Centerspace Q1 FY2026 Earnings Call

Hello, everyone. Thank you for joining us, and welcome to the Centerspace Q1 2026 Earnings Call. Operator instructions were provided to participants. I will now hand the call over to Josh Klaetsch, Director of Investor Relations. Please go ahead.

Thank you, and good morning, everyone. Centerspace's Form 10-Q for the quarter ended March 31, 2026, 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.

Thank you, Josh, and good morning, everyone. I'm here with our SVP of Investments and Capital Markets, Grant Campbell; and our CFO, Bhairav Patel. I'll start by addressing the strategic review which we initiated in 2025. This process is ongoing, and we appreciate the feedback we have received from our stakeholders. The Board and its advisers continue to make progress, and we expect to provide shareholders with a more substantive update on the status of the review process before or in connection with our second quarter earnings release. There can be no assurance as to the timing or outcome of our process and no assurance that the review process will result in a transaction or other strategic change or outcome. We do not intend to provide further details in connection with discussion of our first quarter earnings results today. Thank you for your understanding as we keep our comments focused on our results and our outlook. Our revenues for Q1 were in line with our expectations, supported by stable demand and continued execution by our leasing teams. First quarter results reflect the negative impact of recent changes to Colorado regulations, timing of certain expenses and costs related to our strategic review. These were anticipated, and our expectations for full year core FFO and its drivers remain substantially unchanged. We are reiterating our previously released earnings guidance, and Bhairav will discuss this momentarily. Operationally, we are starting to see the expected seasonal pickup in leasing. While blended leasing spreads in the quarter were up 40 basis points over prior leases, each month demonstrated improvement, increasing from negative 90 basis points in January to positive 140 basis points in March. We've seen this trend continue into April with preliminary blended spreads of 1.8%. The Q1 blend was composed of a 2.1% decrease in new lease rents, combined with a 3.1% increase on renewals, while in April, new lease spreads broke into positive territory and renewal spreads increased to 3.3%. Retention of 54.1% in our same-store portfolio was a 2 percentage point improvement from the same quarter last year, and our resident base remains healthy, with rent-to-income levels at 21.2% and bad debt within our historical range. Our Midwest markets continue to see rent growth outpacing national averages, and our largest market of Minneapolis saw blended spreads of 1.3% in Q1. Notably, Minneapolis has shown the best acceleration into April with blended spreads of 3.8% and new lease spreads of 4.3% in the month. In Denver, Q1 blended rates were down 5.1%, and reimbursement revenues are exhibiting the impact of regulatory changes in the market. Concessions are prevalent in the market, and we experienced our highest usage of concessions to date in Q1. That said, we have reason for optimism. Q1 absorption levels were at their highest level since the pandemic rebound in 2021, and retention in our Denver communities was 51.9%, an improvement over Q1 2025. This data, together with the significant drop-off of new construction starts, sets us up for a better leasing profile as the year progresses, with improvement in both concessions and leasing spreads expected as we enter peak leasing season. Expenses in the quarter were higher than our historic trend or 2026 projected run rate. Much of this was related to timing, which Bhairav will elaborate on. Our team excels in expense management, as evidenced by our same-store expense growth of only 1.6% over 2024 and 2025, and we expect that discipline to show again in 2026 as the impacts of one-time expenses normalize. I would be remiss not to recognize our team. Their commitment and execution set us apart, and we're proud that their efforts have been recognized through several awards, most recently being named a USA Today Top Workplace. I'm very grateful for our amazing team members. With that, I'll turn it over to Grant.

Thanks, Anne, and good morning, everyone. Nationwide transaction activity continued showing signs of improvement, including a 13% total volume increase in 2025 compared to 2024. At the same time, investors are becoming increasingly selective with their investment decisions. There is a wide variation across individual markets as it pertains to investor conviction and actions. Within our geographic footprint, this dynamic exists. In Minneapolis, 2025 was a record year for transactions at $2.5 billion in total volume. This is driven by supply peaking in 2023, and at the peak, new deliveries represented only 6% of then existing stock, comparing favorably to the profile of high supply markets. Coupling this with stable and persistent renter demand, investors have been drawn to the market, and we expect this to continue throughout 2026, in part due to next 12-month deliveries representing 1.6% of existing inventory and the full construction pipeline at 2.1% of inventory. In our other Midwest markets, we continue seeing strong interest from private capital investors. These markets are anchored by health care, education and government and have muted supply profiles, including next 12-month deliveries ranging from 0% in our North Dakota and Rochester, Minnesota markets to 2.4% of existing inventory in Omaha. While the labor market has slowed nationally, we are seeing healthier relative performance in these locations, including in Grand Forks, North Dakota, where the U.S. Space Force is expanding its presence and a new $450 million food processing facility is underway, along with Rochester, Minnesota, which saw strong job growth in 2025, driven by health care and education. Shifting to Denver. Transaction volume was down 41% in 2025 compared to 2024, and this has carried into 2026 thus far. The market continues working through the influx of deliveries from the past 24 months, flat job growth in 2025 and the recent legislative changes affecting property level other income. This has generally put Denver's transaction market in a wait-and-see environment. Premium assets and locations are still commanding strong pricing, including a few recent trades at sub 5% in-place cap rates, though the divide between premium profile and the rest of the market has widened. We believe this theme will continue until growth indicators translate into hard data, providing investors more conviction in underwriting strengthening fundamentals. Strong Q1 absorption numbers are one building block. Taken together, we think this environment reinforces our historical focus on disciplined capital allocation. We expect household formation in our portfolio to outpace national averages by 50 basis points through the end of next year and employment growth to similarly outpace the U.S. We believe this positioning will allow us to navigate the current environment while creating value over time. I'll now turn it over to Bhairav to discuss our financial results and guidance.

Thanks, Grant, and hello, everyone. Last night, we reported first quarter core FFO of $1.12 per diluted share, driven by a 1.1% year-over-year decrease in Q1 same-store NOI. Revenues from same-store communities were flat compared to the same quarter in 2025, with a 1.7% increase to average monthly rental rate in the portfolio offset by a 40 basis point decrease to occupancy and the impact of lower RUBS revenue in our Colorado communities. On the same-store expense side, Q1 numbers were up 1.7% year-over-year, with controllable expenses up 3.5% and noncontrollables down 1.1%. Our G&A expenses increased by $1.3 million over the same quarter last year, with strategic review costs as the main driver of that increase. Turning to full year 2026 expectations. Our guidance is consistent with what we outlined in February with core FFO at $4.93, same-store NOI growth of 75 basis points, same-store revenue growth of 88 basis points and same-store expense growth of 1.5%, each at the midpoint of their guided range. Casualty recoveries in Q1 led us to increase our NAREIT FFO expectations for the year by $0.03 at the midpoint to $4.78 per share. Revenue growth assumes blended gross leasing spreads of approximately 2%, with occupancy in the mid-95% range and retention of about 52%. We continue to expect blended spreads will again be highest in our Midwest communities. That strength will bolster our Denver portfolio, where we expect spreads to be down for the year, though improving as the year progresses. As we have previously stated, regulatory changes are expected to temper revenue growth in our Colorado portfolio, with RUBS expected to be down nearly $1 million, which was already incorporated into our initial guidance. As Anne alluded to earlier, expenses in the first quarter were slightly higher than our expectations. However, part of that increase was driven by timing differences, especially on the noncontrollable side. We recorded approximately $400,000 in real estate tax true-ups during the quarter. True-ups are not uncommon during the first quarter, and we expect these to be offset when we resolve open appeals in the second half of this year. Our nonreimbursable losses during the quarter were also slightly higher than anticipated. This line item tends to be volatile, and our first quarter experience has not altered our expectations for the full year. Controllable expenses were impacted by a low team member open position count and the timing of R&M projects. We expect offsets to both will favorably impact the cost of these for the remainder of the year. Lastly, while G&A during the quarter was higher than the projected run rate for the rest of the year, we now expect full year G&A to be lower than our initial projection. As a result, we still expect to deliver financial performance within the initial guidance ranges we discussed at the beginning of the year. To further aid in modeling, I wanted to highlight our expectations for certain line items and related timing. Costs related to our strategic review are expected to be $1 million to $1.5 million for the year, with those costs expected to occur primarily in the first half of the year. This expense appears in both our G&A costs and has an add-back from FFO to core FFO. Amortization of assumed debt is expected to be $1.3 million for the year, with $490,000 expected in Q2 before quarterly amortization decreases to $215,000 per quarter in Q3 and Q4. Our guidance does not include any acquisitions or dispositions. Turning to our balance sheet. Q1 annualized debt-to-EBITDA was impacted by the higher G&A and taxes in the quarter, leading it to be atypically high. This is not indicative of any meaningful change to our leverage profile, and we expect this number to return to our historical mid-7x range as the year progresses and expenses normalize. Our debt schedule features both a compelling rate and a long tenure with a weighted average rate of 3.6% and weighted average maturity of 6.7 years, while our liquidity remains strong with $267 million of cash and line of credit availability compared to $98 million of debt maturing through 2027. To conclude, this quarter demonstrated the stability and consistency of our portfolio, with our results demonstrating our commitments to both operational excellence and financial discipline and positioning us well for the rest of 2026. Operator, please open the line for questions.

Operator instructions were provided. Your first question comes from the line of Brad Heffern of RBC.

On Minneapolis, it sounds like you're seeing a strong inflection in spreads there. Do you view that market as being sort of back to normal at this point after we've passed all the supply? And then do you expect to see it overshoot to the upside to some extent?

Yes. I think you're exactly right in how we feel about it. We are certainly past the inflection point where demand has stayed steady and supply has been significantly absorbed, and the new supply pipeline, as Grant discussed, is tapering to just over 2%. We're seeing strong rent increases there, and we think that will continue. We have no indicators that demand is softening in Minneapolis. The regional economy is healthy. So we do expect some outperformance from Minneapolis this year, particularly relative to our other markets.

Okay. Got it. And then, Bhairav, on the guidance, Q1 was at the bottom end of the revenue growth guidance range. The expenses in Q1 were close to the top end of the range. Obviously, you didn't change the guidance, but I'm curious if you can just walk through the path to both of those getting to their midpoints? Or do you expect that NOI maybe won't get to the midpoint, just based on where we are so far?

Yes, let's go through the components. Revenue was still in line with our expectations. It was flat for the quarter, but we expected it. The increase in scheduled rent was offset by the loss of RUBS revenue in Colorado, and there was amortization and concessions that started in the second half of last year. But overall, revenue came in line with expectations, and April is shaping up also in line with expectations. We expect that to remain on track. On controllables, R&M was slightly higher in the first quarter. Some of that was timing, which will correct itself. The remainder we expect to offset with savings elsewhere. We are fully staffed now, so we expect to be able to drive efficiencies as we enter leasing season by better managing overtime spend and third-party vendors. So we do expect to remain on track on controllables as well. With respect to noncontrollables, there were some tax true-ups in the first quarter. It's not unusual for us to see tax true-ups in the first quarter. We do expect some fuel savings to materialize in the second half of the year, which should offset it. And, as I said in my prepared remarks, there were some nonreimbursable losses, which again tend to be volatile. We saw higher losses in the first quarter, which is not indicative of the run rate going forward. So that should normalize as well. Lastly, G&A was also higher than the run rate. It was driven by some payroll tax accruals that are typically higher in the first quarter when we grant the equity awards. That should normalize as we go through the rest of the year, and we actually did identify some additional savings. Overall, when you combine all of these components, we expect to remain in line with the midpoint of our NOI as well as core FFO.

Operator instructions were provided. Your next question comes from Ami Probandt of UBS.

Just to dive in a little bit more on the markets. The other Mountain West markets are a relatively small part of the portfolio, but growth in the quarter was pretty soft. So I was wondering if you could talk through what's going on there?

Yes. The other Mountain West consists of Rapid City and Billings. Those markets acted a bit more like Denver recently. They had enormous rent growth in 2021 and 2022 into 2023, but then they did get some supply. Being smaller markets, they have been impacted a bit by that supply. That is tapering off. As Grant noted, we see very little supply coming. But these markets have been equalizing as they work through the supply, and there's also been a slightly softer job picture. Immediately post COVID, they had a big influx of people working remotely, particularly in places like Rapid City, and we've seen that pull back a little. The market is still strong, but we're not seeing the same growth we had earlier; we've had a little pullback in those markets.

Got it. That makes sense. And then just on retention, this has been really strong and remains ahead of historical. I was just wondering if you think that retention might come down at all and to what extent it might come down as you change over to pushing a little more on rate as we move into the peak leasing season?

This is a great question. The market has changed over the last couple of years across the industry; we've really seen higher retention. Peers and private operators are reporting similar trends. Whether this is a fundamental shift, I think people are starting to lean into it: renters are staying renters longer, the average age of a renter is increasing, and a higher percentage of the population is renting, which helps retention. Looking into this year, with significant absorption, there will actually be fewer choices for people to move to. We noted that while retention was strong in Q1, it jumped up significantly in April. My early view is that this could be a fundamental shift in the industry away from the historical 50% retention rate to something a bit higher.

Operator instructions were provided. Your next question comes from the line of Jeffrey Carr of Cantor Fitzgerald.

Just wanted to ask about with the review ongoing and no acquisitions or dispositions in guidance, how are you thinking about capital allocation priorities for the rest of the year? Specifically around the revolver balance and value-add spend? And how much does the review influence those decisions, if at all?

This is a great question. Capital allocation is job number one for an executive team, particularly when you have hard assets. While we have maintained our guidance on value-add for the year and view it as an important part of our program and operating platform, much of the value-add spending is on projects that were started or identified last year. As we think about capital allocation priorities going forward, we're very focused on managing the line of credit and keeping our balance sheet strong and flexible.

Operator instructions were provided. Your next question comes from the line of Mason Guell of Baird.

Has there been any change to the outlook for any of your markets this year? And are any doing better or maybe worse than expected?

Well, as Bhairav said, we expect revenue to come in line with expectations, and that's unchanged for the year. The components are shifting slightly. We'd like to see Denver pick up a little faster; they had strong absorption in Q1, and if that continues, we'll be right in line. Minneapolis is performing a bit better than we expected, but these are slight offsets. Overall, revenue is coming in where we thought, and we expect that to continue for the year.

Great. And then could you provide some color on the real estate investment impairment line item on your income statement?

Yes, we can go through the impairment. From a GAAP standpoint, you typically record impairment on real assets when projected cash flows are expected to be less than book value. Real estate assets usually don't see impairments because they have long holding periods; impairments are more common when assets are held for sale. With the ongoing strategic review, holding period considerations changed for certain assets, which required us to reassess. That resulted in the impairment we booked in the first quarter. It was driven by a change in the potential holding period in light of other strategic-level activity. It was property-specific and related to the reassessed holding period.

Operator instructions were provided. Your next question comes from the line of Michael Gorman of BTIG.

Maybe just a quick one for me on a more strategic level as you're thinking about the portfolio and the business. Obviously, Denver has been a challenge, and that's not unique to you. There was an article in The Wall Street Journal over the weekend talking about the regulatory environment for business in general in the state of Colorado and some increasing concerns about the regulatory burden among the tech ecosystem. I'm just wondering, have you started to see any of those concerns? Have you started to think about those concerns and what that means for the job market in those core metro areas in Colorado? Or is this a little bit too far out on the horizon?

This isn't too far out on the horizon; it's something we're thinking about. When we evaluate markets, we look at business climate, tax regimes and the regulatory environment. In Colorado, you can already see results from some regulatory actions affecting real estate, such as RUBS and our ability to get reimbursement for utility costs. We're starting to see that impact. Some regulatory actions under consideration may be affecting job growth; as Grant noted, job growth was flat after a few years of strong growth. Is this part of a natural maturing of Denver, which expanded rapidly? Did infrastructure lag, prompting regulatory responses? Will this abate over time? That remains to be seen. We're very happy with the portfolio and our basis in it, having begun acquisitions in 2017. Denver still offers cultural gravitas and outdoor amenities that attract residents, and relative to places like California, it remains more affordable. It's definitely something we're watching closely and already starting to feel the impacts of.

That's really helpful color. Maybe just a follow-up. I wanted to make sure I had it clear. It sounds like, to your point, job growth is a little bit slower in Denver, but it sounds like absorption is running at pretty high levels. What could be driving that mismatch, and how durable do you think that absorption level can be with the current level of job growth?

Correct. Q1 absorption numbers were very strong, the highest since the pandemic period. We continue to see strong inflows of renter demand in the market. A big driver is the high cost of homeownership in Denver. Although job growth was flat in 2025, we still see relocation into the market, albeit not at the same pace as 2021 to 2023. Within our same-store portfolio, from 2021 to 2023 about one-third of applicants were from out of state; in 2024 and 2025, that share was 25%. So there's a reduction but still a meaningful inflow of residents from out of state, and homeownership remains expensive in the market.

Operator instructions were provided. Your next question comes from Ami Probandt of UBS.

Maybe a follow-up to Mike's question. There's perhaps some bias among coastal observers about what your Midwest markets might look like. I'm curious about the hiring outlook for recent college graduates across your markets. Do college grads view these markets as attractive, or do they tend to go to bigger Sunbelt or coastal markets and then move to the Midwest later when they start families?

This is a good question. Recent publications highlight hot markets for new grads, and very few are in the Midwest, but we still see strong employers in our markets. In Minneapolis, for example, there are major employers and a strong corporate base: Target, 3M, UnitedHealth and others, plus Cargill as a large private company. These employers draw talent. In other Midwest markets like Rochester, the Mayo Clinic is undertaking significant expansion that draws workers. So while many grads do go to coastal or Sunbelt markets, we see compelling opportunities and feeders from higher education institutions into local employers in the Midwest.

To add to Anne's comments, Minneapolis hosts 17 Fortune 500 companies. We see talent moving to the Twin Cities rather than only to places like Chicago. A strong higher education system in the Twin Cities also feeds local employers. In other Midwest markets, Rochester is driven by Mayo Clinic expansion, and North Dakota is seeing significant investment, including a European company establishing a U.S. plant. These developments may not register like coastal headlines, but they are meaningful on the ground.

One more thought: recent data suggests new college grads are considering affordability alongside other factors, which benefits the Midwest. Markets like Milwaukee, Columbus and Kansas City have attracted an outsized share of grads due to affordability.

There are no further questions at this time.

Great. Well, thank you all for joining us today. We look forward to meeting with many of you at the upcoming BMO and NAREIT conferences, and we wish you all a great day.

This concludes today's call. Thank you for attending. You may now disconnect.