Centerspace (NYSE:CSR) Q1 2024 Earnings Call Transcript

Centerspace (NYSE:CSR) Q1 2024 Earnings Call Transcript April 30, 2024

Centerspace isn’t one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).

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

Josh Klaetsch: 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 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 Centerspace’s President and CEO, Anne Olson, for the company’s prepared remarks.

Anne Olson: 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 will 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 would 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 are 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 are 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 are 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 Rent Cafe 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 are 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 will be well-positioned when those opportunities arise. I’m extremely grateful for all our teams duty to deliver value to our shareholders. Our strong culture is evident in our recent diversity, equity and inclusion report, highlighting our advancement off 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.

Bhairav Patel: Thanks, Anne, and good morning, everyone. We are 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 are 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 most 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 quarter 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 control 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 decrease 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 spend is unchanged from last quarter. On the capital front, our balance sheet remains flexible. We have a well-laddered debt maturity schedule that features a weighted average cost of 3.6% and weighted average time to maturity of six 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 centers-based repurchasing 88,000 shares at an average price of $53.62 during Q1.

We have 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 are proud of the results we achieved in the quarter, and I commend our center-based 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 will turn the line back to the operator for your questions.

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Q&A Session

Operator: Thank you. [Operator Instructions]. Our first question comes from Brad Heffern from RBC.

Brad Heffern: Hey, good morning everybody. Thanks. 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, et cetera.

Anne Olson: Yes. Good morning, 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 — and continued demand. So we have been able to see good rental increases, good renewal increases and really steady occupancy across those markets. A lot of very low unemployment in those markets. So we have really good, strong jobs and regional economies supporting that demand in Omaha Rapid City billings across North Dakota, we’ve seen a lot of strength.

Brad Heffern: Okay. Got it. And then you mentioned that April pricing, the 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?

Anne Olson: 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 a little bit flat for a few more months, but we do expect that new lease pricing is going to continue to accelerate.

Brad Heffern: Okay. Thank you.

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

John Kim: Thank you. 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 four months in a row. What’s driving the — what’s driving demand right now?

Anne Olson: Yes. I think similar to some of our smaller markets. Minneapolis has very low unemployment. And continued rise in cost of housing from single-family homes, particularly single-family homes and then 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 I — here, 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. So Grant, do you want to just give a couple of comments on the supply?

Grant Campbell: Certainly. Morning, 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, peak supply in our opinion has been realized in Minneapolis, 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.

John Kim: Okay. And then Anne, you mentioned in your prepared remarks, I think, April new and renewal leases were — the growth rates were right on top of each other. Historically, you’ve had 120 basis points spread renewals higher. Was there anything in April that — whether it’s concessions or something else building occupancy that led to that renewal rate not being higher the new lease growth rate?

Anne Olson: Yes. part of it is building occupancy. We’re back up above 95% as we — as of April 15th, and I think aiming towards the 96% as we head into leasing season. So that is holding the renewal rates a little bit flatter. Also, these renewals that priced in April or that were affected in April, those really priced in January. And so at that time, we did have really low — slightly negative new lease rates. So some of the deceleration is just timing-wise, from when they price to when they’re actually effective for April. But yes, also, we are building occupancy with a really strong focus on that.

John Kim: And how do you see renewals for the remainder over the quarter or the year?

Anne Olson: Yes. I think right now, renewals are pricing around 3.3% and that’s out into July. And so I think for the quarter, they’re going to come in right around 3%, 3.5%, between 3% and 3.5% for the quarter, is our estimate right now.

John Kim: Great. Thank you.

Operator: Our next question comes from Rob Stevenson from Janney.

Rob Stevenson: Hi, good morning guys. Anne, just to follow-up on John’s question. At what point do you expect new lease growth to have the inflection go back below renewals? Because it’s — you guys are one of — maybe one, maybe two companies that are seeing that strong and new lease growth? Just curious as to when that — if that stays relatively consistent throughout the year or whether or not that sort of falls back at some point here?

Bhairav Patel: Good morning, 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 fourth quarter is when you’ll see that kind of trend slip.

Rob Stevenson: 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 second and third quarter?

Bhairav Patel: Yes. I mean, so from our perspective, the first quarter was about a couple of things, right? It was utilities costs, which has an impact on RUBS revenues. But with respect to actual rental revenue, it’s been trending exactly the way we had expected. So heading into the second quarter and the third quarter, our projections haven’t really materially changed. We do price 60% of our leases in the second quarter and third quarter. So if the trend continues, we do expect to be in the same ballpark that we had expected two months ago. What’s driving the lower revenue is really RUBS income because the lower utilities cost is reducing rental revenue. So — but overall, I think I mentioned on the last call, that our blended rate estimate for the year was about 3%.