Q1 2024 Centerspace Earnings Call
Participants
Joshua Klaetsch; Director of Investor Relations; Centerspace
Anne Olson; President, Chief Executive Officer; Centerspace
Bhairav Patel; Chief Financial Officer, Executive Vice President; Centerspace
Grant Campbell; Senior Vice President of Investments; Centerspace
Brad Heffern; Analyst; RBC Capital Markets Wealth Management
John Kim; Analyst; BMO Capital Markets
Rob Stevenson; Analyst; Janney Montgomery Scott LLC
Connor Mitchell; Analyst; Piper Sandler Companies
Michael Gorman; Analyst; BTIG, LLC
Buck Horne; Analyst; Raymond James & Associates, Inc.
Presentation
Operator
Welcome to the Centerspace Q1 2024 earnings call. My name is Carly, and I'll be coordinating your call today. (Operator Instructions)
We will now hand you over to your host, Josh Klaetsch to begin. Josh, please go ahead.
Joshua Klaetsch
Good morning. Centerspace's Form 10 Q for the quarter ended March 31st, 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 center space, Home's.com and filed on Form eight 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.
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 Brad will discuss third quarter results in detail, I would like to take a minute to discuss our current leasing 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 price that increases averaging 3.4% for blended rate increases of 1.5% for new lease trade-out increased each month in the quarter does bode 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 instantly 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-out 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 the 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 of not experiencing the high supply dynamics of Sunbelt and some coastal markets and our supply profile remains relatively muted. Denver and Minneapolis are 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 concentrations, it ranked eighth in the nation for most apartment absorption over the last 12 months. And according to rent cafes was the number one search market for the 4th 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 sale 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 our team's ability 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 2020 for.
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 seven point your 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 our 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, in this market, rents trending in line with expectations. We are well-positioned as we enter the 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 premium. While successful tax appeals are not uncommon, we recognize approximately $700,000 or $0.04 per diluted share from one such appeals spending or 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% and 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 controlled expenses and in turn, decreased our expectations for controllable expense growth on the noncontrollable 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 I 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.
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 ad 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 of churn over the course of the year, leading to Q1 net debt to EBITDA of 7.1 times.
As noted in our February call, this balance sheet strength allowed us to opportunistically buy back shares with center space 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 committed to a development project in Minneapolis area for 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 90 million has been incorporated in our decks for 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 space team and 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 question.
Question and Answer Session
Operator
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you change your mind, please press star followed by two when preparing to ask your question. Please ensure your device is unmuted locally. Our first question comes from Brad Harper 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 Rock testers and cloud, Omaha and 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 and a lot of very low unemployment in those markets. So we have really good strong job and regional economies supporting that supporting that demand in Omaha, Rapid City billing across North Dakota, we've seen a lot of strength.
Brad Heffern
Okay. Got it. And then you mentioned the April pricing new lease had a pretty significant inflection. There is kind of the mid threes 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, but 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.
John Kim
I think if I have the opposite question to Brad's first question, what's going on in Minneapolis, as you mentioned, it's one of the top net absorption markets. It's one of the most searched markets to 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 rising costs of housing from single-family homes and particularly single-family homes and then coupled with high interest rates. So, you know, 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. And I'll let Chris touch on touch on the supply and demand dynamics a little bit, but I hear what we're seeing on the ground is continued interest and good traffic and rising occupancy rates coupled with strong renewals and now, you know, new lease pricing, that's positive.
So Grant, do you want to just give a couple of comments on the supply.
Grant Campbell
Certainly. 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 that tapering has been realized. Peak supply in our opinion has been realized in Minneapolis, and we've moved past the next 12 months forecasted deliveries in this market, our 6,700 apartment homes. And if you look at the 5-year annual average between 2019 and 2023. Our next 12 months figure is about two thirds of that annual run rate that has been realized historically.
John Kim
Okay. And then and you mentioned in your prepared remarks, I think the April new and renewal leases were the growth rates are right on top of each other. Historically, you've had 120 basis points spread renewals higher. Was there anything in April that Tom, whether it's concessions or something else, building occupancy that led to that renewal rate not being higher than new new lease growth rates?
Anne Olson
Yes, yes, part of it is building occupancy and we're back up above 95%, as we know, as of April 15th. And I think aiming towards 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 effective in April. Those really price in January. And so at that time, we did have a really low on slightly negative new lease rates. So some of the deceleration is just timing wise from when they price so when they're actually effective for April. But yes, also we are building occupancy was up with a really strong focus on.
John Kim
And how do you see renewals for the remainder have a quarter of 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 three, 3.5 between three and three 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
Good morning, guys. And 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 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 Brad. I'll take that one. So with respect to new lease pricing, typically we see that and 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 or is it just conservatism that doesn't see revenue growth accelerate from here given the seasonally beneficial, it 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 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.
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 revenues, 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%. That is still what we are expecting.
What you've seen is rental revenue trend exactly the way we thought it was in the first quarter was about 1.6%. In April, it's about 3%. We would expect to see it increase a little bit as we enter Q2 and Q3. And so again, not materially different from a revenue perspective.
On the expense side, there's a couple of things that are driving and the change. And we mentioned real estate taxes. That's a one-time thing in the first quarter and you know, and again, utilities cost, which again is related to the milder winter. So as we think about the rest of the year, our projections are materially different from what we had said last time. And revenue is trending exactly the way we have thought, including occupancy, which is trending in the right direction.
Rob Stevenson
Okay. And then I guess the other question --
Anne Olson
I was going to say, you know, the corresponding offset to that revenue is actually greater on the expense savings side. So overall, even though we're being fairly 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 and analog.
Rob Stevenson
Okay. That's helpful. And then, Tom, can you talk a little bit about the pricing environment for the types of assets and the markets and submarkets that you're looking, you know, to potentially sell arm, where was the sort of cap rate fallout on that $90 million of dispositions and you guys I know it's not in guidance, but are you guys thinking about marketing more assets for sale and seeing if you can get your price hit this year? You know, how are you thinking about sort of culling the portfolio and over the remainder of 24?
Anne Olson
Yes, this is Dan. And then I'm going to ask Graham 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 you know, if there was some good transactions that we thought we would have a good use of proceeds. And we have we do have some assets in mind like our historical capital recycling. Those are in markets where we think that lower growth are older assets and you know, 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 some acquisition activity and the right opportunity in order to implement that with respect to the Minneapolis assets that we sold and pricing, I'll let Graham answer the Minneapolis sale of those older vintage communities cap rate, there was low sixes.
Grant Campbell
Regarding your question on current pricing landscape, and while 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 five 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, five to five and a quarter 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 installment of price discovery.
Rob Stevenson
Okay. I guess the question that asks or raises is what is the financing environment? I mean, you've got Fannie and Freddie and you've got some other stuff available, the apartments that aren't available to other guys. But are you seeing the the financing market flow reasonably. Is it still tight? Is it choppy with whether or not you guys are using bank financing and have 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. minus stuff?
Bhairav Patel
And Rob, this is Bhairav. So from a financing perspective, we have kind of seen spreads hold steady. I mean, I think the volatility is really driven by it's Treasury market or the treasury rates. So from a financing perspective, we haven't really seen a big change in terms of being able to finance some of these assets overall, I think despite the volatility, the spreads have held up, the banks are still willing to lend the term loan environment is a little bit challenged in the pricing from a private placement perspective for someone like us is a little bit challenged in terms of spreads. But from a from a treasuries of our from our agency perspective, I think the financing is still available on assets that are cash flowing.
Rob Stevenson
Okay. That's helpful. Thank you. Appreciate the time this morning, guys.
Operator
Our next question comes from Connor Mitchell from Piper Sandler.
Connor Mitchell
Hey, good morning. Thanks for taking my question. On the in abroad, 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 asked a different way how much of the later winter benefited, you know, cost savings or lower expenses or lower revenue for you guys versus savings for the residents that you have implemented?
Bhairav Patel
Connor, so from a from a full year perspective, maybe of the if you look at our revenue guide, we kind of reduced it at the midpoint. Most of that reduction is driven by Rob's revenue that is expected to be lower as as the expense was lower as well. So I would say about at the beginning of the year, we expect about 50 basis points of year-over-year increase driven by RUBS now it's about 30 basis points. So that's really driving the reduction in rental revenue projections are overall revenue projections.
Connor Mitchell
Okay. That's helpful. And then maybe considering the acquisition market and the transaction market that's been discussed a couple of times and you guys mentioned that it's a tough market right now. Is that primarily due to the spreads you've been discussing? Or are there is there more competition from the likes of cash buyers or other competition or another component that that's causing this tough market at the moment?
Grant Campbell
Yes, morning Connor. This is Grant. I'd say from a competition perspective, we're seeing high net worth and private capital types as the most aggressive buyer profile right now. And some of those groups are they're obviously fully aware of what the cap rate is on the buy side and they're taking a view there and their long-term hold. They acknowledge there may be a period of time of negative leverage there. They're willing to accept that they may be an all-cash buyer. And we have certainly seen that in many instances where groups are saying we'll buy this all-cash and we'll quote unquote figure out financing later. So I would say that competition for us, the the same amount of people are doing all the same thing. So touring assets, underwriting deals, having conversations when it comes to who's actually getting most constructive, it's high net worth and private capital type.
Connor Mitchell
Okay. That's helpful. And then you guys mentioned that you're kind of on your you're seeing this tough acquisition market. So maybe in the meantime to use or share your thoughts on how you view it 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?
Anne Olson
That's a great question and one that is top of mind for us. I think when we think about potentially selling or having either free cash flow or other proceeds from sales, our priorities right now are keeping the balance sheet, flexible infill and also maintaining a very low floating rate debt, which we have currently executing on our value add program. This year, I think we'll spend around $20 million on value add. And this year which that's a good, good return for us and also keeps the product competitive as we hopefully move into a more competitive environment and watch a little bit the supply moderates and then after that, you know, I think we are more mindful of the balance sheet and I think more focused on deleveraging the Company than executing additional buy backs up.
Connor Mitchell
Okay. Appreciate it. Thanks, everyone.
Operator
As a reminder, if you like to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Michael Gorman from BTIG.
Michael Gorman
Thanks. Good morning. And I'm sorry if I missed this, but in your discussions about kind of 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?
Anne Olson
No, actually, we're seeing some 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 good performance in Rochester year over year. And St. Cloud, we've seen good performance. But overall, the market as a whole has moved moved in it in a way that's better for us and seeing stronger new lease rates across the board.
Michael Gorman
Okay. That's helpful. And then maybe just one last question on the acquisition side of things. I'm 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, why are in terms of pricing pressure.
Grant Campbell
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 year or so. I think the dispersion of underwritten rent growth. If we stick with that variable, that dispersion was wider a couple of years ago than it is today. I think people that are being thoughtful if they were underwriting heavier growth. They've dialed that back for groups that were, you know, fairly conservative a couple of years ago continue to be fairly conservative. So that dispersion has tightened from a rent growth perspective. And I think at the end of the day, it's which group is willing to accept and some of the variables that we touched on here earlier, perhaps negative leverage and perhaps cap rate that doesn't maybe feel great to them today, but they believe in the long-term story of the submarket.
Michael Gorman
Great. Thanks for the time.
Operator
Our question comes from Buck Horne from Raymond James.
Buck Horne
Hey, good morning, everybody, and thanks for the time on a quick quick question for Grant them because the deep dive on Minneapolis, was that not really helpful of discussion there about the supply by pipeline. There is wondering if you could do the same for Denver. I'm just kind of discussing where we're at in terms of the supply pipeline, you were kind of getting close to peak deliveries? And also just any additional color in terms friends between the suburban assets versus downtown Denver?
Grant Campbell
Yes, morning, box from a supply perspective, Denver's 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 months. Deliveries in Denver are forecasted at 11,000 apartment homes, and that is consistent with 2022 and 2023 delivery levels in that market. So we really tie and bifurcate what's in the pipeline, will that all get completed versus what is actually going to deliver and delivery forecasts tell 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.
Buck Horne
Any differences between kind of the suburban assets versus downtown Denver?
Grant Campbell
Yes, I think certain pockets of downtown or the urban environment are feeling maybe more concessionary pressures. You have 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.
Buck Horne
Got it. Thanks, guys. Good luck.
Operator
We currently have no further questions. I will hand back over to Anders Allison for final remarks.
Anne Olson
Thanks, everyone, for joining us this morning, and we look forward to seeing many of you at the upcoming BTIG, BMO, and GNE real estate conferences. And if we don't catch you there and we'll see you at any read in June
Operator
This concludes today's call, and thank you for joining, and you may now disconnect your lines.