Q3 2020 Investors Real Estate Trust Earnings Call
Good morning, and welcome to the I R. E T. <unk> third quarter 2020 earnings call all participants will be in listen only mode.
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Now I'd like to turn the conference over to President and CEO of IRA team Mark Decker. Please go ahead.
Good morning, everyone I read you filed its form 10-Q for the third quarter yesterday after the market closed I.
Additionally, our earnings release and the supplemental disclosure package have been posted to our website at IR 80 apartments Dot com.
And filed on form 8-K.
It's important to note that today's remarks will include our business outlook and other forward looking statements that are based on management's current views and assumptions on our results in 2020, including views and assumptions related to the potential impact of the COVID-19 pandemic.
Our quarterly report and other SEC filings, the less certain factors, including those related to the pandemic that could cause our actual results to be materially different than our current estimates.
Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call.
Joining me. This morning is adelson, our chief operating officer, and John <unk>, Our CFO.
I'd like to start by walking our team who's on the line and thank them for the incredible efforts undertaken to make everyday better for our customers.
2020 has been a wild ride, but our team has done a fantastic job.
Providing a strong and consistent experience for our residents and we're certainly fortunate to be focused in our geography, and our customer base, who are seeking a great home at a reasonable price point.
Our business continues to prove resilient as we maintain occupancy and push rental rates when possible.
Our primary investment markets, the twin cities and Denver are experiencing more volatility than the remainder of our portfolio.
We expect that our thesis of Minneapolis, providing stable growth.
And Denver are providing more dramatic growth will play out as the recovery progressive with.
With rents are still seeking growing urban markets containing strong employment and amenities early.
Early indications show Minneapolis, standing Pat well, Denver, staying outside in migration from some of our largest U.S. cities.
Also witnessed first hand, the combined effects, the cobot shutdowns and social unrest are having on the urban core.
Our five assets in the core of the twin cities in Denver, comprising roughly 14% of our I know why over the next year are hampering the overall performance of those portfolios.
For example, our Minneapolis suburban portfolio has a weighted average occupancy that is 270 basis points higher.
And new achieve lease rates in the suburbs increased 3.1%.
Versus a decrease of 16.8% in the core.
The impact of the economic downturn on our twin cities and Denver markets are balanced by the strong performance of our secondary markets, where we are achieving strong revenue gains across Montana, Nebraska in the Dakotas.
Our market and product diversification, both by suburban urban and price point.
That's well positioned during the economic crisis and will help us as we continue through recovery.
Transactionally, we had an active quarter, we sold four of our least efficient assets in Grand Forks.
And acquired a 465 home community in Denver.
With this purchase we now have scale to achieve operating efficiencies there.
What's been surprising so far in the early days of this recession is the combination of deteriorating fundamentals and strong liquidity for multifamily product everywhere over.
Over the last several cycles when there was a recession the secondary and tertiary markets suffered disproportionately trott and liquidity.
In fact, the opposite has occurred today at some of the largest and most liquid markets face greater economic and regulatory uncertainty.
A reversal of the prevailing trends of the last 20 years.
We were able to take advantage of that and the sale of our Grand Forks assets, where we were happy with the pricing achieved at sub 5% cap rate on our trailing 12 months and Hawaii.
And when we consider the high Capex associated with these older assets, the true economics or even better.
As we monitor the investment opportunities in Minneapolis, Denver, and Nashville, It's notable that overall transaction activity has significantly decreased since the inception of the pandemic.
Across the U.S. multifamily transaction volume was down 68% in the second quarter and 50% in the third quarter compared to the same periods in 2019, we.
We feel great about our ability to invest in Denver, where transaction volume was down 43% in the third quarter as the dearth of opportunities has heightened competition and pricing continues to trend upwards from pre covert expectations.
We've also somewhat altered our position on ready liquidity deploying the cash we had on hand last quarter into the Denver, Denver acquisition, but maintaining a keen high on our commitments over the next 24 months and keeping capacity for difficult times and opportunities.
Morning, 20 required a significant rewrite to our plans and we are prepared to meet the continued challenges ahead.
However, our game plan hasn't changed we remain focused on increasing our exposure to strong markets, improving our per share metrics and extending our financial flexibility and liquidity.
With that I'd like to add and please take us through the operating update.
Thank you Mark and good morning, as the pandemic continues its effect on our results well not dramatic our compounding 72% of our portfolio leases have been price since April 1st and during the six month period, ending September Thirtyth, new leases price 60 basis points lower than the prior year comparable period, while renewals increased 2%.
Despite leasing activity being dampened by the economic downturn during the third quarter. We believe we were able to stabilize rents and increase occupancy, resulting in revenue growth of 1.1% over third quarter 2019.
Our efforts to optimize revenues were led by 90 basis point higher occupancy in the third quarter compared to third quarter 2019, and our same store weighted average occupancy for the quarter was 94.4% one metric we track closely as revenue per unit, which incorporate the rents and occupancy and our revenue per unit increased from 10 80.
Eight per unit as of September Thirtyth, 29, 10 to 11 <unk> four per unit as of September Thirtyth. This year.
Well the second quarter saw a significant drop in traffic due to cold shutdown, our third quarter traffic was up 26% year over year and our strong occupancy enable enabled us to hold our new rents flat and achieve 60 basis points of increase on renewals in Q3.
Notably we saw an increase in renewal rents in September of 1.4% and our preliminary October results indicate that stronger renewal rents may continue as we achieved a 2.1% increase for the month.
As with our peer companies. Our results are a story of markets as Mark mentioned the impact of the pandemic and social unrest has hit our dense urban markets harder than the rest of the portfolio.
During the third quarter, we saw new lease rates in Minneapolis, and Denver decreased 7.2% and 8.9%, respectively compared to third quarter 2019.
This was offset by significant gains in billings Omaha, St cloud and across our North Dakota markets markets with less regulation related to covert precautions and until recently, a lower cobot infection rates.
In the third quarter, we realized strong collection with 98.8% of expected residential revenue collected and just 24 rent deferment requests across our portfolio year to date, we have deferred a total of $251000 in rats with only 59000 of those amounts remaining to be repaid we.
We did see a slight uptick in deferral requests in October with 15 request for an aggregate rent deferral of 21000 or 14 basis points of expected residential revenue collections in October remains strong at 98.5%.
Year to date through September Thirtyth, our revenues have increased 2.1% and net operating income has increased 1% over 2019, well. This has been a challenging year for rise by five efforts, we remain optimistic about the opportunity to increase margin across our portfolio.
Challenges include flat revenue growth due to the impact of the pandemic wage pressure health insurance costs and of course, the significant increases our industry has experienced in real estate taxes and insurance expense. In spite of these our optimism remains due to opportunities and value add revenue optimization and controllable expense management.
As we've been monitoring expenses directly related to changes in operations due to covert protocols. We believe there will be opportunities to manage these more closely as our new realities stabilizes into 2021.
Despite lagging second quarter traffic and economic uncertainty, we continued with value add commentary in unit renovations within nine communities in our portfolio this quarter.
During the quarter, we completed a 195 unit renovations and were cheating or under written premiums with an average return of 18% upon leasing.
Our unit renovation focus remains on our Minnesota, and Nebraska portfolios with 66% of the renovated units located in Minneapolis in Rochester, and the remaining units located in our Omaha market.
I mentioned, the compounding effect that depend on that at the top of my comments and wed be remiss. If I didn't know that fact, and our team members. Our team continues to show remarkable resilience and commitment to our customer experience.
Well during the second quarter, we focused almost entirely on the safety of our residents and team I coming together to do the right thing. This galvanized our team and we have been able to sustain that through the third quarter I'm grateful everyday for our team's dedication to our mission and now I'll ask John to discuss our overall financial results.
Thank you Ryan last night, we reported core FFO for the quarter ending September 32020 of 94 cents per share a decrease of five cents or 5.1% from the third quarter of 2019. So.
The decrease in core FFO for the quarter can be attributed to lower and NOI of $1.9 million, primarily due to the impact of dispositions in the third and fourth quarter 29 team and the second quarter of 2020 offset by reductions in GMI and interest expense.
Year to date core AFFO is unchanged from the prior year at $2.76 per share.
Turning to our general and administrative expenses for the nine months ended September Thirtyth 2020 gene.
Gene, a decrease by 10% or $1.1 million to $9.7 million compared to the same period of the prior year the.
The decrease is attributable to decreases in compensation related to open positions.
Faulting fees and travel and conference call us directly impacted by a company of 19.
Interest expense of $20.6 million decreased by 11% or $2.6 million for the nine months ended September thirtyth compared to the same period of the prior year Prime.
Primarily due to the replacement of maturing debt with lower rate term debt and lower average balances on our lines of credit.
Year to date property management expense of $4.3 million decrease $200000 or 4.6% compared to the same period of the prior year.
Casualty loss was $91000 for the three months ended September 32020, compared to $178000 for the same period of the prior year.
The current quarter's loss includes $695000 related to help damage incurred during the quarter on a rapid city portfolio.
Offset by a 532000 dollar reduction in the prior quarter loss related to our core mall portfolio.
For the nine months ended September 32020, casualty loss was $1.3 million compared to $911000 for the same period of 29 team.
Approximately $2 million in capital expenditures are expected to be spent over the next 12 months to replace the impact of assets from these two events with with $750000 expected within the next quarter.
Turning to capital expenditures, which are highlighted on page S. 16 of our supplemental same store capex for the nine months ended September 32020, <unk> was $7.2 million, a 60% increase from $4.5 million for the same period of the prior year.
The increase in Capex was related to a delayed start a project in 29 team due to adverse weather full year same store Capex is expected to fall in the range of 900 to $925 per door, which has increased from our prior outlook due to an additional 750.
Thousand dollars full for a full group replacement as a result of the aforementioned hail damage.
In Q3 value AD spend was $4.2 million as compared to $1.9 million in Q3 2019.
For the nine months ended September 32020 value AD spend was $10.4 million compared to 3 million for the same period in 29 team during.
During the quarter, we issued 145000 common shares through our ATM program at an average net price of $70.55 per share for total proceeds of $10.2 million year.
Year to date, we have issued 819000 common shares at an average net price of $70.23 per share for total proceeds of $57.5 million.
The proceeds from these shares were used to help fund the park House acquisition.
Looking at our balance sheet, our total liquidity as of September Thirtyth was $132 million, including $150 million available under our unsecured line of credit and $17 million in cash.
As of September 32020, we had apartment community communities, representing approximately 10% of pro forma and alike that are not pledged under the unencumbered asset pool.
This unpledged asset pool has a total value of $223 million, which allows for an additional $134 million of liquidity under the terms of our line of credit look.
Looking to the remainder of 2020 and 2021 as of September Thirtyth, we have $35 million of debt maturities and $27 million remaining to fund under our construction and mezzanine loans.
For the development of a multifamily community in Minneapolis.
We believe our current liquidity is sufficient to cover our foreseeable capital needs, while allowing us to pursue opportunities in our target markets of Minneapolis, Denver and Nashville.
Further information on our liquidity can be found at page S 11 of our supplemental.
As we look ahead to 2021, we continue to evaluate the impacts the current pandemic and economic crisis will have on our business into next year. This.
This includes continued pressure on the top line as the impact of the remaining 28% of our leases.
Sign pre co bid our renewed are replaced with post cold good leasing activity as well as the potential headwinds expenses expected with expenses.
Including having our common facilities open throughout all of 2021.
Higher self insured health care costs as a result of delayed medical procedures during the pandemic.
Increased costs associated with PDP materials, and other measures adopted to keep our communities safe.
Increased insurance cost as a result of continued catastrophic losses suffered by the insurance industry and the potential for higher real estate taxes as they can state and local governments seek to close budget shortfalls caused by the co bid related shutdowns.
As we continue to navigate the pandemic, we remain encouraged by our Q3 results, which reflect the work of our dedicated team members, who every day leave our mission of providing great homes with that I will turn it over to the operator for your questions.
We will now begin the question and answer session to ask a question you May Press Star then one on your Touchtone phone.
If you are using a speakerphone please pick up your handset before pressing the keys to.
To withdraw your question. Please press Star then two.
Our first question today comes from Daniel Santos with Piper Sandler.
Hey, good morning, Thanks for taking my questions. My first one that is more of a big picture question clearly the team has done a great job of pivoting the portfolio to focus on key Midwest markets and I think the case for owning some will say less brochure markets like billings, where revenues were up over 7% it's pretty clear.
But as you said your long term strategy is to expand in larger markets like Minneapolis, and Denver, which are seeing better but similar pressures in some of the coastal cities. So I was wondering if you could give us some more color on how you're thinking about expanding in those markets versus maintaining your exposure to smaller markets, which are clearly bright spots in the portfolio.
Yeah, that's a great question Daniel Thanks.
Listen I think are driving.
Focus continues to kind of be around and not kind of continues to be around markets that have real depth and and real observable job and income growth I mean that is ultimately the long term secret ingredient to.
Good apartment cash flow growth. So I think we have absolutely I think been positively surprised with the positives surrounding the smaller.
Smaller markets, where we have diversity and I'll confess.
Probably more open minded to having some slice of diversity in markets like that in the future than we might have otherwise been but another way to get that is.
It's just to make sure you do you identify really good sub markets and some of those larger markets, where you have some good supply type constraints and things like that so I don't think it changes our overall view, although we're certainly happy we have the diversity we do.
Got it that's that's helpful. So my next question, whether its run collections renewal spreads occupancy your portfolio has been relatively stable throughout what I am assuming most people would say it's been a pretty disruptive year. What would you say the biggest drivers of that stability is that affordability is at the portfolio.
Next is your urban and suburban ratio.
Yeah, I think my in my view it is.
The mix of both market and buy a suburban and urban so when we have talked a lot and I know you've been in tonys investor meetings, where we've talked about how minneapolis sort of feels to us like the most fully developed version of our investment thesis around.
Urban and suburban and and a and B a and.
And it has really performed well, but but obviously our portfolio is definitely being lifted by those secondary and tertiary markets are now and do you want to answer that yes, I think one of the big drivers, which we commented on and it's pretty clear is compared to our public peers. You know the last regulation around coal that precautions and the more open to kind.
Dummies have really benefited us throughout the Midwest, Yeah, that's a great point.
Got it that's it for me congrats on the quarter.
Thanks.
Our next question comes from Gaurav Mehta with National Security.
Yeah. Thanks, good morning.
I think you talked about.
No.
Declining.
On the new wins for your urban markets I'd like 7.2% in an 8.5%.
I was hoping if you could maybe touch upon.
How the trends on a month to month basis did you see the trend said Barcelona did you see that stabilized in some of your urban markets that you're seeing weakness.
Yeah, Good morning, Rob when might you.
Yeah. Good morning. Good question, we do watch the month to month trends, you know really closely and particularly on the renewal side I think across the portfolio. We're seeing a stronger trend in renewals. We were at 1.4% in September our preliminary October numbers show, 2% up on renewals when we look at.
Urban markets, you know that the hit has been kind of a little bit more consistent where were down in those markets. You know pretty consistently so we're not seeing much of a trend yet besides that where we are down more in those markets than in the suburban markets.
But nothing that's yet shows that we're on our way back up out of the out of negative.
New lease growth.
In Denver Minneapolis.
Yes, I mean as a portfolio I, we feel like we are stabilizing right now but.
With some markets improving but yeah.
Yeah, we're definitely seeing the improvement that trend improvement on both new lease rents and particularly on renewals.
In the suburban markets that those urban market, we don't yet have a trend line to say, if we think it's going to start picking back up or not.
Okay can you remind us what's the portfolio mix within some sort of warning or Mormon Nvidia total portfolio.
Yes.
We really have five assets that are urban that comprise about.
14% of our NOI.
If you look on a go forward basis.
No three in the twin cities and two in Denver.
Okay.
Having mark in your prepared remarks, you talked about transaction volume being down probably mid sector.
Maybe talk about who are the buyers and sellers that should trend watching in the market and what kind of people find it or is it any different than than people that voted transacting people within your markets.
Yeah, I think for the I mean, obviously multi is a big market and.
There are lots of participants and most of them live outside of the public markets and I think we're seeing that reflected in the transaction volume so.
If anything there's there's probably been a marginal add to the investor pool.
In light of what's happening in other sectors. So if you ran a.
Maybe he ran an opportunity fund in January you, probably had the ability to do multifamily in your funding, but you didnt actively do it.
Because you were looking at other sectors and you might you might be considering multi more than you were otherwise.
We're definitely seeing that but in terms of who is who who do we find in the.
In the bidding room, so to speak I mean, it's it's the same groups. We saw before I'd, just say theres varying levels of conviction. So I think there are still some groups who.
Yes, I don't want to be the first person at their investment committee to talk about any anything.
We actually took the EPS opposite approach and really were active this summer trying to shake some things loose.
We found in most instances, we chase things into other People's arms, but.
But you know its I would say it's a it's the same group plus a few extra is.
Buyers.
Okay. Thank you that's all I had thank.
Thanks, Greg.
Our next question comes from Rob Stevenson with Janney.
Hi, Good morning, guys Mark how are you guys thinking about dispositions over the next few months, especially if there is a push for 10 31 assets.
Ahead of year end and how much of your dispositions over the last few years have been to 10 31 buyers.
Yeah.
The answer is.
Where we would be we'll always be opportunistic I mean everything in the portfolio has a bye now.
Price and.
So if we can find someone does prices aren't all they all require exuberance to get there but.
But in general.
We're always trying to call from the bottom so.
And add to the top so in terms of what if we sold the 10 31 buyers I mean.
Two assets right yeah. So a couple of years ago, we sold two small assets worth about 6 million Bucks to.
Buyer in Rochester, the balance, which is over 200 million of multi.
250, probably it has all been to.
And non 10 31 buyers.
Okay. So it's not a big impact for you guys.
Yes buyers may have used 10 31, but it wasn't part of their strategy or pricing that you know larger institutions are private equity funds that would be using.
Tenthirty when we lost a couple of the summer to 10 31 buyers where we were.
We were down to a small pool of buyers and found ourselves just bidding against someone who wouldn't stop raising their price and.
Found out after the close today, you know that person was not going to stop in the realm of reasonableness. So.
Good for you for stopping I guess.
Okay.
And how are you guys thinking about redevelopment spending and how the recent returns been trending over the last few months do you put that on hold given that you may not be able to get returns in the near term that you. What do you do it now anyway on vacancy while you can in anticipation of the 2021 will be.
Able to jump those rates up how are you guys thinking about that today and where are the returns Ben.
Yeah, I mean, we have enough active projects that we can.
Throttle up and down a little bit I mean, obviously were restrained by turnover, but you know our our plan is to continue to make those investments provided they continue to hit the returns on it and yeah. I think you know we've been we were very careful particularly at the beginning of co led it to say do we need to stop and what and redo the market research to see if the premiums would hold up.
Because obviously every time, we make an investment there is a risk on whether or not it's going to lease for what we what we wanted it and what we found particularly in some of our markets where there are supply constraints is and our occupancy is high is that there's still a lot of demand for product and that there's a lot of demand for renovated product. So you know we can control.
And you would kind of on the same plan I think will.
Hit the spend that we estimated ahead this year for a value add and you don't feel really good about some of the opportunity is when when you look at our portfolio. For example, I noted we had some renovations going in Rochester that is a fairly large rental market compared to the size of the overall market and.
And not a lot of new supply so while they have gotten some new supply we have a really good opportunity to kind of draft behind that and we're not seeing a ton of new buildings going up that would compete with us with the renovated product. So we do still have some good pockets of opportunity that we want to chase down we're being very careful on.
You know with the comp side to make sure that it will compete in the market and that we think that we can get the rent premiums that would justify the spend okay.
Okay, and then and how successful you guys been in terms of pushing your lease expirations into the second and third quarters I mean, what percentage of your leases do you guys now have rolling in the fourth quarter and then the first quarter, where things may be a little bit more challenging.
Yes, So you know since the beginning of <unk> in the second and third quarter, 72% of our leases roll. So we feel pretty good about that you know now that in this instance that means that 72% of our leases have price during cold then and we only have 28% in.
In the third or in the fourth and first quarter. So.
You know I think our exposure is good we're constantly tweaking it to match, what we see in traffic pattern that'll take a little bit more time, obviously the traffic pattern. This year was off pretty significantly given very little traffic in Q2 and higher traffic in Q3, and we're seeing higher than we thought higher traffic in October then last October as well so.
You know that that expiration profile may want to move we're never going to be done trying to identify exactly where it should be as the market moves, but we feel pretty confident about the amount of leases in the second and third quarter and the opportunity that that will bring next year as we head into the summer months and with hopefully a better recovery on the eking out.
Unlike side okay.
Okay, and then last one for me.
Any markets, where you have been seeing incremental deterioration in September and October market condition was.
I don't think so I mean, I think the theme the the most prevalent theme in our portfolio for certain is that just the core versus suburban in the twin cities in Denver.
I think we probably you know when when covert first came about.
I suggested that we just roll everyone flat.
In hindsight, we probably didn't need to do that.
So, we probably stifled some economic or revenue growth there.
But you know that's kind of that's.
That's over now and we're and we're really you know, we're we're getting rental increases where we can and really focused on staying staying fallen and keeping pricing power for when things get a little better.
Okay. Thanks, guys appreciate it thanks.
Thanks, Rob.
Our next question comes from John Kim with BMO capital markets.
Thanks, Good morning.
You guys mentioned social unrest in your core urban markets and I think you quoted a 17% decline in new leases in Minneapolis in urban core how.
How much of this do you think is.
Due to safety concerns and people looking to lead the cities with the discussion of the funding the please.
Versus I guess, new supply or other economic factors.
Yes.
Morning, John Thanks, I think it's really mostly about covered I mean.
The the just vacancy of the city just exacerbates the issue.
The safety issue with which I, which obviously Minneapolis has been.
In the headlines more than we'd want to be on all of those items, but.
I think it's really the kind of the second derivative. The first thing is covet and and when people get back into the office.
You know I think things will definitely improve.
To me now you know you're you're living at our place in the North we've called freight yard and you've got a killer apartment and you can walk to the river and you used to go to walk to a 100 restaurants and bars and I can talk to 20 restaurants and bars and someone just still your bike. So you know your.
Your your marginal input there is not positive because you can't go to any of the sports things you want to or any of that stuff. So.
I would say its a.
It's obviously a big issue for the cities.
And in general and in North America, and it's certainly an issue here, but I would say if if everyone or back you know if target and.
The other large corporate users in the city said, hey were coming back to the office tomorrow, because we have a therapeutic or whatever we have that makes us all feel safer and the office I think a lot of that would turn pretty quickly.
Okay. There has been discussion of compressed cap rates in many markets, including Denver.
Can you comment on the cap rate on the park contract was just assets that you purchased and what your leasing strategy is 'cause it because I think it's a relatively new building.
Yeah. So we bought that on our math at a going in roughly four to four and a quarter cap. So we've historically given 25 basis points.
Ranges obviously.
That in our judgment will hopefully be a trough year number. So our first 12 months of cash flow will hopefully be.
The lowest and certainly they've been affected by covert so we underwrote really no rent growth in year, one and modest rent growth in year, two and three so trying to be conservative.
But for sure I mean looking in Nashville, we are seeing things trade in the mid threes.
So we haven't got anything to pencil there.
So yeah, I would say that cap rates are definitely have come in.
I would certainly suggest that everyone should be mindful that its on drop cash flows.
It's not clear to me and it isn't the case for us that we've.
Lowered our long term return expectations.
So I guess, if it if you're but looking to buy something and sell it in two or three years. It's a hard time to buy something right. Now if you have got a five to 10 year.
Timeline in your mind, and then I think you can make sense of it and in fact, you probably some of these markets look more appealing to you than they might have before and.
And it's also the case that with some of the regulatory risk you know in California, New York and elsewhere that.
That that those are markets that take a lot of investment dollars and as you.
No.
Emphasize is the marginal dollar leaves that marketing goes into a market like Nashville, or Denver, or many which together.
Together those markets and in a high year would have $10 billion of volume out of 180 billion of total volume when you when you push that marginal dollar out.
You know it it obviously helps compressed returns and rates or another.
Big factor there so I've read a bunch of those same things in fact, some of them. Maybe you wrote but a lot of the commentary I would agree with cap rates have definitely.
Come in.
Are you a buyer or a in Nashville, if pricing remains in the threes or are you willing to give it to another.
<unk> market.
Uh huh.
I mean, we're a buyer as long as it's accretive and and we are a long term believer on the asset and.
I guess, you could possibly count and some modest dilution if you feel really strong about the out year growth, but in general we don't have a lot of happy agreement in our boardroom when we come with those kinds of ideas. So.
We're focused on on per share cash flow growth and how we do that so I mean, one of the things that we really liked about having Nashville in our world as as I've talked about before that.
It opened our opportunity set up 50% because we were previously really mostly hunting in the twin cities in Denver and now its twin cities Denver Nashville, So it gives us some better perspective.
But if that market continue to long term just not be open to us.
I guess, we have to consider I don't believe that that will happen but.
We'll have to see.
Final question for me is I think you provided.
In October update as far as renewal.
2.1% and the collection rate, but I was wondering if you could also provide an update in occupancy as well as the new lease rate growth.
Yeah, our new leases in October and these are preliminary numbers because we're you know just a couple of days at the end of the month and things are still getting entered but our weighted average occupancy today is 90 to eight and our new lease rates in October looked like they were about Oh, I'm sorry, sorry.
94, nine, yes, sorry, I'm, sorry about that and our new lease rates were down 1.1%. So we still are seeing a little bit of a decrease that's only on about 200 leases for October so it's not a huge volume and as we talked about earlier expiration profile is much lower in the is a winter month.
94 make sure yes, 90, 494 nine sorry.
And that weighted average for October Board month, then.
That's for a weighted average same store.
Got it okay. Thank you.
Thanks, John.
Our next question comes from Amanda Sweeter with Baird.
Thanks. Good morning, just following up on the transaction market have you guys started to see any price discovery in the urban core as if your target markets and then has your thinking changed at all in terms of where you want to be with in those target markets. Apart from some of the comments you made earlier about avoiding pockets with higher supply.
Yeah. Good morning, Amanda Yes, I mean, I can give you a story of recent activity. There was an asset in downtown St. Paul that what's for sale that you know rough roughly it was you know nice.
Rehab of an old building it was a.
Yeah rumored to be for sale last summer, we really liked it I think the price talk last summer was call it 60 million Bucks.
It has come to market I don't know if it's been put under agreement, but I believe the price talk was around $45 million, which would have been something like 200 doors, so well below replacement cost.
The asset has some interesting unique physical aspects because its a converted office building.
So there are some there's a lot of commercial lot more commercial space, then you might like.
But the point is.
P.
People his perspective on downtown St. Paul has changed a lot from a great.
Market with some nice little.
Pockets of great activity going on and lots of things to do to you know now ecolabs out of the office and they are going to be and somewhat certainly other major major employers are as well and so what we're seeing in our own property is folks.
Folks who took an apartment maybe they work four or five days a week and lived at our apartment and then how to have a cabin in Wisconsin as their primary residents are just living there. So you know when some of those employers come back we expect there will be living with us again and until then they're not.
So when I look at the when we looked at that asset.
And we price it in that $45 million range its pricing at.
Mid six to high seven kind of Unlevered, IR with pretty reasonable assumptions, but you're really betting on downtown St. Paul, which just doesn't feel great right now because there's just not a lot of there's just not a lot of activity in the city.
So again.
We're having a hard time convincing ourselves to buy into the theme, we're already seeing and the things we own in the downtown area where people are.
Less excited about living there because there's just less people pay a premium to live downtown if all the things you pay a premium for aren't available via the premium doesn't make a lot of sense. So.
So I mean, that's one small for instance.
Where I can tell you, we we looked at it pretty cobot and post I think directionally.
That owner and most owners.
On a spot where they don't need to sell I mean that that owner doesn't need to sell if they do.
They've gone from hitting a home run to a double I mean, they did a really good job.
Turning that property and and.
But there are only going to sell it they have a good thing to put the money into because.
They could probably hold out.
And do better later.
Yes, let me help you thought I mean, no that's helpful and looked out and then can you just daft rank as you think about the balance sheet start Greg how are you thinking about sources of acquisition capital today between levering up selling additional assets or issuing equity via the ATM.
Yeah, we would stack rank.
Levering up the lowest and.
And be sort of dispassionate between sales or or ATM or capital raises.
Again focusing on.
Doing our best to maintain or extend our per share kind of earnings power.
So we're not uncomfortable where we are.
With leverage today.
I'd say, we're comfortable you know one of the key things.
Things were focused on is maintaining access to the.
Private placement market, which we.
Certainly have access to that today, if we want it so that.
That's a big governor in our mind.
Yeah, Amanda I would just add I think the park houses.
A good model for the type of acquisition that we'd like to do we raised close to $60 million on the ATM.
[music].
Shed some pretty inefficient assets for excellent pricing for about $40 million and then we are able to transact.
On a 145 million dollar asset in a great sub market.
That makes sense thanks for the time.
Thanks Amanda.
Our next question comes from Jim Sullivan with BTI gene.
[noise] yeah. Thanks.
Just a first question for and you talked a little bit about the value add program earlier and.
Given what's happening with cap rates in the markets tightening and tough to sometimes get across the finish line on properties you might like I'm just curious.
Here is what the scope is for expanding that.
You know say over the next.
Six to eight quarters.
I think you used the word that you were careful about the underwriting and you know you had pretty ambitious ROI targets you hit it on what you've done so far.
So what kind of the scope is there for you to increase that.
You know given maybe the lack of attractively priced acquisitions.
Yeah. That's that's a great question I think one we're thinking a lot about we are actively looking at an underwriting more value add projects within our portfolio. It's an important part of our budget process. We each year that we talk with our community and regional managers about where they see opportunities what they what they're hearing it.
Where how much more run they think that they could get you know, they're the ones who are interacting everyday with the prospects and and hearing well I didn't like your kitchen or you know I want to go to a nicer building with a better clubhouse or you know what those amenities are so you know we can do all the research on the market Times, then and all the underwriting that we also use the time during our budget.
Isn't really touch base on here, what our community leaders think could be beneficial for their communities and the value add process for us goes everything from renovating units to looking at amenities to you know how we can create efficiencies by it in investing in infrastructure or a technology see within the community.
Let's make a matter so I think you know our.
Our plan is to consistently do $10 million to $15 million of investment a year and we feel like we have a pipeline for rent to do that so you know it is going to expand overtime because that amount will compound you know these projects take two or three years. So if we if we outlaid $10 million to $15 million of investment in year, one and $10 million to $15 million in near.
Or two you know in your overtime were where were building on that because.
You know it takes two to three years in most instances just spend not spend that money. So I think we do have a pretty good opportunity and one thing that we're going to be really cognizant about especially given the trend right. Now is in our markets that might be smaller Ah, we often see little or no supply and so what is the opportunity in those markets.
To really push rents or move to the top of the market in rents.
So markets that we have not quite gotten to look out yet, but where we see really strong growth over time, including markets like billings or rapid city, our North Dakota portfolio has been really well situated where after some of the dispositions. We've done there. So there could be some opportunities there to refresh and stay at the top of the market.
In those areas, where we see very little supply.
Yeah.
I'm, just going to circle back and add to something I said earlier, because I mentioned mid threes in Nashville, and I've already gotten several and that's about it. So I should qualify that is for the nicest newest stuff in Nashville that that's not a market wide cap rate. That's it you.
One new product, it's just come off lease up and things like that so.
Sorry, Jim just to tack on that general thought.
No no problem no appreciate that I guess, the other part of the value a question, though given the compression in cap rates and what we'll call secondary markets is that achieving.
Achieving that yield on cap spend.
Combined with the the cap rate compression.
Holy expenses, presumably the value creation opportunity that you're perceiving in doing this.
That's that's right and yes.
I think we are and we're thinking about that closely you know one of the questions that we ask for every value add project as you know with respect to the rest of return profile is where are the cap rates, where do we believe our NPV is you know what what would if we just sold that opportunity to a value add.
Buyer, who will underwrite divert the returns on the value add and kinda pay you for that you know we always do that analysis tools to think about you know what is the value we're going to create versus the value we could get for viasat to allow someone else to take on the rest of the value add yeah, and the the real challenge I think.
As you can spend a navy and you can spend earnings per share are people can measure. It. So I think one of the natural questions that I feel like you're dancing around is why aren't you selling more stuff [laughter].
And the answer is you know, we certainly consider it we will consider it the the Grand Forks sale really was operates.
Opportunistic and not something that we had planned when we got to the game of the year, we were really surprised to see.
The level of interest in those assets when we launched in.
In June in kind of the new world. So it's definitely on our mind.
Constantly and something we talk about any investment committee along with these value add deals you know all the time.
Thanks for that and then a question for John on costs, you made a number of cautionary comments about areas, where there where you're concerned about potential cost increases.
Most of those items that you mentioned, John I think I'm, right or really fall into the category of non controllable.
Particularly were talking about real estate taxes and insurance. So I just wonder if you can give us some.
You know some kind of a ballpark.
Ballpark guesstimate in terms of the increases that you might be.
Facing and 21 in percentage terms versus what you had to face already this year.
Sure.
Good morning, Jim I would say they fall into two buckets.
The first bucket or really items that there were savings in this year.
Because of Cove in.
Closing common area facility.
Our self insured health care costs people, not being able to get into their physician. So those are going to be returning to normal levels in the future. So that would be the first bucket and then as you mentioned the non controllable.
Okay.
We have had some initial discussions on insurance premiums and are getting feedback that we should expect things in the 10% to 20% range for increases.
And.
We are out with brokers now getting bids and locking that down and we will definitely have that locked down by the time, we come on this call next quarter.
But indicative pricing despite pretty big increases last year. If you recall, we had a premium increase and of.
25% to 30% last year, so it's less coverage I mean, the quality of its more its more or less.
That's right with higher aggregates and more restrictive deductibles so.
So it's a little surprising to us that initial pricing them and once again I don't have final pricing to share, but that's what we're hearing from our brokers.
On real estate taxes, we have not seen any increase increases yet and that may be you know longer term.
But it so happens most our markets will send out their valuations.
Really in the next four to six weeks.
So once again, we'll have a much better feel of.
What those increases are when we come on the call next quarter.
But it's something we're concerned about but we have no visibility yet as to what those increases are.
Yes, I mean, I think on the bright side there Jim.
A lot of our portfolio has been I'll say marked to the state of the art because.
Almost half of our portfolio has been purchased in the last few years. So if you have owned an asset for a long time.
You know you're going to get market.
Increases if you just transacted on it it's really hard to argue that it's not worth what you just paid for it so.
We feel like we have relatively up to date taxes, which is not a positive because it means we're sort of getting taxed at the full level on the other hand, it should lessen our exposure to sort of surprises like we had last year in Rochester, where that is the case, where we had those on those assets for a while and then on the insurance front I mean, you know I guess the good news for us.
Is that everyone is affected by that.
Habitational insurance is just an area, where the underwriters did a poor job making money.
In most of the mid teens and they've really been trying to claw that back while also licking their wounds from a bunch of other really large losses kind of across the globe. So.
If you have a piece of real estate, where someone is sleeping and living for.
An entire a 24 hour period, as we do and hotels do and senior housing and so forth. Your insurance is going up because there's just been a.
Poor experience there from the insurance community.
Sure well I appreciate that detail and then just a final question for me you talked about the acquisition opportunities I'm just curious.
Even though you may have.
Hesitate to commit capital to some of the urban markets, but.
I, just wonder whether you're seeing any signs of.
Stress with developers who are struggling to achieve their lease up objectives.
You know in this market and potentially.
You know those assets might be coming on the market or are available at what might be pretty attractive pricing.
If I looked at from a long term perspective.
Yes, I do think.
That is I think the areas of most opportunity are.
In the downtown.
Markets and.
Deals that are in lease up for certain are an area, where I mean, we've seen several large national merchants who have.
A large equity partners in multiple deals in multiple markets lower their exposure and you know if that asset was par at par with February onest.
You might be able to buy that asset in the 93 to 97 territory today.
And your.
Sure you know, you're obviously, taking more risk on the lease up.
Another area, where we've seen a similar theme is something that did get leased up but its last seven months of lease up in the last seven months. So they filled the asset, but they probably did it or certainly did it at rents that were lower than they expected. So the cash flow stream that's in place that you're buying maybe.
There may be some better opportunity for that to grow relatively quickly.
Once we get to.
From a ground in terms of the recovery.
And I mean less than we would we would absolutely.
Pursue either of those types of scenarios and we're underwriting those things every day, we do believe in urban centers long term.
It's just a question of how much risk or are you getting paid for the risk its not clear.
Clear that you are at this point I think it's much query on the asset in the area or the example, you just described the new asset.
Yes in a market you understand that feels a little bit better.
Okay, great. Thanks, guys.
Thanks, Jim.
Again, if you have a question please press star and number one.
Our next question comes from Buck Horne with Raymond James.
Hey, Thanks. Good morning, you address maybe my question, especially insurance costs I did have a one point I was maybe a little slow in picking up the clarification here, but just on the casualty loss in the quarter just.
Help me understand so the 90 91000 or so that flow through the income statement, but theres an add back.
In the core FFO for 545000, just what was what was the what was the difference between those two figures again.
Sure.
So the 90000 is really comprised of a we had a little over $600000. Maybe 700, almost 700000 dollar loss this year our this quarter.
We also had a reversal of a change in the estimate from a prior quarter loss. So that's what's shrinks that number in the current quarter and why that Matt is $90000.
As far as the add back to core FFO.
That the loss the incident, we had this quarter that we had a loss.
Some of that was a portion of that loss was the write off of an.
An existing assets. So we have to do a complete roof replacement so.
We write that asset off and that's a that's a non cash transaction and we add that back to our core AFFO.
Okay, and then as we spend that yes, and then as we spend the replacement cost you'll see that go through our capital expenditures, but you need to know that somewhere Mike dance and Jeff Carter, our smiling because we had a lot of discussions on that [laughter] [laughter] [laughter] [laughter]. Just just just wanted to clarify make sure I understood all the movies.
I appreciate that.
And the other cost piece of the equation for me was just the SGN a run rate you guys have made a lot of progress controlling those expenses, obviously some of that related to.
Post pandemic World, we're in I'm just curious.
Of the costs, you kind of outlined that were potentially going to come back to you next year. You know is that going to affect the EPS run rate, where you're at now or how sustainable is this current SGN a run rate.
Yeah Buck so as I mentioned in my comments some of those are due to open positions.
We do intend to fill those open positions as.
Artico bid and part of some cost constraints.
And just a difficulty interviewing and evaluating the position.
You know, we've we've held those opened but a lot of our team members have been pulling double wait and so the plan would be.
That we would retire those also.
You know to elect less extent in 2021, you know travel conference all both fiber costs will return, but you know we don't think we'll go back to pre cobot levels in 2021 of those areas. So we're still going to get from say means there are I mean.
Gene Ace been a focus of ours from day one so.
You know while the pandemic in some decisions we've made have contributed reducing those costs.
You know.
As.
We don't see those.
Turning to a pre co bid levels.
In 2021, once you apply inflation factors.
If that makes sense at all like if you took our 29 2019 costs applied inflation factors to 2021, you know, we do anticipate keeping some of those savings.
All right sounds good. Thanks, that's all from me.
Super Thanks Buck.
This.
Just a question and answer session I would like to turn the call back over to Mark Decker for any closing remarks. Thanks.
Hey, Thanks, dial and thanks, everyone for your time and interest in Iris T., we wish.
Everybody is safe and healthy holiday and if you haven't already get out and vote. Thanks. So much.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.