Q3 2019 Earnings Call
Good day.
Welcome to chorus call leasehold and operator will be with you shortly.
Chorus call conference would you like to join.
Yes investors really.
Sorry.
Okay. That's may I have your name please.
David the I'd and the Brown the R.W. Ed.
And your company.
Yes.
Item A.I.E.R.A.
Thank you will join you and now the call is being recorded.
Current.
Did you give officer.
Okay.
As well as analysts and our chief operating officer.
On kirschman, our chief.
These.
No Sir.
Our 10-K.
I'd like to turn the call over to Mark.
The SEC.
Thanks, John .
The respect to non-GAAP measures, we use on this call including pro forma.
15 is all about executing and working to demonstrate progress off of 2018.
So reasons management uses these non-GAAP measures.
As a focused housing.
Assist with respect to any performer.
Tier things are coming together in a very powerful way.
Any forward looking statements made on today's call represent management's current.
And the company assumes no obligation to update or supplement these statements.
Diluted share.
Untrue.
15% year over year, driven by strength in operations as demonstrated by 5.3% same store NOI growth.
Lower cost of debt disciplined management of our controllable expenses as well as our corporate DNA.
Year to date, our statistics are equally impressive so before we go further I'd like to thank our team for taking good care of our customers, while delivering outstanding financial results. Thank you I or 80 team.
One of our largest areas of focus is our rise by five initiative, which we embarked upon a year and a half ago.
For the third quarter, we picked up 70 basis points of margin over the prior year and are on track to achieve our goal.
Of greater than 60.5% NOI margins.
Rise by five is really a portfolio of initiatives and investments designed to take I receive from being a very good operator to a market leader.
One of the elements included in rise by five is actively managing our investments and giving ourselves at using a chance to succeed.
The series of transactions that have occurred since our last conference call. In August are a powerful example of how this can work.
As you May have read we made two important investments in our core markets and Opportunistically exited from Topeka as well as refined our Bismarck portfolio.
Specifically, we purchased freight yard Townhomes and flats in the North loop neighborhood of Minneapolis, and Logano at Cherry Creek in Denver.
Here are some portfolio efficiencies that we gained.
We sold 11 communities comprised of 158 buildings and redeployed into two communities with just three buildings.
Annualized margin on the assets sold was in the low fiftys, while the NOI margin were purchasing is in the high Sixtys.
The age of our homes.
Went from an average of 30 years to six years and while.
The one building in a twin cities is 100 years old the homes were all completely renovated over the past two years.
Our average rents went from $810 to 1700 $30.
In addition, with a new assets falling into existing regions, we were able to get more efficient in our property operations by eliminating three positions.
Due to our operational consistency active portfolio management activities and act and active portfolio management activities, we were able to lower our average cost of debt 40 basis points from September 2018 to September 2019, while increasing the length of our average maturities by one and a half years and Laddering those maturities.
Most notably the $125 million of notes with Prudential represents pricing that is on par with triple B minus right issuers. So we are doubly pleased first that the private placement market is now open to us for long term unsecured notes.
And also that our inaugural pricing was able to take into account. The work we've done over the past three years to our credit profile.
Accessing capital markets is a critical part of being public and so today, we entered into a $150 million at the market equity distribution program or ATM.
We'll be using the cash proceeds from these primary share offerings for general corporate purposes, with the goal of increasing per share metrics, improving marcher markets and maintaining a strong balance sheet.
Turning to our markets, we see strength in particular and the twin cities, which consistently ranks among the nation's metro level leaders for occupancy even in light of strong supply we've seen cap rate compression on investment transactions over the past few months, which we believe demonstrates confidence by investors several of whom our new in the market and see a relative.
Value opportunity.
Apartment fundamentals are also strong in Denver, with 96% occupancy market wide in the third quarter.
Demand continues to outpace supply as Denver has and continues to see positive trends in population and job growth.
Looking towards 2020, we expect that over 40% of our ally will come from top 20 markets that are driven by innovation and play well together in terms of growth and stability.
The balance of our NOI in 2020 will come from a more efficient and growth oriented portfolio centered around education healthcare government and services.
As we mentioned on the last call. We believe the amount of capital interested in multifamily is driving broad based strength in pricing.
We've been focused primarily on the benefits of this is a seller and believe that tertiary markets or pricing closer to primary markets than ever.
This is a big tailwind for our strategy, but offers challenges when we go to redeploy the sale proceeds. However, when you consider our north star, which is durable cash flow growth. It is an opportunity. It is an opportune time to sell out of slower growth markets and purchase less capital intensive assets in growth oriented markets.
We will continue to be disciplined and opportunistic with our lens on any activity focused around improving per share results, improving our exposure to markets with better opportunities for growth.
Maintaining a strong balance sheet with access to men and maintaining a strong balance sheet with access to many forms of capital.
With that let me pass the mic to and Olson, our Chief operating officer.
Good morning, and thank you Mark with 5.3% same store NOI growth in the third quarter as compared to the same period last year and our comparable year to date same store NOI growth, reaching 4.4%, we're demonstrating that our investment increasing efficiencies and operating acumen are producing results.
Our NOI gains are being driven by increases in revenue, particularly in our strategic market of Minneapolis revenues across our same store Minneapolis portfolio are up 6.5% year to date compared to the same period last year.
Our entire Minnesota portfolio has maintained strong performance throughout 2019.
And when looking at that aggregate portfolio, we achieved an increase of 7.3% annualized growth in the third quarter compared to the third quarter 2018.
Revenue across our other markets remained steady with the exception of our North Dakota portfolio, while revenue growth has lagged our north Dakota markets performed well in the quarter due to strong expense management Grand Forks has experienced a 6.5% increase in NOI year over year year over year, and Bismarck is up 2.4% year over year.
Our focus on controllable expense containment is ongoing and in the third quarter, we reduced same store controllable expenses by 2.1% or the same period in 2018, bringing our year to date controllable expense growth to negative 30 basis points compared to 2018.
These measures combined with our revenue enhancing initiatives are not only providing strong NOI growth across our portfolio, but are there framework for building, an agile and scalable aberrations platform that can be a competitive advantage as our portfolio grows and changes.
These initiatives are also the foundation for margin expansion.
While the work on expanding our margin is producing positive results with a 40 basis point increase year to date over the same period last year, we are facing headwinds and non controllable expenses across our portfolio. We have realized in our anticipating rising real estate tax and insurance costs.
This heightens, our focus on our rise by five initiatives, our controllable expenses as a percentage of revenue have decreased 120 basis points year to date compared to 2018 and I'd like to talk about a few of the key initiatives. We have undertaken in 2019, where the early results are indicating strong future performance.
In February we change our approach to our revenue management platform. They increased revenue we are achieving demonstrates that we're capturing the market rents within the portfolio on new leases as well as achieving strong increases on lease renewals. These changes have also helped us move our lease expiration profile to more accurately reflect the seasonality of our markets and we have implemented.
These changes while maintaining strong occupancy.
In May we instituted a requirement that our residents obtain renters insurance or pay a noncompliance fee. This change is being implemented other leases roll throughout the remainder of 2019 and into 2020.
This initiative reduces our risk and potential cost related to uninsured losses as well as creates additional revenue.
As of September Thirtyth, 61% of our units are subject to this requirement with 40% providing evidence of insurance and the remaining residents paying the noncompliance be upon full implementation. We anticipate this initiative will generate in excess of $1 million and annual revenue.
Also in May we removed utility reimbursement caps on over 70 of our communities for new leases and upon renewal. We've just started to see the positive impact of this on our financial statements and our third quarter same store results showed an increase of approximately $54000 or 7.2% in utility reimbursements compared to third quarter last year then.
Increase will continue to compound.
In October alone, we achieved a 41.5% or $85000 increase over October 2018.
On a complete lease role we are in anticipating an increase of approximately $15 per month per unit, resulting in over $2 million of additional revenue annually.
Another key to our margin expansion is capitalizing on the value add opportunity within our same store portfolio in the third quarter. We renovated 51 units in Minneapolis and since we began renovations in this market. We have completed 150 units are approximately 22% of approved and planned renovations.
We expect that achieving our premiums on renovated units will contribute to revenue increases in Minneapolis through 2020 with expected pickup in rental revenue growth from value added investment in the Omaha market to start showing in the third quarter next year.
This quarter's results demonstrate that our team is prepared to continue to evolve our operating platform to achieve efficiency inorganic growth I'm grateful for the commitment flexibility and balance that our team members bring to work each day to serve our resin.
Now I'll turn it over to John who is thoroughly verified all of the numbers I. Just gave you an is ready to tell you all about core FFO.
Thank you William last night, we reported core FFO for the quarter ending September 32019 of 99 cents per diluted share.
An increase of 13 cents or 15% over the same quarter in 2018.
Year to date core and AFFO is $2.76 per diluted share compared to $2.49 for the first nine months from 2018, an increase of 27 cents or 11%.
The increase in core FFO was primarily due to an NOI growth lower general and administrative expenses and reduced interest expense from the refinancing of debt at more favorable terms.
The increase was partially offset by higher property management expense and higher casualty losses from weather related events.
Looking at our general and administrative expenses total gene a decreased by 3% to $10.7 million for the nine months ended September 32019 from 11.1 million in the same period of the prior year, primarily due to decreases of $707000.
Severance related costs.
$476000 and legal fees related to our successful pursuit of recovery in a construction defect claim.
And $241000.
In real estate taxes unsold parcels of land.
These decreases were partially offset by an increase of $927000 in compensation costs. As a result of a decrease in open positions and higher incentive compensation related to expanding the participant pool and our long term incentive plan.
Property management expense was 4.6 million for the first nine months of 2019, and 11% increase compared to 4.1 million in the same period of the prior year.
The increase was primarily due to the implementation of new technology solutions related to improving the residue experience.
As well as compensation costs, including severance.
Moving to capital expenditures as presented on page 14 of the supplemental for the third quarter of 2019 same store Capex was $2.1 million, which was $1 million less than the same period in 2018.
To the first nine months of 2019 same store Capex was $5.2 million, a decrease of $1.6 million compared to the same period in 2018.
For the full year same store Capex is expected to be in line with calendar year 2018 at $9.5 million to $10 million.
Turning to the balance sheet as of September 32019, we had $155 million in total liquidity, including $147 million available on our corporate revolver.
As referenced earlier by Mark in his comments during the quarter, we entered into a private placement agreement for the issuance of up to $150 million senior unsecured promissory notes.
We view this financing to be validation of the enhancements, we have made to our balance sheet and the realization of our goal to obtain investment grade like debt metrics.
During the quarter. We also entered into a 12 year interest only 59.9 million dollar mortgage loan priced at a fixed rate of 3.88%.
This year has seen our team execute on a number of initiatives and transactions that we believe position us for the future with a more durable and stable cash flow stream.
As a result of these activities in our operating results.
As presented on page 15 of our supplemental we are updating our guidance.
We are increasing the midpoint of 2019 full year core FFO per diluted share.
Hi, six cents.
Two $3.73 by increasing the guidance range to $3.68 to $3 from 78 cents.
The higher core FFO target is from continued strong results from our operations.
Disposition, and redeployment execution and lower interest costs from favorable terms on our debt refinancings.
We are increasing the midpoint of our full year same store and and allied guidance from 3.5% to 3.75% by increasing the bottom of our guidance range. We now expect same store NOI growth to be between 3.5% and 4%.
We are narrowing the range of our 2019 full year same store revenue growth to 3.25% to 3.75%, which left the midpoint on changed.
And finally, we are narrowing the range of 2019 full year same store expense growth to 3% to 3.5%, which left to mid point unchanged.
Please note we are planning to provide full year 2020 guidance on our next call when we discuss the fourth quarter results of 2019.
With that I will turn call over to the operator.
Thank you we will now begin the question and answer session to ask your question you May Press Star then one on your telephone keypad.
You are using a speakerphone please pick up your handset before pressing the keys to withdraw your question. Please press Star then to.
Our first question today, we will come from drew Babin with Baird. Please go ahead.
Hey, good morning.
Good morning drew.
Just wanted to talk about the the exits of Topeka and Bismarck, obviously cap rates in markets like does have come down fast can probably are still coming down while this may be stabilized and some of the more core markets are major markets around the country can you give us a little more color on the exit cap rates on these markets.
As well as if you're willing to disclose kind of first your expectations on the on the recent acquisitions.
Sure.
Yes, so yes, as we said thematic way still a lot of demand in these markets in.
Topeka that went off at a six to six in quarter cap, So six to six and a quarter capsule drew if you recall our convention.
As to give a quarter panic point range. So six to six in the quarter for Topeka Bismarck with six in a quarter to six and a half.
And then on the buy side we are.
I would say four and five AIDS to foreign seven eight is roughly for three quarters cap going in.
Okay, that's helpful and I guess.
Also obviously there is this a growth difference between the markets you're buying in the ones, you're exiting which is probably the major reason why you're doing it.
And by our numbers certainly the long term demand growth prospects of Minneapolis, Denver are certainly exceed places like Topeka Bismarck have you internally quantified that at all sort of the.
For the IR, our expectations, so our long term over to markets, you're exiting versus the one jure you have been entering or have been growing in.
Maybe give a little more color on how management thinks about that.
Sure. So let me give you a bit of a long answer that the the way we look at it is every quarter. We look at every asset and we have judgment around markets in growth prospects generally, but we also have a tenure capital plan for every asset and.
We look at what we think expenses and revenues are going to grow by then we look at what sort of what the after everything cash flow as to the enterprise and we force rank all the assets and.
And then we have an NPV that we set against that so.
I would call that sort of our.
Our point of and difference, where we are happy to hold it.
When in the case of Topeka was really that was an opportunistic sale. So.
We were getting a lot of feedback from the brokerage community that there was a lot more.
Interest in Topeka than there had been historically. So these are brokers are saying hey, we've been transacting into FICO for 20 years, and historically you might have to people who could credibly by this whole portfolio. Today, we think you're going to have six Andrew pricing is going to be better and we said well that's.
That's interesting.
Well take it to market on that basis in the end, we did get eight beds from all really highly qualified buyers and ended up selling added about.
8% to 10% premium to our Navy. So what we thought it was worth so that was really an opportunistic move for us in the case of the Bismarck assets.
Those were smaller assets with lower rents and.
And our judgment, a pretty heavy capital load over the next 10 years.
So while those cap rates.
Our higher than what we purchased at this sort of after everything cash flow in some cases could be the same or better and certainly the growth is better and we're very grateful for the experience, we hadn't Topeka, but I mean of fund in fact onto peak as growth in 1960. There were 120000 123000 people there and today there is 100.
25000, you can buy a single family home, there and the low hundred thousand dollars range. So.
Thats, an excellent thing in terms of cost of living but but a bad thing in terms of being a landlord. So.
We were happy to get out of there that's how we think about it and.
You know again on the Bismarck side that was much more I would say tactical versus opportunistic where like we have in in the case of my not we really paired our portfolio down too.
More institutional larger assets, Iran's better margins more efficiencies et cetera.
Okay, that's great detail I prefer long answer is cannot answer here.
Capital Jewish wardrobe.
[laughter].
Just wondering.
I should just add on top of all that we put an IR an unlevered IR. So we compare what were what we could buy with what we could hold.
It would be another key factor there sorry.
Okay, great appreciate it.
Just one more for me.
The other income growth, which is kind of been exceeding this growth in pure rents and you talked about.
The penalty fees are not getting renters insurance, the the reimbursement caps lifting and things like that which.
Very important things to be doing very crucial and growing your margins.
Should we expect that other income remains a tailwind to the overall revenue growth number next year or it sounds like there's plenty of opportunity left and I guess, how far away from getting to the point, where some of the low hanging fruit in that number is maybe work through and rent growth kind of goes back to where pure rents are.
We're in the case with some of your peers, even on a lower number this quarter than other income kind of stalls just get square that away that's very helpful.
Sure. The short answer is yes, and LMS and to give you some detail.
Yes. Thanks drew we we do expect that it will be a tailwind through next year as I indicated.
We are doing a lot of these initiatives on the lease roll so whereabouts.
60% of the way through getting units into these programs, which leaves 40% into next year and so we do think that it will continue to grow and if you recall, we really started this program a year and a half ago by resetting a lot of our market fees that as an ongoing that's.
Ongoing so that's just not a onetime things that we look at that now every year, we're increasing them, where we can either garage rent pet fees.
Really trying to keep our rents.
And our overall revenue optimized and in line with market. So we do think that we will see good good tailwinds on the revenue side from other revenue opportunities.
Great. Thanks, all for the color that's all for me.
Thanks drew.
Our next question will come from Rob Stevenson with Janney. Please go ahead.
Good morning, guys Mark So you sold about a third of the Bismarck portfolio looks like how does the asset quality compare with what you sold versus what's remaining for you guys.
Yes, I am a third probably by units in less than a quarter by value.
Okay whats.
Does that answer the question.
Okay. So then so theoretically then the this stuff is remaining is a better quality than what you just sold.
On a unquestionably yes.
Okay, Alright, just trying to think about that and you know from your standpoint like how when you look at it you've been executing well on the sell side with these transactions, but how strong is the acquisition side for you given where cap rates in demand is for people with much lower cost of capital even though your says.
Come down of late you've got these recent disposition proceeds as well as some potential future proceeds as some of the other properties your marketing or sold how confident are you that you can close in the near term Ron acquisition or two or these proceeds likely to be used to reduce debt maybe fund redevelopment in the near term.
I mean, where.
We're highly confident in our ability to redeploy the money I would say.
Semantically since I've been here, we've had more ideas than capital and.
I would considered our job to continue that and balance.
So.
We have a lot of good ideas for what to do with.
With future proceeds whether they come from asset sales or the ATM.
And in both Denver many it.
So we feel good about that.
Okay, and then John Pragmatically is there are limits.
Are you guys going to run anywhere close to a limit even if you.
Sell more assets in terms of roles and ability to sell in any given year.
No.
We don't have any issues there.
All right and then lastly.
We do actually monitor that on track that and make sure we're in compliance with all those.
Guidelines are rules and.
We do not have any limitation.
Limiting factors.
And then last one from me answer John So same store expense growth is 2.8% year to date. The revised guidance is three to three and a half this numerically implies a 4% plus for the fourth quarter, what's driving same store expense growth in the fourth quarter up more than 4%.
Yeah, Great question, we had our we have a very tough comp in our fourth quarter 2018. If you go back and look at our performance that quarter was a very strong quarter. So there's some.
Comp issues, just with some favorable resolutions that happened them.
In addition, we had.
Did some initiatives around staffing and structuring in the third quarter of 2018.
And kind of as we've gone through this year, we've had a pretty nice comp and by the fourth quarter of 2018.
Those had all been implemented so we don't have as strong as a comp there to offset.
Some of those expenses the expense growth, we're seeing on the Noncontrollable side.
Okay. Thanks, guys appreciate it.
Thanks, Rob.
Our next question will come from Barry, Oxford with D.A. Davidson. Please go ahead.
Great. Thanks, guys.
When you look into 2020 and your acquisitions are you buying some.
Newer growth markets or will your goal will be more to get economies of scale in the current markets that you're right.
So when you say growth markets, you're talking Denver, and many correct twin cities, Yeah. I mean, they the answer is Oh, I guess, we'd like to finish starting in Denver, we perceive.
There to be some benefits from a procurement and human capital perspective to have a few more deals. They are we at right now we own three.
Communities in Denver, and I think we'd love to on four or five and then we really would like to turn.
The other markets and we when we think about other markets.
I mean speaking broadly we're thinking.
Three to six or four to eight kind of in total if we built it out.
All the way and those markets would have similar characteristics.
To Denver, and Minneapolis in terms of population north of a million.
Heavy bent towards innovation lots of growth good overall housing dynamics.
For someone who's in the apartment business, maybe some different weather.
And seasonality, so things like that where.
We're not really looking at any market.
Right now beyond the twin cities in Denver, but.
We are doing work.
Around the economics and and multifamily.
Dynamics of those markets.
Right and then looking at acquisitions and dispositions for 2020 will they.
Well they come roughly in line together or one outstrip the other.
By a wide margin I know, you're not giving 2020 guidance I'm talking by you know by a wide margin.
Yeah, I mean, our our if everything goes the way we plan, we we would be biased towards.
Maybe we'd be a net buyer in 2020.
Okay Bye margin.
Great that's like Pan plans are very well see.
Yeah exactly I know these are issues that you know you can't control you can only go after them right. Yeah animal I think directionally, we're far more interested on the size of the per share.
FFO and distributable cash than the size of the company.
Right, but no.
Yes, no absolutely that makes sense.
Alright.
Thanks, guys appreciate it.
Thanks Barry.
Our next question will come from John Kim with BMO capital markets. Please go ahead.
Thank you.
We have some like atypical occupancy pattern.
Whereas occupancy this quarter was down 90 basis points sequentially by 140 basis points year over year on a same store basis.
Can you just remind us what this is attributable to.
Yes. Good question, it's really attributable to our goal of optimizing revenue. So we have we are we have and we are willing to let occupancy dip a little bit when we're seeing really strong rent growth. So overall the revenue in the rent that ran trend looks really good and it has.
About occupancy to come down a little bit.
Also we haven't we have talked about in the past the tough lease expiration schedule with the seasonality of our markets.
Most people are moving in the summer it's a it's a pretty heavy load in the summer we had been working on our revenue management system to release.
Get that inline with the seasonality to make it a little bit easier on the property and have undertaken a lot of initiatives in that regard that those things take time to move so I think on occupancy trend, it's really due to our goal to.
Optimize revenue overall and get the higher achieve the higher rents and a and also our lease expiration profile.
Okay.
I may have missed this but what were the blended lease growth rates, this quarter, new and renewal and where where our renewals going on right now.
Yes, so renewals now in October our are going out right around our October numbers were up 2.7%, which is right in line with our overall same store year to date, our blended is right at 2.4 so.
We still feel pretty good about where the where the leases are coming in.
And new leases in third quarter, where.
Hi, too well.
You know new leases in the third quarter.
Our were down a little bit we haven't seen more growth on the on the renewal side.
And so 1.4% was on new leases in the third quarter.
Okay.
Question, maybe for Mark the Minneapolis City Council earlier this month.
Last month actually was looking at.
Rent control as a as potential measure.
And you.
Comment and how that may impact your portfolio going forward.
Yeah, I mean, I think as a as a practical matter.
Well, we think that that is at its a real policy debate because there are real issues with.
Affordability in housing.
We don't see that as a large threat.
The city did enact what they call. The 2040 plan, which allows for a lot more density, which I think.
Probably will help more in terms of getting supply bill they have also enacted.
And inclusionary zoning.
Policy, which.
Put a bunch of developers kind of into the into the queue early so theres a lot coming out of the ground here.
In particular on the downtown and.
And I think that we'll have a kind of a surge of supply and then it will really Peter out as that includes areas zoning.
Works its way and Theres also some.
Theres been some.
Arguing around screening criteria here in town, but in general I think rent control is unlikely but.
Im not a politician so.
Hi, suddenly certainly watch.
But that were not.
Actively concerned about.
So from an investment.
Perspective, it doesn't put you on pause.
Thank you.
New acquisitions in the market.
It does not and we've not seen at.
Stop anyone else and I mentioned in my prepared remarks, we really are seeing.
And listening to some of the other calls it sounds like this is happening.
Oddly, but we're seeing some tightening.
And pricing higher pricing and we're seeing a lot of new participants in the market. So I'd say to the interest in this market is stronger than ever.
Got it Okay and then my final question is.
On your balance sheet, which looks like leverage has been increasing on a net debt to EBITDA basis.
Where does improving the balance sheet fall in your priorities.
Versus earnings growth and.
I guess improving the the.
Yeah concentration in your top 20 markets.
Yes top three but third so we're most focused on metrics.
Core FFO and distributable cash.
Where next most for I mean, our our view is there is greater risk.
In the event of a downturn given where we are today.
And being in markets that have.
Cap rates that gap out quickly financing the gaps out quickly.
Demand any of the apartment level that.
Slows quickly then there is to having the leverage levels that we have today. We've also done quite a bit of work to latter those maturities. So you know all debt is not created equal as you know and we've worked very hard.
To improve the form of the debt, we have and we're going to continue to do that so it's something we think about constantly it is a priority I did note and your note.
The comment on leverage it did tick up but that's really kind of a point in time thing when you consider the asset that we sold.
We had a small industrial asset that we sold.
In the twin cities and then we had the Bismarck portfolio that that brings it down probably a quarter turn.
And I would say you know.
For certain we aren't.
Trying to tell the market, we're comfortable with more leverage we were happy with its kind of where we were going into this quarter I think you'll see us work our way.
Back towards that level through a combination of.
Sales potential capital raises et cetera.
Great. Thank you.
Thanks, John .
Our next question will come from Jim Sullivan with a BTI Ji. Please go ahead.
Thank you.
Couple of.
Appreciate the questions from me.
First of all there was the earlier question about the occupancy trend and looking at individual markets on a sequential quarter basis.
The biggest drop in occupancy was Minneapolis.
I'm curious.
The the reasons behind that I know you'd be a value add program is kind of concentrated there. So there may be a factor but.
Just curious how you expect that market's occupancy rate to trend.
Over the next two quarters.
Yeah. Thanks.
Well when we look you nailed that it's really vacancy loss associated with our value add program as Mark mentioned earlier, we do think and see that Minneapolis has one of the strongest overall occupancy trends historically and we feel that in our assets that are not in our value add program. So really what is impacting the mini.
He Atlas occupancy is is simply the value add.
Which have going into two large two of our largest assets here.
Okay, and just a little bit further on the value add I know, that's kind of I think kind of 0.2 in the capital allocation priority list.
What's the average period to complete.
The value add projects.
I think overall when we look at an asset we're looking at generally two to four years. The completed projects. Some of them are much shorter, but if we're talking about in unit turns we do those on the lease role we have done some projects and much shorter timeframe. I think we finished our very first a whole building kind of light renovation. We did those then occupied.
I'd units early or mid last year that only took us about three or four months, but if we're going to roll through and renovate a full units it's about two to four years.
The.
The you know my question is really focused on the old individually unit basis. Once it was the police terminates finished starts to value add to win new unit is ready to be released what how many days or weeks are we talking about yet where we target under 30 days and we have been able to do that adds a at our one of our Minneapolis assets worker.
Only averaging 19 days and at the other Minneapolis out that were at 28 days just just under 30.
Okay, and then what kind of a related question. The also you have.
Specified in prior presentations.
Value add menu I take a total of about 33 million.
And again I.
I know you may update that when you give your.
Your guidance for 2020, and I know this as a multiyear multiyear effort, but is the value add menu likely to grow materially from where this here when you come out what's your next presentation.
Yeah, I think at the beginning of 2020, we will start underwriting or projects that will we were just launching in Omaha in the third quarter, We launched the Omaha project with our test units and we'll start seeing that that's a very significant project down there at FX five six of our assets.
Omaha, Lincoln and so.
At the beginning of 2020, we will look to underwrite. The next set of a value add we do expect that the pipeline will grow approved projects that are in the Q.
And so far and I know, it's early days student yields.
Okay and on the projects are in line with the underwriting.
Yeah, Yeah, we've been pleased so far we do monitor it closely.
Really looking at if there is you know as there's maybe increased cost or decrease cost what that means for the premium we need to achieve and we're trying to stay very nimble as we as we roll through the projects.
Okay. Then final question for me on the revised outlook.
We have you changed the average shares outstanding number there.
Increasing it is that because of where the share price is currently in the potential buybacks that.
You may or may not too.
No the the change in the share count.
Has to do with.
Just the weighted average rolling through or are you comparing it to what was in the prior guidance.
Yes, Oh.
Part of that too is now we have.
Some dilution.
From so it building in that dilution, which would have.
Increases shares, but the dilution is from the the convertible preferred opie.
The series D that we did in February so, yes, so our guidance doesn't anticipate any buybacks our share issuances, okay very good. Thank you.
Thanks, Jim.
As a reminder, if you would like to ask your question. Please press Star then one our next question will come from Buck home with Raymond James. Please go ahead.
A close enough guys yes.
Well I mentioned, our first time color here guys, but I wanted to go back to maybe the Capex guidance, if I could just to understand I think it sounds like there's a catch up in capex spending in the fourth quarter, just maybe walk me through the timing of that spend and and also just also curious as you're looking at out ahead with the.
The introduction of some younger buildings.
Into the portfolio. If we think about 2020 capex related spending me all else equal.
Should the spend level in aggregate the same better lower than and then this year.
Yes, so going to your first question.
As far as fourth quarter and full year guidance around capex.
So we got a late start because of late winter, but we've been getting these projects teed up and they are off and we're already now so.
The real focus is.
Prior to winter setting then they get a lot of these projects done.
But the work going into this the spin we're going to happen in the fourth quarter, it's really been going on for three to four months.
To get these up and running.
As far as next year that is the thesis and.
As we.
Go into these newer assets that are per unit capex will be lower with these assets.
Really on on we looked at on the yield basis, right so relative to rent.
The cost to turn a.
Our by US stove for our unit to get $800 of rent.
It's not that different from the cost of stove from unit to get $1700 of rent. So.
We are definitely planning on seem.
You know improvement from that going in the future.
Great.
And just thinking about real estate taxes.
Just how strong asset pricing has been particularly in many and Denver.
Do you think thats going to start to affect tax appraisals going into next year or how do you think about budgeting for.
Estimated taxes next year or in a future just given what's happening with just capital markets activity effect out.
The tax outlook looks for you guys.
Yeah I.
It's it's affected by growth.
And transactions more than anything and.
We've been seeing it my three years here in the valuations are going up and taxes are going up.
We do expect that to continue into 2020.
We have.
Every time, we get an asset valuation, we compare to where we where our valuation as than we do appeal a number of those but typically speaking.
We we are seeing taxes increase into one or expecting taxes to increase in 2020, we're actually getting the valuations now we're seeing those increases in the valuations what we don't get yet and we won't get till later this month, our December or really what those mill rates are.
To give you a.
Yes that prevents me from give you little clear picture, but the valuations are going up for 2020.
And my last one just real quick looking at the debt maturities for 2020 and 2021, just what your thoughts on any opportunities to refinance or pay those off early or just any other.
Opportunities to drive your interest rate costs, a little bit lower in the near term.
Yes, so we.
We have about $60 million to $70 million of debt.
At a weighted average rate of 5.2% that's how we have access to over the next 24 month.
So we really pair that down with some of the financing activity, we've done and this past quarter for third quarter.
But there is still some fruit out there to be harvested yeah, I mean, but just to add to that I mean, I think we feel like we've been very this has been a very fortunate tailwind for us we weren't planning on this financing environment and it's really a big part of what catalyst catalyzed us.
Moving to sell some of these assets earlier that sort of.
We are able to pull that good news forward and still deliver good.
Per share metrics, while also improving the quality of the portfolio. So.
Good news as it was there a bad news as it's not as much as it was.
Six months ago.
Okay Alright.
Congrats yeah. Thanks, so much.
And this will conclude our question and answer session I would now like to turn the conference back over to Mark Decker for any closing remarks.
Thanks, Sean.
We appreciate everyone's interest and the company and wish everyone, a happy and healthy holidays. Thanks. Thanks for your time today and if you're attending narrates annual meeting in L.A. next week, we hope to see there.
The conference has now concluded. Thank you for attending today's presentation and you may now disconnect.