Welcome to the Centerspace Q1 2024 Earnings Call. My name is Carla, and I'll be coordinating your call today. We'll now hand you over to your host, Josh Klaetsch to begin. Josh, please go ahead.

Good morning. Centerspace's Form 10-Q for the quarter ended March 31, 2024, 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 statements will materialize, and you're 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 Centerspace's President and CEO, Anne Olson, for the company's prepared remarks.

Good morning, everyone, and thank you for joining Centerspace's first quarter earnings call. With me this morning is Bhairav Patel, our Chief Financial Officer; and Grant Campbell, our Senior Vice President of Capital Markets. Before taking your questions, we'll briefly cover our first quarter results and trends, our transaction activity and our outlook for the remainder of 2024. I'm happy to report core FFO per share of $1.23 for the first quarter, driven by stable fundamentals across our markets paired with disciplined expense management and a little help from a mild winter that reduced our utilities and associated expenses. While Bhairav will discuss our quarter results in detail, I'd like to take a minute to discuss our current leasing trends. In our same-store portfolio, market rent has increased year-over-year for the first quarter. And while a moderate amount of 2.5%, this is in line with our expectations and year-to-date, we're pleased to see that translate into positive lease-over-lease growth. For new leases, our trade-outs were flat for the quarter, and renewals priced debt increases averaging 3.4%, for blended rate increases of 1.5%. The new lease trade-outs increased each month in the quarter. This bodes well for us as we begin the leasing season. Occupancy remains a focus, and today, we're slightly above 95%. Our marketing strategy aimed at the highest intent lease has led to converting more leases in this quarter than the same period last year. As we look at April, pricing is trending positively with indications of new lease trade-outs of approximately 3.5% and renewal increases of 3.3%. We feel good about our resident retention rates, which are above 50%. Our results in Q1 and the trends we see give us confidence to bring up the low end of our guidance, raising our outlook for 2024 at the midpoint to reflect estimated annual core FFO growth year-over-year of 1%, with this growth coming in addition to the deleveraging and portfolio upgrades we achieved last year. Our confidence in this portfolio is bolstered by low bad debt of just 26 basis points in Q1 as well as continued stability in our regional economy. On the whole, our portfolio is not experiencing the high supply dynamics of Sunbelt in some coastal markets, and our supply profile remains relatively muted. Denver and Minneapolis are our markets with the highest levels of supply and we're seeing tapering of homes under construction and projected deliveries into next year. With respect to Minneapolis, our largest market concentration, it ranked eighth in the nation for most apartment absorption over the last 12 months, and according to RentCafe was the number one search market for the fourth month in a row. Turning to transaction activity. All is quiet on the acquisition front. We believe some recent larger transactions could help narrow the bid-ask spread on valuations and loosen up the market for acquisition activity. During the first quarter, we closed the previously disclosed sales of two communities in Minneapolis for gross proceeds of $19 million. These proceeds were used to pay down the line of credit debt that was associated with our Q4 2023 acquisition in Fort Collins. Completing our capitalization of that transaction, advancing our capital recycling initiatives and facilitating the purchase of $4.9 million worth of our common stock early in the quarter, we're committed to growing our business, and while the overall economic environment has limited our access to capital, we do believe we can effectively recycle portions of our current portfolio for the right opportunities. We'll be well-positioned when those opportunities arise. I'm extremely grateful for all our team's dedication to deliver value to our shareholders. Our strong culture is evident in our recent diversity, equity and inclusion report, highlighting our advancement of and commitment to providing a great home for our team to achieve the best results. This report is available on our website. Now I'll turn it over to Bhairav to discuss our overall financial results and outlook for the remainder of 2024.

Thanks, Anne, and good morning, everyone. We're pleased to report another quarter of strong earnings growth with core FFO of $1.23 per diluted share, driven by a 7.5% year-over-year increase in same-store NOI. Revenues from same-store communities increased 3.5% compared to the same period in 2023 with the increase attributable to 3.9% growth in average monthly revenue per occupied home, which was partially driven by higher RUBS income, as the rollout was fully implemented at the end of last year. The higher per home revenue was slightly offset by a 30 basis point year-over-year decrease in weighted average occupancy to 94.6%. However, occupancy has picked up nicely in April, as Anne noted in her remarks, and with market rents trending in line with expectations, we're well positioned as we enter leasing season. Property operating expenses were down by 2.2% year-over-year. The decrease was driven by lower utilities costs and successful real estate tax appeals, offset by increases in compensation, administrative and marketing costs and higher insurance premiums. While successful tax appeals are not uncommon, we recognize approximately $700,000 or $0.04 per diluted share from one such appeal spanning more full years. However, it did not materially impact our full year projections as the anticipated refund was incorporated in our prior projections and corresponding guidance ranges we shared last quarter. Turning to guidance. We updated our 2024 expectations in last night's press release. For 2024, we now expect core FFO of $4.74 to $4.92 per diluted share, an increase of $0.03 at the midpoint from prior expectations. This number assumes same-store NOI growth of 2.5% to 4%, driven by same-store revenue growth of 3% to 4.5% and same-store total expense growth of 4% to 5.5%. A warmer than usual winter and favorable changes in natural gas pricing led to better-than-expected results in utilities during the first quarter, helping us reduce year-over-year controllable expenses and in turn, decreased our expectations for controllable expense growth. On the non-controllable expense side, favorable results, particularly in real estate taxes related to both the previously mentioned rebate and other tax adjustments as well as lower non-reimbursable losses are leading us to decreased full year expectations. Importantly, I'd like to highlight the relation between utility expenses and RUBS revenues, and remind everyone that the lower utilities costs drive lower expectations for RUBS revenues, which led to the decrease in the high end of our revenue guidance. Moving on to other components of guidance. G&A and property management costs and interest expense are expected to be slightly higher than previously projected. Our guidance for capital expenditures, including value-add spending, is unchanged from last quarter. On the capital front, our balance sheet remains flexible. We've a well-laddered debt maturity schedule that features a weighted average cost of 3.6% and a weighted average time to maturity of 6 years, and we had approximately $230 million of liquidity at quarter end via cash and line of credit capacity. Our capital repositioning activities last year drove leverage down half a turn over the course of the year, leading to Q1 net debt to EBITDA of 7.1x. As noted in our February call, this balance sheet strength allowed us to opportunistically buy back shares with Centerspace repurchasing 88,000 shares at an average price of $53.62 during Q1. We've already funded $8.8 million of the $15.1 million we committed to a development project in the Minneapolis area, with the remaining funding expected to occur over the next several months. This, along with the sale of two assets in the Minneapolis metro area for roughly $19 million, has been incorporated in our guidance. Our guidance assumes no additional investment activity for the rest of 2024. To conclude, we're proud of the results we achieved in the quarter, and I commend our Centerspace team on providing us with an excellent start to the year. We look forward to building upon these results in the rest of 2024. And with that, I'll turn the line back to the operator for your questions.

Our first question comes from Brad Heffern from RBC.

Can you walk through how things look on the ground in your smaller markets? I think we all have a pretty good handle on Minneapolis and Denver, but it would be great to get a quick perspective on Rochester, St. Cloud, Omaha, North Dakota, etc.

Yes. Brad, great question. As you know, our smaller markets do make up a pretty significant portion of our NOI. And we've seen real strength out of those markets, particularly across North Dakota on a year-over-year basis. Those markets, the hallmarks are really lack of supply there. And so we've continued to see good rental increases, good renewal increases, and really steady occupancy across those markets, with a lot of very low unemployment in those markets. So we've really seen good, strong jobs and regional economies supporting that demand in Omaha, Rapid City, and Billings. Across North Dakota, we've seen a lot of strength.

Okay. Got it. And then you mentioned that April pricing, new lease had a pretty significant inflection there, is kind of the mid-3s where you would expect it to shake out for the bulk of leasing season? Or do you expect to see sort of more of a sequential gain there as we get deeper into it?

Yes, we're right on where we expected right now, and we do expect some acceleration into the leasing season, but we may see the renewals stay right around where they are or a little bit flat for a few more months, but we do expect that new lease pricing is going to continue to accelerate.

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

I had the opposite question to Brad's first question. What's going on in Minneapolis? You mentioned it's in one of the top net absorption markets. It's one of the most searched markets for four months in a row. What's driving demand right now?

Yes. I think similar to some of our smaller markets, Minneapolis has very low unemployment and continuing rise in costs of housing from single-family homes, particularly single-family homes, coupled with high interest rates. So one of the reasons Minneapolis or any market gets supply is because there was demand. I think Minneapolis had quite a bit of pent-up demand, a lot of years of lack of supply. I'll let Grant touch on the supply and demand dynamics just a little bit. But what we're seeing on the ground is continued interest and good traffic and rising occupancy rates coupled with strong renewals and now new lease pricing that's positive.

Certainly. John, from a supply perspective, in Minneapolis, the pipeline certainly has tapered over recent quarters. Currently, we're at about 3.7% of existing stock under construction that is down from 6% at midyear 2023. So that tapering has been realized, and in our opinion, peak supply in Minneapolis has been realized, and we've moved past it. Next 12-month forecasted deliveries in this market are 6,700 apartment homes. And if you look at the five-year annual average between 2019 and 2023, our next 12-month figure is about two-thirds of that annual run rate that has been realized historically.

Okay. Anne, you mentioned in your prepared remarks that in April, the growth rates for new and renewal leases were very similar. Historically, you've observed a spread of 120 basis points, with renewals being higher. Was there anything in April, such as concessions or other factors affecting occupancy, that resulted in the renewal rate not being higher than the new lease growth rate?

Yes, part of it is building occupancy. We're above 95% as of April 15, and we aim to reach 96% as we enter the leasing season. This is keeping renewal rates relatively flat. The renewals priced in April were influenced by pricing in January, where we experienced low, slightly negative new lease rates. Some of the slowdown is simply a matter of timing from when they are priced to when they become effective in April. Additionally, we are focused on increasing occupancy significantly.

And how do you see renewals for the remainder of the quarter or the year?

Yes. Currently, renewals are priced at around 3.3%, effective until July. For the quarter, we estimate they will be between 3% and 3.5%.

Our next question comes from Rob Stevenson from Janney.

Anne, to follow up on John's question, when do you anticipate new lease growth will drop back below renewals? Your company is one of the few experiencing strong new lease growth, so I'm curious if this trend will remain steady throughout the year or if it might decline at some point.

Rob, this is Bhairav. I'll take that one. So with respect to new lease pricing, typically, we see that higher than renewals in the second quarter and the third quarter, just given how our market rent acts as we go through the season. So towards the end of the third quarter into the fourth quarter is when you'll see that kind of trend slip.

Okay. And then the midpoint of the same-store revenue guidance, I think is 3.75% now versus the 3.5% you did in the first quarter. What is it over the remainder of the year? Is it just conservatism that doesn't see revenue growth accelerate from here, given the seasonally beneficial moves usually in the second and third quarter?

From our perspective, the first quarter focused on a couple of key factors, particularly utilities costs affecting RUBS revenues. However, actual rental revenue has been following our expectations. As we move into the second and third quarters, our projections remain largely unchanged. We set prices for 60% of our leases during these quarters, so if the current trend continues, we anticipate staying within the same range we forecasted two months ago. The decrease in revenue is primarily due to RUBS income, as lower utilities costs are impacting rental revenue. Overall, I mentioned in the previous call that our blended rate estimate for the year was around 3%, and that expectation still holds. The rental revenue has been trending as we predicted, showing approximately 1.6% in the first quarter and about 3% in April. We expect it to increase slightly as we approach Q2 and Q3, indicating no significant changes from a revenue standpoint.

Okay. And then I got the other question.

Go ahead.

No, no, go ahead, Anne.

I was just going to say, the corresponding offset to that revenue is actually greater on the expense savings side. So overall, even though we're being conservative on the revenue, that decline and what we're projecting for total revenue, I mean, it's actually going to drop to the bottom line in a positive manner in NOI.

Okay. That's helpful. And then can you talk a little bit about the pricing environment for the types of assets and the markets and submarkets that you're looking to potentially sell? Where was the sort of cap rate fall out on that $19 million of dispositions? And are you guys thinking about marketing more assets for sale and seeing if you can get your price hit this year, how are you thinking about sort of culling the portfolio over the remainder of '24?

Yes. This is Anne. And then I'm going to ask Grant to comment specifically on pricing. But as we look at '24, we certainly do have assets that we believe could be good candidates for capital recycling. We need some pickup in transaction volume in the markets that we'd like to acquire. So if we found a great opportunity or if there were some good transactions that we thought we'd have a good use of proceeds, we do have some assets in mind like our historical capital recycling; those are in markets where we think have lower growth. They're older assets with high CapEx and/or low growth potential, lower rents overall. So we do feel like we have a pipeline that we could use for capital recycling. We just need some acquisition activity and the right opportunity in order to implement that. With respect to the Minneapolis assets that we sold in pricing, I'll let Grant answer it.

Yes. The Minneapolis sale, those older vintage communities had a cap rate in the low 6s. Regarding your question on current pricing landscape, there continues to be a bid-ask spread that exists in a lot of cases today on individual asset conversations that we're having. Along with that, there is the continued disconnect between public market valuations and private market valuations based on the recent transaction data points that do exist. In Denver, current price talk today is 5% to 5.5%. We did see an incremental uptick approximately one month ago in valuation conviction in the private market, where buyers and sellers were increasingly finding common ground at, call it, 5% to 5.25% for well-located communities. That was then followed by the recent run-up in the 10-year treasury, which has again brought real-time volatility to asset pricing and is leading to what I'll call the latest installments of price discovery.

Okay. And I guess the question that I ask or raise is, what is the financing environment? I mean you've got Fannie and Freddie and you've got some other stuff available, the two apartments that aren't available to other guys. But are you seeing the financing market flow reasonably? Is it still tight? Is it choppy with whether or not guys are using bank financing? And if they pulled back in your markets, how would you characterize the financing environment for somebody buying $19 million worth of assets or the sort of BB- stuff?

Rob, this is Bhairav. From a financing viewpoint, we’ve seen spreads remain stable. The volatility is mainly influenced by the treasury market and treasury rates. Overall, we haven’t experienced significant changes in our ability to finance these assets. Despite the volatility, spreads have remained steady, and banks are still eager to lend. The term loan market is somewhat challenging, and pricing for private placements is also tough regarding spreads. However, from a treasury or agency standpoint, financing remains accessible for cash flow positive assets.

Our next question comes from Connor Mitchell from Piper Sandler.

Anne and Bhairav, you guys kind of answered this a little bit, but maybe going back to the RUBS and how that's affecting you guys. Just maybe ask a different way. How much of the lighter winter benefited cost savings or lower revenue for you guys versus savings for the residents that you've implemented, the RUBS?

Connor, from a full year perspective, our revenue guidance has been reduced at the midpoint. This reduction is primarily due to lower RUBS revenue, as the expenses were also lower. Initially, we anticipated a year-over-year increase of about 50 basis points driven by RUBS, but now that figure is around 30 basis points. This change is significantly impacting our rental revenue projections and overall revenue expectations.

Okay. That's helpful. And then maybe considering the acquisition market and the transaction market, that's been discussed a couple of times. You guys mentioned that it's a tough market right now. Is that primarily due to the spreads you've been discussing? Or is there more competition from like some cash buyers or other competition or another component that's causing this tough market at the moment?

Yes, Connor, this is Grant. From a competition perspective, we are currently seeing high net worth and private capital types as the most aggressive buyer profile. These groups are fully aware of the cap rate on the buy side, and they recognize that during their long-term hold, there may be a period of negative leverage, but they are willing to accept that. Some may be all-cash buyers; we have often observed situations where groups state they will purchase all cash and figure out financing later. In terms of competition, the same number of people is engaged in all the usual activities like touring assets, underwriting deals, and having discussions. However, those who are most proactive and constructive are high net worth and private capital types.

Okay. That's helpful. And then you guys mentioned that you're seeing this tough acquisition market. So maybe in the meantime, can you just share your thoughts on how you view utilizing that capital for stock buybacks or other purposes currently versus maybe waiting for the market to find some better spreads and you can go after some acquisition opportunities?

That's a great question that we are currently focused on. When considering the possibility of selling or using free cash flow from sales, our main priority right now is to keep the balance sheet flexible. We also want to maintain very low floating rate debt, which we are actively managing as we implement our value-add program this year. We plan to spend around $20 million on enhancements, which we believe will provide a good return and keep our products competitive as we anticipate a more challenging market and observe supply changes. After this, we will be more cautious with our balance sheet and prioritize reducing debt over initiating additional stock buybacks for the time being.

Our next question comes from Michael Gorman from BTIG.

Anne, I'm sorry if I missed this, but in your discussions about the quarter-to-date trends for the second quarter, are there any particular differences in the geography in terms of the improvement in the new leasing trends across your portfolio?

No, I think we're seeing improvement across the board. I mean, we've seen some outperformance in some of the smaller markets. I mentioned North Dakota. We've seen some good performance in Rochester year-over-year. In St. Cloud, we've seen good performance. But overall, the market as a whole has moved in a way that's better for us, and we're seeing stronger new lease rates across the board.

Okay. That's helpful. And then maybe just one last question on the acquisition side of things. Understanding the bid-ask spread, obviously, given all the market volatility, is there any kind of disconnect in terms of underwriting, in terms of buyer and seller expectations for the trends in NOI at the property level, just given some of the impact that we've seen across markets in terms of supply or in terms of pricing pressure?

Yes. I'd say in this environment, it's very hard to underwrite large outsized rent growth that maybe certain groups were underwriting here over prior years. So I think the dispersion of underwritten rent growth has tightened from a rent growth perspective. And I think at the end of the day, it's which group is willing to accept some of the variables that we've touched on here earlier, perhaps negative leverage, perhaps a cap rate that doesn't feel great to them today, but they believe in the long-term story of the submarket.

Our next question comes from Buck Horne from Raymond James.

Just a quick question for Grant. Because the deep dive on Minneapolis was a really helpful discussion about the supply pipeline there. I was wondering if you could do the same for Denver, just kind of discussing where we're at in terms of the supply pipeline if we're getting close to peak deliveries? And also just any additional color in terms of trends between the suburban assets versus downtown Denver?

Yes, Buck. From a supply perspective, Denver is our market with the highest levels of supply; currently, 9% of existing stock is under construction, which represents about 25,000 apartment homes. These figures, similar to Minneapolis, have also tapered since last quarter. Minneapolis has seen a longer period of tapering, but the data is telling us and telling others that the tapering could be beginning in Denver. Next 12-month deliveries in Denver are forecasted at 11,000 apartment homes. That is consistent with 2022 and 2023 delivery levels in that market. So we really try to bifurcate what's in the pipeline, whether that all will get completed versus what is actually going to deliver. The delivery forecast tells us that we're not going to see any outsized deliveries; it's going to be on par with what the market has produced here over the recent past.

Awesome. And any differences between the suburban assets versus downtown Denver?

Yes. I think certain pockets of downtown or the urban environment are feeling maybe more concessionary pressures; you've had more construction activity when you think of just the size of geography in that downtown area. Suburban Denver certainly has had new construction. There are highly desirable micro markets where people have been building and will continue to desire to build. But the spread of that over a larger geography is leading to, in our opinion, on a relative basis, less concessionary pressure in the suburban environment.

We currently have no further questions. I'll hand back over to Anne Olson for final remarks.

Thanks, everyone, for joining us this morning, and we look forward to seeing many of you at the upcoming BTIG, BMO and Janney real estate conferences. And if we don't catch you there, we'll see you at NAREIT in June.

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