Q4 2019 Earnings Call

Limitations any forward-looking statements made on today's call represent Management's current opinions and the company assumes no.

Location to update or supplement these statements that become untrue do to subsequent would be this morning is Mark Decker our chief executive officer as well as an Olsen our chief operating officer and John Coachman our Chief Financial Officer at this time. I'd like to turn the call over to Mark. Thanks, John and good morning everybody. We appreciate you joining to discuss our full year and fourth quarter 2019 results 2019 was an incredible year for the business our shareholders and our team and I'm very proud to be part of what we've accomplished a m. I r e t Team. Thank you so much for a job. Well done, the big highlights of 2019 include core ffo growth of 9% Balanced Life by strong markets and disciplined operations. And finally a dividend coverage ratio that has improved from minimum coverage in 2018 to a healthy margin of safety in New Jersey.

2019

I'd like to take a moment now to bridge our 2020 Outlook heading into this call consensus estimates were $4 of core ffo per share with the midpoint in our range of $3.66. We need to highlight the key components of the difference.

first

The sale of some of the Sioux Falls portfolio in December of 2019 had an eighteen to $0.20 impact on twenty-twenty as a result of this was a qualitative win and we were excited to exit a low-growth low-margin market at a premium to rnav.

That adjustment hasn't made it into consensus yet.

The second Factor impacting our 2020 Outlook is our non control expenses. Overall. We expect our total real estate taxes to increase 14% in 2020.

Versus nineteen a major component close to fifty percent of this was in Rochester where our taxes went up 28% portfolio wide.

Rochester's investing in their infrastructure to transform what is a global center of excellence in medical research into a more Dynamic place to live which we support nevertheless. We'd like to see a more measured approach to funding infrastructure and we will be appealing our valuations in Rochester as well as in other markets where we saw taxes rise higher than expected particularly in Minneapolis and Nebraska

lastly on the

Our whole industry is experiencing significant increases both in the cost of insurance as well as reduction in coverage through higher deductibles and stop losses and the difference in 2015 vs. 2020 is in the team's not the high single digits as we were expecting.

Taken together the increase in real estate taxes insurance premiums and our deductibles and stop loss in excess of our expectations reduces our 2020 ffo Outlook up by 17 to $0.19 or 35 to $0.39 in total.

I should also comment that we sold 203 million of Assets in 2019 and have only redeployed 169 million dollars. We also took the opportunity in the fourth quarter off to raise Equity to fund our early 2020 pipeline. So we started this year with forty four million dollars in cash. These combined proceeds will fund our plans q1 invest money.

Including a development financing we closed in late 2019 for the construction of a great new apartment community in Minneapolis where we will learn a strong return as a lender and have the option to purchase a home invasion.

Well, the construction loan will be funded over the course of the Year. These investments will get us fully redeployed on a on a leveraged neutral basis and are all funded today.

The 2019 sales were a trade-off of short-term earnings for long-term durable cash flow growth and we're excited for how these activities have positioned us for the future the per-share impact of exiting Topeka and Sioux Falls and reducing our exposure to North Dakota was managed by the excellent results. We achieved with our recent long-term financing.

If we've had the opportunity to tell you our story, you've heard us talk about three key goals. These are first grow core ffo and distributable cash flow with a target of greater than 5% on a second improve our exposure to Growing markets and third maintain and improve the quality and flexibility of our balance sheet given the combination of items. I've just outlined while 20,000 miss the core ffo growth goal. We certainly hit markets and balance sheet hard and we should grow our distributable cash flow in 2020. I'm not thrilled about guiding to a year-over-year decline in Courtney as I look at our total portfolio today versus one year ago. I'm ecstatic about what we got for these decisions quality counts.

Here are some great.

In January 2019. We had eighty seven communities with an average size of 157 units per community. And today we have 69 communities with an average size of a hundred seventy-three units bought our 2019 dispositions resulted in a reduction of the number of roofs in our portfolio by 303 or 26% Our total portfolio average rent increase by 10% and noi margin should increase by 80 basis points noi derived from our Target markets of Minneapolis and Denver increased from 31% to forty off our balance sheet is also much improved. We reduced our aggregate number of mortgages by half and we sit at 50% unsecured today. We also reduced our average interest rate by over fifty basis points while increasing are weighted average maturities from 4.6 to 6 years and continue to ladder our maturity schedule.

Qualitatively we had some big Milestones since our last year end call also.

Most notably we access the private placement market and achieves pricing comparable to investment-grade other investment-grade issuers. We also access the equity Market very efficiently with ratm the company's first primary common Equity issuance since 2013 and our Equity market cap Rose from 650 million at 12:31 2018 to $9,000 million on 12/31 2019 as the market recognized our transition from Diversified to multi-family and our efforts around comprable T and transparency bore fruit.

Just a few weeks ago. I was included in the S&P smallcap 600 and we've seen a big lift to over 1.1 billion of equity cap. And they float of a rush of a billion dollars this opens up a new world of investors and should add to our daily liquidity.

All right by five initiatives continue to bear fruit and we expect to continue our progress to achieve this critical goal not controllable expense growth of 11% Plus in twenty-twenty is adamant, but we have momentum on operational improvements and we're going to work to control what we can our team is proven over the past three years that we are agile Innovative and can successfully on our plan to build a great company. There are still lots to do that energizes us.

turning briefly

To the markets we continue to like Minneapolis Greater Minnesota and Denver which now comprise over 60% of our cash flow. We're seeing continued enthusiasm from capital and the development Community built upon continued strength and housing Fundamentals underpinned by high incomes household formation.

And a great employment Market are secondary markets all remain healthy with reasonable Supply and strong fundamentals. So in summary, we took advantage of the market and achieved great pricing on our tertiary market sales in 2019. We still have lots of work we can do in our own portfolio to continue driving value. We have a pipeline of Investments That founded on a leveraged neutral basis and when we find further Acquisitions that we believe create long-term pricing power and add to the portfolio strength as well as the per-share financial results. We have the flexibility to age and with that and let me pass the Mike. Thank you Mark and good morning everyone. I'll keep my remarks on our operations brief as you heard. We have a lot of work to do to mitigate the impacts of taxes of life insurance, and I'd better get to it. But first, let's take a minute to talk about our 2019 efforts and what we are focused on for 20 20

With 3.6%

I'm sorry, noi growth in 2019 compared to 2018. We feel good about our continued progress. Our year-over-year growth is driven by a combination of Revenue growth and 70 basis points of occupancy. The fourth quarter saw increasing occupancy throughout the period and the trend has continued into February with today's same store occupancy at 95.3% increasing occupancy coupled with steady occupation led to your over your gains and rent per unit of 2.9% Our renewal percentage held steady in 2019 at 50% and while the difference in new lease runs across the portfolio was relatively flat dead. We were able to push our average renewal rents 5.1% for the year as we sit today. We're in a very similar position to where we were in 2019 from an occupancy and exposure standpoint, but we are achieving higher

Overall our markets performed while in 2019. We're pleased with the revenue growth and our Minnesota markets particular Minneapolis where we saw 5.6% growth year-over-year. We're also pleased to see the increased efficiencies in our North Dakota markets expense containment initiatives there resulted in strong noi growth across that portfolio.

Notable that in Omaha. We had a year-over-year decline in NY. This was the result of increased expenses associated with real estate taxes and insurance claims weather related damages incurred in early 2019 resulted in a year-over-year occupancy decline of 1.2% from units that had to be taken offline for repairs. The portfolio has recovered and today our occupancy in this region is 94.5% off.

We're executing our plan to arrive by 5 with the goal of increasing our noi margin by five hundred basis points. We refined our expectations and process around extends control that did realize some fourth quarter ounces related to roof repairs that we had anticipated would hit in our capex this inclusion of $230,000 in our expenses negatively affected our year-over-year expense growth by forty basis.

With respect to our Revenue initiatives. You may remember that in May 2019. We removed all of our caps for our utility reimbursements or rubs. And as this Rose through the portfolio, we realize income of $8,000 in the fourth quarter of 2019, which was a 25.2% increase compared to the same period in 2018 similarly our renters insurance program, which also kicked off in May nineteen brought in a hundred and ten thousand in the fourth quarter. Both are rubs and renters insurance will continue to positively impact our results as we move through these final few months of the roll out.

our same-store

My margin was flat year-over-year, but we have made progress on the components of our business that we can control our efforts resulted in an increase to gross margin of fifty basis points in 2019 compared to 2018 back and starting our Rise by 5 in 2018. Our overall Noy margin has increased across our portfolio by 200 basis points.

A key component of Our Eyes by 5 is our value-add Renovations. We completed 44 unit Renovations in the fourth quarter is our leases rolled bringing a 2019 total to $166 units across the real life. And as of today, we have two new club houses under construction in our Minneapolis Market as we work to reposition assets with both amenity and unit Renovations in the fourth quarter are average cost of in Union was $10,667 and are achieved premium average $154 in 2019. We invested approximately five million into our existing portfolio Thursday. We're also executing on our plan for unit and amenity Renovations in Omaha and Lincoln and we anticipate spending ten to Fifteen million in value ad capital in twenty-twenty while staying flexible and committed to getting are under written off.

20 raised by Five Focus is on a resident experience. We're in the final stages of our lead to lease platform rollout and are at the beginning of rolling out enhanced training and onboarding on our interactive training platform that was amended in 2019. We are additionally exploring how we can improve our position going into our next Insurance renewal and what are best practices are in real estate tax advocacy and appeals.

By focusing on providing an excellent customer experience and achieving consistency throughout our portfolio to enhance scalability. We will execute on the goals of cash flow growth enhanced Market exposure and balance sheet flexibility. We have a team that has experienced committed and fully aligned with our mission, which is to provide a great home for our residents our team and our investors John can't wait for these efforts to hit the bottom line page him tell you how our company-wide efforts impacted our 2019 results and twenty20 Outlook John. Thank you. I am last night. We reported core ffo for the 12-month period ending December 31st, 2019 of $3.72 per diluted share an increase of $0.31 or 9.1% from the prior-year for the quarter ended December 31st. 2019. Core ffo was Ninety Six.

cents per diluted share

an increase of $0.04 or 4.3% from the prior-year

the increase in full-year core ffo is primarily due to noi growth reduced interest expense from refinancing of death and more favorable terms and lower General and administrative expenses partially offset by higher Property Management expenses and Casualty losses from weather-related events.

The rate of core ffo growth in the fourth quarter was reduced by the disposition that took place during the third and fourth quarters net of the impact of new acquisitions during the third quarter of looking at our general and administrative expenses. Total. Genie was fourteen point five million for the year a $400,000 decrease from the prior-year period or the quarterback the December 31st, 2019 Jean a at 3.6 million dollars was in line with the prior-year.

Property Management expensive was six point two million for the full-year a 12% increase compared to 5.5 million for the prior-year. The increase is primarily due to the foundation of New Technology Solutions related to improving our resident experience.

The capital expenditures as presented in page s13 of the supplemental for the quarter ended December 31st, 2019 same-store capex was four point four million dollars off a 1.7 million dollar increase from the prior-year. This increase was expected in due to a delay in the timing of the start of some capital projects during the first half of 2019 Dodge a full year same-store capex was $871 per unit which is lower than our original guidance for 2019 of $900 to $925 per unit as discussed earlier by an during the fourth quarter $230,000 a plan roof repairs were recorded as maintenance and repairs instead of capex, which contributed to the lower per-unit capex spend in addition value adds been for the quarter increased to two two million dollars in was 5 month.

dollars for the full year

As we continue to roll out the value-add programs and discussed earlier turning to our balance sheet as of December 31st, 2019. We had $227 in total liquidity including $199 available on our corporate revolver. We continue to make great strides in decreasing are secured borrowings increasing our weighted average term to maturity and lowering our interest costs.

At December 31st 2019. We have 24 mortgage loans outstanding with the balance of 330 1 million versus fifty mortgages outstanding with the balance of $4,046 million dollars at December 31st, 2018 these improvements to the balance sheet increase our flexibility as we seek to improve our portfolio in our target market wage during the year ended December 31st, 2019. We disposed of 21 non-core apartment communities to commercial properties and three Parcels of land for an average gross sales price of $203 proceeds from these sales were primarily used to acquire three new apartment communities for total aggregate price of $169.

as of December

31st 2019 we have $44 million dollars of cash in hand that is available to be redeployed including $17 of 1031 exchange funds from the December sale of the Sioux Falls portfolio.

As a result our net debt ratio has improved to 7.2 times as of December 31st 2019 from 7.8 times as of December 30th 2018.

During the 12-month period ended December 31st 2019. We repurchased and retired approximately 465000 common shares and operating units for an aggregate cost of twenty six million dollars at an average net price per share of $56.24 during the fourth quarter. We registered an ongoing Market offering in sale program for up to 150 million dollars in common shares for which we issued three hundred and eight thousand shares at an average net price of $72.29 per share for a total net consideration of twenty two million dollars.

Looking ahead to 20.

20 as percentage in our earnings release our outlook for core ffo is a range of $3.52 to $3.80 per diluted share with a mission point of $3.66 per diluted share.

As shown on page fifteen of the supplemental ffo growth for 2020s impacted by reduction of ten point eight million dollars in noi from 2019 disposition wage offset by an increase of approximately 4.8 million dollars in on same-store and Ally in 2024 or 2019 Acquisitions in addition wage 2020 Investments of 66 to $72 from the unemployed underemployed proceeds held at December 31st, 2019 are expected to add approximately 1.5 million dollars of net accretion to 2020 ffo. Finally 2020s Outlook is favorably impacted by approximately 3 million dollars of lower interest off as a result of 2019 debt refinancing.

Or same-store communities. We expect an ally to grow between one and 3% and 20 twenty this reflects expected same-store Revenue growth between 2.5 and 4% off and same-store property operating expense growth between 4.5 and 6% We expect Revenue growth to come from rent growth and other income initiatives that seek to optimize overall Revenue stream.

Impacting same-store expense growth is an increase in non controllable expenses due primarily to a 1.9 million dollars or 11% increase in real estate taxes as a result of higher property valuations and a $500,000 or 13% increase in Insurance costs as insurance carriers seek to offset adverse catastrophic loss experienced by increasing rates across the country. In addition to higher insurance premiums. We are also seen a reduction in coverage through increases in our stop off and changes to our deductibles resulting in an additional five hundred and fifty thousand of expected casualty losses for 2024 total projected impact from change in insurance premiums and coverage of over 1 million dollars.

on the controllable side

Operating expenses. We are seeing the benefit of our Rise by five initiatives which generally flat to modestly increasing costs.

However, most of our markets continue to experience low unemployment and increasing wage pressure and we expect twenty-twenty seems to our compensation cost to increase 5 to 6 % as we respond to market conditions.

Total same-store controllable expenses which include repairs and maintenance utilities and marketing and administrative costs as well as compensation costs account for two-thirds of total expense and are expected to increase 1.5 to 3%

Now turning to General and administrative and Property Management expenses for 2020. We are projecting our expense to continue the current run rate of 3.6 to 3.5 million dollars per quarter for 2020 Property Management expenses for 2020 are expected increase $300 to $600,000 for costs related to the continued implementation of new technology initiative turning the capital same-store capital expenditure cost for 2020 are expected to range from $825 to $900 per unit off while our value-add program Capital spin is expected to range from ten to Fifteen million dollars.

in closing

Like to reiterate Mark's comments that while our 2020 Outlook may not reflect the qualitative improvements. We have made to our portfolio during the year the construction of the portfolio wage stability of our cash flow flexibility of our balance sheet and improve exposure to our Target markets provide a more valuable company with greater long-term growth potential than we had 12 months ago. I like to thank each of our team members who embrace the change we are affecting and who choose to dare to win on a daily basis with that. I will turn the call over to the operator for your questions.

We will now begin the question-and-answer session to ask a question. You may press * then 1 on your touchtone phone. If you are using a speaker phone, please pick up your handset before pressing keys. If it anytime your question has been addressed and you would like to withdraw your question, please press * then two at this time. We will pause for a moment to assemble our roster off.

And our first question today will come from Neta of national Securities, please go ahead. No. Thanks. Good morning fog on the on the dispositions and in going forward in 2020, I guess in as as you think about further improving your portfolio and recycling Capital markets and took advantage of the pricing that you guys are seeing in the market. How do you balance that with with your goal of improving earnings going forward?

Yeah, carefully, I mean, I think it's what we saw last year was a lot of games on the operating side and a big opportunity get the financing side. And so as I think we've commented in the past, we really pulled forward some of those sales. I think you know, one of the things that we've said to investors and we just said a few moments ago is, you know, we're really committed to trying to deliver greater than 5% core ffo and ffo growth then we we didn't do that this year cuz we got caught a little bit on the taxes. So we're going to have to find ways to do it in a way that stays balanced. So we'll be very picky about it. I do think the market is continues to be exceptional to sell anything. So, I mean, we I only got her eye on the ball there, but I think you know absence something that's really exceptional. We're going to be really focused on Ops and and doing our best to eek out some per share growth this year.

Okay, and second question, can you maybe talk about the timing of redeployment of the proceeds? I know you have 66 or 72 million dollars of investments in 2020 Maybank add some more color on you know when you expect to close that.

Yeah, so roughly half of that or a little less than half of that is this construction loan?

Which I'll talk about in a moment. The the balance is is to assets that I expect us to close if everything goes as we have planned and in the first quarter, so Monday the the loan is a construction loan or or counterparty is Trammell Crow commercial out of Chicago. It's a group we know well that's one of our assets here in the Twin Cities called Arcada and they're very active in the market. So we had a high degree of confidence in them and their work the the asset it'll be a hundred and thirty units over a local grocer Lunds and Byerly's which is a great local company that has I think 27 or 28 stores in the Twin Cities market and really were

Right there with Whole Foods on prepared foods and a bunch of things like that that really get people excited about a grocery experience. So it's in a fantastic neighborhood that like Nokomis area where there's a lot of Park amenities. There's a nice couple area a couple of block area with some good restaurants and things and there's been really no new Supply there within a couple mile radius. So we're really excited. The amenity. There is the location there's some added amenities with the grocer and what's kind of right out your front door the price point. We're we're really excited about which I think the average rent Thursday in the Seventeen eighteen hundred dollar range, which is attainable too many. This is a very desirable neighborhoods South Minneapolis the the structure of the deal, which is probably what folks care about the most at this point is wage. It's a two-piece two loans one is a first mortgage roughly twenty nine point nine million. It's four and a half percent fixed-rate we funded I think six million dollars of it off.

At the end of the year. So right right at the very end of December and will continue to fund the drawers. It's a that's the first mortgage construction mortgage. And then we have a second which is a mezzanine wage of about fifteen million. That's at 11 and half percent. We won't really get into that connect till next year. So we might get a little of that funded by the end of 2020 but most of that will be in 2021 and then those two things will run until the outside either gets sold or we buy it. We have an option to purchase it that that would be our plan. So I'm excited about that. I think it's a great opportunity for for us to continue to build on our portfolio here in the Twin Cities.

Okay, that's all for me. Thank you. Thanks. Our next question will come from Rob Stevenson, please. Go ahead. Good morning guys. Can you talk a little bit about what you're seeing in your Minneapolis Market operationally how much new supplies the market seeing and how much of that is directly competing against your assets. And then also are you guys making a call of rental wage occupancy is sub 92% occupancy seems abnormal in the days of Revenue Management Systems.

Yeah.

A couple of questions there. I'll start with the supply pictures and ask and to talk about occupancy. But what we're seeing in the Twin Cities is depending on whose numbers you you read or somewhere between a $6,075 units which would be as high as we've been in the supply cycle in this economic cycle on the other hand off. This is still one of the most occupied markets of any major market and we continue to see rent growth. So I I'd say that the overall Supply picture wage for the whole Market is balanced. There are a few areas where there is I would say some heightened Supply. So in particular in the downtown Market where there's been some new house rules around include inclusionary zoning a bunch of developers ran through the window there to try to get deals done before that became the law which just happened at the beginning of this year dead.

And then there's a few submarkets.

And and some of these affect us. So for example in the downtown Market our our asset hundred thirty two units read twenty five or six year old asset now now has faith in you know, a five or six block radius. Mm new apartments most of which are actually high-rise. So I mean, we've got a really good basis there, you know, there's a competing product that's in lease up right now is getting 250 to 270 a foot in rents, and we're in the in the 220s. So with very good product that feels butiki in the West End Market. We have an asset Arcada that has had competition sprouting up all around it for the last few years again. I mean, the the bad news about being in a good location is other people want to be there Thursday and that's another story where we really like our basis and feel like that market will help pull us up over time in both cases. We've done a good job of holding occupancy a. Dyna it would be dead.

The market where that Dynamic is in place. And so if you took those three submarkets West End downtown in Edina together. It's on the

That's half the supply in the market. So it will affect us. It's I don't think it's going to affect us very negatively. It will affect our ability to push rents. But again, we're below the new Supply which I think is a good Dynamic with very attractive product on the you want to talk about occupancy. Yeah, occupancy side in Minneapolis the the dip and I see there is is really due to the value-add. This is the market where we have two of our largest assets going through a value-add renovation. So that does increase our vacancy. It was off that increase in vacancy was one and half percent just in the fourth quarter attributable to value-add and we we do see that tapering off a little bit as we get that those programs rolling a little bit faster in our in our occupancy is higher because of our lower lease expiration. So we have less units actually in the in the value-add program, but you're right our our goal is to balance off.

To optimize total revenue and so that is a little bit sub-optimal occupancy. But we did see as you could see in our supplemental we did have really good positive rental growth in the Twin Cities so long, you know, some of it was a little bit of trade-off for rape versus occupancy and a big portion of it was the vacancy from value-add. Okay, and then since they didn't make it into the same sort of polio nineteen and not in the supplemental. Can you talk about how your Denver assets are performing and how they're expected to perform in 2020?

Yeah, do you want to yeah, so we're we're really pleased with the Denver assets. We have three assets there one which we just acquired Logano in 2019. And we also internalized the management of West End in 2019. So we now have you know, three solid assets that we're managing ourselves, which has been great for our team team in Denver and we're really happy with how they're performing. We're seeing really great growth on the renewal side there which is very positive considering the supply in that market and in 2020 the both the Dylan and Thursday and will be in our same-store portfolio. So you'll start seeing seeing numbers on that region in our first quarter results, but you know, we're we're expecting to Hold Steady there and get some rent growth in 2020 from all three of those assets strong on the renewal side and we are seeing some rent growth on new leases as well.

Okay, and then can you?

A little bit about you know, you know where in terms of the markets are going to wind up being for you guys are going to come in at the sort of high end or even above the high end of the same store Revenue walk ins for the year. And which ones you expect to sort of be at the lower end.

Yeah, and and yeah, I think for for our 2020 guidance, you know, we're really expecting quite a bit of Revenue growth in Minneapolis. Mostly due to the value-add. We should be seeing some better Revenue growth out of Omaha and and we'll and we expect a Denver will be a strong contributor to on the high-end high-end side on the lower end of the guidance would be our North Dakota markets where we do continue to see, you know, a limited amount of ability to push rents there.

And his Redevelopment stripped out of same store or is it included in the same store? It's included in the same store. Okay, and then lastly for be Mark, how are you in the board? Think about New Market opportunities, whether whether it be a market like Phoenix or Dallas or some other Market that you could go into if you sell down the Legacy markets overtime how high of a concentration in Denver and the Minnesota markets. Are you willing to go and do you need, you know some additional incremental investment markets in order to balance that out going forward?

Yeah, it's a great question. It's something we're spending a lot of time on and you know as part of a whole strategy of you know, how we differentiate and how we compete and what it gets the investor to be different markets. I I think we will end up looking into other markets as I think we've talked about in the past it it will they will share the DNA that that many in Denver have in terms of what we believe to be durable reasons to live there and high quality of life and Innovation Centric economies. So that's that's work we're doing right now. I mean, I think as it relates to you know, the the focus of myself and the team every day, it's really all about operating and and continuing to to build margin. You know, when we we sit around and talk about what could be, you know, we definitely will will hone in on a few markets and directionally in my mind, which is this is me speaking out the full board, you know, it should be less markets. Not more money.

with concentrations in areas where we really feel we can build a

Additive advantage and and have above-average growth.

Okay, but in the meantime, is there any caps that you guys have put in place in terms of how much any one particular Market or how much any one or two particular markets can really represent in terms of Revenue or whatever metric you want to look at just in terms of diversity and and concentration risk. We have we have not okay.

All right guys. Thank you. Appreciate it.

Thanks, Rob.

Our next question today will come from very Oxford d a Davidson please go ahead great. Thanks guys looking at the recent sale of Sioux Falls off and the cat break their if you could kind of you know, maybe if you can't give an exact one talk about it and then the cap rate that you're currently looking at for four deals in the market place kind of right now, I guess Mark what I'm really kind of getting at is cap rate dilution. Yeah. So the Sioux Falls Sioux City, we we sold on a what we're we like to give Colby Point range is 5 and three quarter to six cap. Okay, which we were quite pleased about. We we put that in our portfolio Sioux Falls in point of fact, they were actually two portfolios there that were actually in reasonably disparate geographies, Sioux Falls, South Dakota and Sioux City, Iowa, so

Have different markets but very similar product and and what really Drew RI to that sale as I as I we made mention on the last call was what we saw happen in Topeka, which was a robust bid for a product that you know, we felt had very low growth prospects and very high capex that needs so, you know, the the the the other half of your question, which is where do we see investing? I mean, we've been really surprised with where some of the assets have priced it is my belief and I think you could probably find some math to support this that the investment Community has lowered their overall return expected expectations. So, you know large insurance companies Pension funds who I think this time-lapse may have been underwriting too, you know, an unlevered mid-60s have moved that number down to 6 and I also think that's a big dial to turn. I also think they've changed their own. No.

trans about the reversion cap

And maybe they've gone from ten basis points for every year. They hold of expansion to 5 or they're going to exit flat because I think there's a general perception that we're lower for longer and they need to get the money out can't win deals right now. If 7% unlevered irr is your is your required return? So that's a long-winded way of saying the cap red spread is is probably a hundred fifty basis points. I think that ma'am a little bit the the afo story or the distributable cash story, which I think is better. So, you know a broker would tell you that you could buy the Sioux Falls portfolio and you could put agency issue on it and it's going to be $250 a unit of capex. I mean that just isn't so we we can't underwrite that way. We don't so when we look at our you know, hold versus said that's a pretty powerful positive for us. And and that's before you even talk about growth which is highly important.

Right, right Mark. Are there other Trammell Crow deals out there that you guys engaged in? Like like like this one or the other ones out there look very kind of runoff situation. We'd like to do more but you know, they're just more runoff that was a a bit of a one-off it was I mean, there are there is an opportunity to do more deals like that develop type deals. But you know, we look at quality of earnings we look at risk in that particular situation. That was a a group we know well and had to have had a lot of dialogue with God. It was sort of opportunistic there. They got pretty far down the road with another partner and and needed a quick close at the end of the year and we were able to wage be there for them. I I'm not sure how many what I would call unitranche deals. You'll see us do where where the full stack like that we're probably more open to doing the meds and preferred type Investments if wage.

Our way possibly to owning the asset.

So it we look at them all the time. It's something you can turn the stick it on and get just crushed with volume of opportunities. So we're we're pretty picky there.

Perfect. Now that that makes sense and that's good on that option to buy is that a pre-negotiated or will that be negotiated at the end? We have a we have a we have a contract in terms of price that is kind of a ceiling and a floor that gets us what we perceived to believe to be a twenty-five to fifty basis point premium package. Today's market cap rate for a new asset now having said that today's market cap rate for a new asset is lower than I think we negotiated because we've seen some pretty some pretty stout pricing. So for example, just to give you one anecdote. There was an asset here in the Twin Cities that that just traded last quarter. It was less than a year old. It was barely stabilized in a good location, but it's certainly not an A-Plus location in my judgment and it traded at a four and a quarter.

To an out-of-town buyer. All the buyers were out of town.

So Minneapolis, I think is seeing more Capital than they have historically. Um, it's a good Stable Market that's produced long-term top-line growth and very consistent occupancy. And that's you know, because people are moving out of Manhattan because they're a little nervous about rent control in other places or for whatever reason there's just a lot of capital and a month and I'd say more of its trained on the Twin Cities than has been true historically.

Great. Thanks so much guys. Thank you.

Our next question will come from John Kim of BMO Capital markets, please go ahead. Good morning. This is Marissa on for John. My first question is on on control expenses. Can you discuss which markets are contributing to the large increase this year and off of that? How does this impact the timing of Your Eyes by five program?

Yeah, so the biggest Market that that really caught us by surprise and and everyone else. I think who read our numbers last night was Rochester in Rochester. Our taxes went up 27% year-over-year, which is quite a bit and then we you know, we had a couple of other markets in particular Minneapolis and off on Lincoln, Nebraska. But uh, so we weren't planning. I mean, I think we had high expectations for taxes and they exceeded our expectations. So how does it took affect our ride by 5. It definitely stunts it. I mean it's going to be hard for us to show meaningful margin growth this year. I mean, we're going to try like hell to do it and I like

I'd like to report.

We did this time next year, but those expenses are hard to overcome. I will say all the work we've done on Rise by five allows us to hold margin as opposed to go backwards. So long one part of going forwards is not going backwards. We will achieve that.

Got it. Sorry. Go ahead. Also. I was wondering if you can discuss how much you're spending this year on top Investments and potentially branding initiatives.

This is John Coachman. So on the tech initiatives, the things were really spinning on now are more on edge, you know, the additional user fees for using our implementing new technologies. We're not spending a lot of capital at this point. You know, we may do that down the month and we will communicate that but right now it's really the investments just going through our property management expenses as additional user fees. And I I think as we discussed in the guidance, you know that amount in 2020 is going to increase about three to six hundred thousand dollars. A lot of that increase is wrong what we've already committed to in 2019 and it's just getting the increases from a full year run rate in 2020 versus, you know, seven months of run rate wage.

2019

Thank you.

Our next question will come from Amy of btig, please. Go ahead. Good morning. I'd like to return to occupancy for just a moment with the kitchen and bath Renovations starting in Omaha. Should we expect to see a similar occupancy dip to what we saw in Minneapolis?

Yeah, we will have some additional vacancy loss in Omaha, but we we still given the offline units that we have last year and some of the dip we had an occupancy, you know, and we've now recovered up to ninety four and a half percent. That's where we sit today. I wouldn't say it's going to be any worse than what we experienced in 2019 and then that market. Okay. Thanks and then change the past you've talked about efforts to increase occupancy through reducing these vacant following the lease termination. Could you discuss the progress on that? And also how you expect overall occupancy in your portfolio Trend in 2020?

yeah, so

Goal is to really start to kind of minimize the Delta between our top, you know, a high occupancy and low occupancy the the volatility there and really are you know, we're trying to run the office at 95% or right around there which we believe gives us good pricing power and and really hits right where the market is across the portfolio. We have made progress on rejecting the number of days vacants both, you know, two components of that one. They're they're being turned faster. Our expectation is that all of our terms are done within 3 to 5 days off and second, you know, we we have a much larger focus on leasing particularly as last year. We enhanced our Revenue management platform and that is getting you know, we have a lot of focus on getting the uniforms with the Dora at the right price and have had some success in that.

Okay, thanks. So should we expect to see continued benefit through maybe the first half of 2020 or is this something that's ongoing through the end of 2020 and a 2021?

I think it's ongoing. I mean, we we can't ever really stop our focus on reducing that the number of days vacant. I mean you it it does drive a lot of Revenue and and really can create some efficiencies on-site when they move process down to move those units quickly.

Absolutely, and then just one quick one on the repair and maintenance is any of that RM increase due to the kitchen and bathroom nose or is that all capitalized month? That's all being capitalized as I mentioned some of the increase in the fourth quarter was due to roof repairs that we believed at the time we engaged on those repairs would be considered Black Box items. So as John noted our capex came in a little bit lower than we had guided to but our repairs and maintenance in the fourth quarter, you know did have a $230,000 hit of fact, we we won't see again.

Okay.

Great. Thanks. That's all for me.

Yeah, and if you have a question, please press * then 1 our next question will come from Buckhorn of Raymond James, please go ahead. Hey. Thanks. Good morning, Mark. I just want to go back to the Rochester tax increase if you could for a second, how do you go through the appeals process with either that municipality or whether you're young at Minneapolis or Lincoln or wherever you're getting these outside increases how do you think the appeals process could play out? You know did did the did the entire Market get home? You know that kind of reassess it or a similar magnitude reassessment. Was there something particular about your property that that was outsized? Well, you know just trying to understand if there's any change that what you're modeling here is kind of the the worst case scenario and you can possibly get some recovery later this year. Yeah, fuck everyone is around the table here is jumping to answer this question cuz we've

I'll talk so much about it, but I'll start.

Um, the the answer to the question is I think it's a lot of things. I mean one there is a new assessor in that jurisdiction in Rochester and off they have a a house view if you will a government view that multi-family hasn't been paying their fair share. They have the benefit of a lot of transactions that show off values are you know, they've been somewhat inconsistent. So if you look over the last couple of years two years ago our taxes would up 10% last year taxes went up one. So, I mean we were expecting tax increase I would even say we could have expected the increases to come they they start really writing up the assets sort of a third at a time and it spilled through that way what they did which I think is unusual Em are absolutely going to appeal is they Mark the whole thing up twenty-five 28% I think with no change in mill rate or fees or anything like that. So it's just a straight.

Year-over-year increase that is close to a million dollars. I mean, it's our largest expense line in our p&l. So we will appeal I mean our our team from the last two years are still outstanding. So these things do take time the the numbers you have from us are what we believe to be is the worst case which is what we've been assessed at and if we can do better off on appeal, you know, that will unfold, you know, a year or two years plus down the road. So I think we'll have some success there but not really impossible to say and if you look at it from their perspective, you know, they have limited abilities to to pick up revenue and it's more attractive to tax a multi owner than a dog owner cuz we don't vote but but I think you know this thematically this is a this is something that's happening across all markets and it Ebbs birth.

close and

You know again, we like Rochester and we we think they've done a great job in making it a more Dynamic place to live a lot of their efforts are around making it the place that can compete with Back Bay or San Diego cuz what they have there in terms of the facility. The Mayo is truly incredible and and you know, like everyone else in the world. They're they're trying to find the best talent and God, you know, Rochester Minnesota in February just doesn't feel like San Diego. So that's a hard thing to compete with what they're doing to make it more Dynamic I think is effective. We support that would certainly like to do a more measured way and that that's the discussion will be having I guess it okay that that's really helpful and looking at the value-add program the Investments for this year. Do you guys have a nice Target or under written return on investment for this year spend is it any is it any different than than what you've achieved on previous value ad spending or how do you how do you quantify wage?

You know.

Either the incremental rent and the incremental Roi that you're getting there. Yeah. So we we really have two categories of value-added projects one would be kind of amenity upgrades on a positioning of assets. And on those were looking to get a 10 plus percent return now, we think that those those Investments have a longer life, right? So that is putting in a club house rebranding, you know, exterior work and and that that return that 10 + percent return really drives what the second half of it is is the unit rental and there were really looking for fifteen to twenty per-cent. I think our fourth quarter return with $154 premium and about 10 and 1/2 thousand dollars of spend is just over Seventeen percent. I think that is what I can expect from us going forward with respect to the unit turns and then you know, there is some variation as we reposition the assets to help us get that premium on on the unit renovations.

Perfect. Thank you. Thanks. Ladies and gentlemen, this will conclude our question-and-answer session at this time. I'd like to turn a conference back over to Mark Decker for any closing remarks.

Thanks.

I'll send and and thanks everyone for your time and interest in our company today. We look forward to talking to you after the first quarter. And if you're headed to the Raymond James Institutional Investor conference in March, we'd love to see you there.

The conference has now concluded we thank you for attending today's presentation and you may now disconnect your lines.