would we have any disruption or any loss of other key team members? And we haven't. So I think this larger raise represents 2 things: one, how we feel like the transition has gone and certainty now in how that's going to play out in the G&A; and two, the strong operating results. So a big driver is the NOI, that big NOI increase, but we also experienced that in the first quarter. I think like most of the people in the industry who are reporting and as they reported in the first quarter, original 2023 guidance was a little more conservative on both revenues and expenses. And we've been having favorable experience in both. So it is a big jump, but it's both quarters put together and positive results with respect to the transition in the way of little disruption. Bhairav, is there anything you wanted to add to that?

No, I think you covered everything. And Connor, as we kind of spoke last quarter, we were still at the beginning of the first half of leasing season. And as we went through the first half of the leasing season, we did see turn costs, which were what kind of drove our expenses up last year, come down dramatically. Now we hadn't really seen that when we spoke last, and as we kind of went through the first half of the leasing season, we feel confident about what that is trending at. And building that in was another component, along with some utilities expenses where we've seen the trend turn positive as well in our favor.

I appreciate the information shared. Following up on operating expenses, particularly utilities, it certainly appears to be stronger compared to last year. I'm curious if this improvement is largely due to the higher comparisons from the previous year or if it indicates the impact of RUBS and other factors. How should we anticipate operating expenses and utilities to evolve in the future regarding their growth rate?

Certainly. In the first half of last year, we observed a 25% increase in utilities. Part of this is due to comparison effects. We have also seen a decrease in utility costs per unit, which is why the utility expense appears lower on a year-over-year basis in the second quarter. It's important to note that the RUBS rollout you mentioned is not reflected in the utilities line; the changes there are simply due to the reduction in per unit costs. The income from the RUBS rollout is included in the other revenue section, contributing to some of the revenue outperformance. Regarding the rest of the operating expenses, we have confidence in the trends observed during the first half of the leasing season. We have allowed for some flexibility, anticipating a slight increase in turn costs in the latter half of the leasing season. Overall, we are maintaining these trends for the second half of the year, which is influencing the changes in our guidance from an NOI perspective. From a revenue standpoint, we have slightly tightened our guidance range and raised the midpoint, but it remains consistent with what we stated last quarter.

Our next question comes from Rob Stevenson from Janney Montgomery Scott.

The $90 million to $100 million of investments, so sort of narrowed number, is that already under contract, identified? Or is that something that you're just putting in there as a placeholder at the moment?

Yes. Rob. We do have an asset under contract in the Mountain West. And so we feel pretty confident we're just starting the due diligence on it. So of course, there's no certainty yet in it, but it is a narrow range because we feel confident. We also are looking at our pipeline and seeing what else might be behind that and so really felt good confidence that we could include it in the guidance.

Okay. And so that $95 million to $100 million represents that one asset?

Yes.

Okay. And then, Bhairav, I mean, I think there was a little less than $20 million out on the line, which I think on the supplement says 7.35% interest rate. Where can you get that cheaper today to finance this acquisition longer term? And how excited are you going to be to finance something at a 7.35% interest rate for any length of period of time?

I mean the answer is not very excited to finance it long term at 7%.

Bhairav likes a challenge, Rob.

Yes. With respect to this particular asset, as Anne mentioned, we have identified that asset. We are going through due diligence. There is the possibility of a loan assumption that we've kind of built into the numbers. So that is expected to be pretty close to where our weighted average interest rate is on an overall basis today. So that is kind of built into the numbers. The rest of it is going to come from the proceeds from the sales. So overall, as we think about financing this particular asset, it's going to be a combination of that we can assume and the proceeds that we expect to receive from the 4 additional assets that we are expecting to sell in the second half of this year. In terms of where we can find good financing. I mean obviously, the spreads have widened dramatically between the private placement market, which we have tapped in the past versus the secured debt market. So with spreads being where they are, if you're looking at long-term financing just on a cost basis, you're going to be forced to kind of look at long-term agency debt, which is the most competitive form of financing based on some recent conversations we've had with folks in the industry. But with respect to this acquisition, we have kind of laid out the funding plan.

All right. That's helpful. And then what are you seeing in terms of bad debt trends these days? Any material uptick in skips and VIX and things like that?

Bad debt. Collection rates are holding pretty steady. In the first half, we've seen bad debt at about 20 to 30 basis points. We expect that trend to continue. What we've also seen is less volatility with respect to collections. So all of that kind of bodes well for the second half of the year where we've kind of provided for a little more margin, not a lot more. But what we've seen so far and the most encouraging trend is really the less volatility and the higher collection rates relative to what we've seen in the past. And we expect that to kind of hold for the second half.

All right. And then last one for me. And one of the things that's benefited all of the apartment REITs on the OpEx side over the last few years is increasing use of technology, not only reduce headcount, but efficiency and maintenance and all sorts of other areas. Where are you guys in terms of that spending and the realization of the benefits? And how much more material technology upside is coming to you guys through operations here over the next 4 to 6 quarters?

Yes. This is a million-dollar question, Rob. But I think we're still at the beginning of really identifying what the efficacy of that technology is. And as you implement these technologies, sometimes you see those boosts in the margin, but you feel it on your G&A side with additional staffing to run those from a centralization perspective. So we're really monitoring that. And I'd say we are just finishing a pilot of smart home technology, which we expect to roll out throughout the portfolio. But we want to be really careful and disciplined and make sure that we're not just trading dollars between NOI and G&A, number one; and number two, that it's technology that meets the resident where they're at, enhances our customer experience and that we think drives revenue. These technologies are expensive. Most of them come with per door fees that we have to take into consideration into perpetuity. And we also have a portfolio that has a unique footprint where in some of our smaller tertiary markets, the technology isn't as important to driving the revenue as it might be in urban markets. So I'd say we're still in the frontier days of our technology implementation as it relates to resident experience and really driving margin. We feel very good about where we are on foundational platform. We made a lot of large investments over the last couple of years in our accounting, our business intelligence systems how we're going to use data and data analytics from everything to providing information to our community-based teams in dashboard form to how we're doing our forecasting process. So from a foundational perspective, we feel great, and we feel like we're going to have the facility to experiment a little bit with some of the other technologies. And our goal is to really stay disciplined and make sure that it gets to the bottom line.

All right. And is there a material spend coming in the back half of this year or next year for the smart home or anything else?

We included this in our value-add figures. We have increased our guidance regarding our spending on value add, which includes investments in smart home technology. Our approach to implementing this is to ensure that it delivers a return that meets our value-add return threshold for both common areas and individual units.

Our next question comes from John Kim from BMO Capital Markets.

Robin sitting in here for John. Just wanted to touch on the high end of same-store guidance. How do we get there? And what blended rates does that assume in the back half?

This is Bhairav. Yes, with respect to revenue, again, as I stated earlier, we haven't really changed our assumptions materially. I think I mentioned on a previous call that we expected blended rates somewhere between 4.5% and 5%. And with respect to our revenue guidance, that still holds true. A lot of the change with respect to the guidance and even on the high end is really coming from the expenses. With respect to utilities, if we experience a larger decrease than we are currently projecting that can push us to the higher end. But at the midpoint, as we look at our second half assumptions, we haven't really changed those materially. A lot of the guidance upside is really coming from what we've already realized in the first couple of quarters, specifically in the second quarter and then also driven by some of the G&A savings that we expect as a result of the CEO transition.

Got it. What markets are showing the strongest and least strongest blended growth as of now?

Yes. We're seeing the strongest growth in our markets where we have value add within the same-store portfolio. So Omaha, St. Cloud, those are really showing the strongest growth. And that is driven by value-add spend over the last 18 months.

Okay. And if I can squeeze in one more. Could you elaborate a little bit on the dispute in the lawsuit filed by the adjacent property? And are there any chances of this being recurring costs going forward?

Yes. Our dispute centers around a retaining wall that is located on our property. The issue is whether this wall allows water to flow onto the neighboring property, potentially causing damage to their building. We have completed the trial regarding monetary damages, which we believe is a fixed cost. However, there is still some uncertainty about the total judgment amount we will have to pay. What remains uncertain is whether we will need to make repairs or replace the retaining wall. Our estimate for those potential costs is significantly lower than the total judgment amount. We are currently engaged in settlement discussions with the neighbor, which can be challenging. However, from a recurring cost perspective, we anticipate resolving this matter definitively by the end of the year, so there should be no ongoing costs moving forward.

Our next question comes from Wes Golladay from Baird.

I just want to ask a question about the asset under contract. Would that be a stabilized asset?

Yes. Typical with our acquisition philosophy, we do try to seek stabilized assets or assets that are close to stabilization. This would be fully stabilized and operating at the time of acquisition.

Okay. And do you have the loss to lease of the portfolio today?

Yes. As we sit here today, the loss to lease is close to about 10%. And as we go through the second half of our peak leasing season, we expect to realize some of it as leases kind of roll.

Okay. And then the last one, you mentioned not filling the COO position. Is that something you may do next year? And is there any, I guess, unfilled positions throughout the company that might be driving some of the expense beat this year?

Yes, we are not planning to fill the COO position at this time. Our senior team has taken on some additional responsibilities to cover that gap. With my operational experience in that role and Bhairav's expertise, we feel confident moving forward. We have also added to our team, as you may have noticed, with Josh Klaetsch joining us as the Director of Investment Operations. We're pleased to have him, and while he mentioned at the start of the call that you shouldn't take everything we say at face value, I can assure you there are no unfilled positions. Given that we have sold a significant number of assets this year, totaling 13 dispositions and about 2,000 units, we are closely monitoring general and administrative expenses. We are committed to ensuring our support groups deliver efficient and effective services to our operations team. Therefore, we don't anticipate any substantial increases in staffing or large rises in general and administrative expenses.

There are currently no further questions on the line. So with that, I would like to turn back to Anne Olson, CEO, for any closing comments.

Thank you all for listening today and for your great questions. And I hope you all have a great day.

That concludes today's conference call, everybody. Thank you very much for joining. You may now disconnect your lines. Have a great rest of your day.