Q3 2021 Centerspace Earnings Call
Good morning, and welcome to the center space third quarter 2021 earnings Conference call.
All participants will be in listen only mode should you need assistance. Please signal a conference specialist by pressing the Starkey followed by zero.
After today's presentation there'll be an opportunity to ask questions to ask a question you May Press Star then one on your telephone keypad.
To withdraw your question. Please press Star then two.
Please note this event is being recorded.
I would now like to turn the conference over to Mark Decker Chief Executive Officer. Please go ahead.
Good morning, everyone Center spaces Form 10-Q for the quarter ending September 30th 2021 was filed with the SEC yesterday. After the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website.
At the center space homes Dot Com and filed on form 8-K.
It is 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 and we cannot guarantee that any forward looking statement will materialize and you are cautioned not to place undue reliance on these forward looking statements.
Please refer to our earnings release for reconciliations of any non-GAAP information.
Which may be discussed on today's call.
I'm joined this morning by Anne Olson, our Chief operating Officer, and John Kirschman, Our Chief Financial Officer.
I'd like to start by welcoming my team members out there on the line many of whom are shareholders and thanking them for the fantastic efforts as we endeavor to create better every day.
It's an incredible time to be in the housing business in the center space team is giving outstanding effort and getting results.
2021 is a big year for the company.
So far this year, we've implemented and integrated a new operating system that will enable our team to deliver a consistent resident experience welcomed over 100 team members and integrated 17, new communities growing our portfolio by 20%.
And refinanced over one third of our debt outstanding lowering rates, adding considerable duration and providing greater greater financial flexibility and certainty.
All of this in addition to our day jobs.
As shareholders. We're so fortunate to have this center space team and these key foundational steps position us for further growth and efficiency.
Meanwhile, our business remains resilient, we posted an outstanding quarter and our outlook for the year has improved.
The results were driven by broad based strength across all of our markets with notable improvement in the twin cities and Denver.
We've discussed in past calls our expectation that these markets would serve as a bit of a second gear and that is coming to fruition.
So it was just 60 days left in the year, we began to turn towards 2022 where we will focus on taking our recent platform investments and using them to deepen the value proposition for our residents.
Well also continue to invest in communities to grow the quality of our portfolio and our long term earnings power.
It is true that we've never witnessed a more competitive investment climate and at the same time, we've never had a higher quality earnings stream or better cost of capital. So we are able to be competitive for assets that we like and we are actively underwriting and offering on communities in our focus markets.
We're also always opportunistic should we come across the portfolio that makes sense.
We do see challenges in the years ahead for the industry and ourselves with respect to labor property taxes insurance and a more difficult regulatory environment.
The one we can have the most influence over as labor and we're working to address this critical issue by maintaining an environment, where people want to be and providing compensation benefits and tools that allow our team to thrive here.
Balancing these headwinds out are very strong fundamentals and we believe those will prevail in the months and years ahead.
One specific area of pressure as rent control. This is an important day here in Minnesota for the housing industry as both Minneapolis and St. Paul our largest cities have rent control initiatives on their ballots.
In St. Paul the ballot includes rent control measures that are far more restrictive than we've seen anywhere in the U S and in Minneapolis.
Happily the voters to determine whether or not to give the city council the authority to regulate residential rents.
We are monitoring these initiatives closely.
The passage of the St. Paul Initiative would impact one community that contains 191 homes, representing approximately one 4% of our NOI.
In Minneapolis potential rent control measures could affect four of our communities with 385 homes and three 1% of our NOI. So in total five communities 576 homes and approximately four 5% of expected NOI.
Well know more tomorrow.
We've supported efforts opposing as initiatives in both cities, because we know that the way to improve the quality and affordability of housing is to make it easier to add supply.
Adding restrictive regulations inhibits investment.
And with that and would you please provide us with an operating update.
Thank you Mark and good morning, our third quarter results demonstrate that the improvements of our operating platform are providing us with leverage to capitalize on the strong fundamentals of 2020. One our same store portfolio is performing well with stable occupancy and six 2% revenue growth in the third quarter compared to the same period last year driving a year over year.
Our increase in NOI of 7.5% our revenue growth. As this is the result of very strong leasing activity with 10, 8% average effective lease over lease increases in average effective renewal increases of seven 2% across our same store portfolio. This resulted in blended effective rent increases of 9% in the third quarter.
Comprising 41% of our total lease exposure well all of our markets experienced same store sequential revenue growth in the third quarter, our largest market Minneapolis experienced seven 8% revenue growth and 15%, 15.7% NOI growth.
This is a positive trend given the slower recovery, we had been seeing in Minneapolis and Denver.
Across our Minnesota markets, we are encouraged by the progress within our portfolio as the eviction moratorium has expired and rental assistance programs have gained momentum our collections. This quarter were 98, 7% a 70 basis point improvement over the second quarter with strong Occupancies. We grew our same store average monthly rental rate per unit.
Eight to 1200 and $79, a $46 or three 7% per unit increase over the second quarter of this year.
As we head into the fourth quarter initial results are positive in October we saw significantly increased traffic over 2020 and our same store portfolio achieved 7% average lease over lease effective rent increases and 7.4% average effective renewal increases our current same store occupancy was 94% and with just 12 per.
None of our leases expiring in the fourth quarter, we expect to be able to capture rent increases while boosting occupancy throughout the quarter.
These results take the right systems and the right people.
Our teams have worked tremendously hard this year and on top of that we on boarded 17, new Minnesota communities and over 100, New team members in September were 60 days in and while we expect some volatility in our non same store results as we move our new communities onto our systems, we remain optimistic about the opportunities for growth that the new portfolio brings.
We're going to execute on these opportunities by keeping our mission to provide great homes and our focus on customer experience at the forefront our rise by five margin improvement program demonstrates this commitment our 'twenty 'twenty. One focus has been on our transition to a single stack technology platform and value add improvements.
We're now live across our portfolio on our new systems and working our adoption plan to ensure we take full advantage of all that it has to offer.
The nonrecurring expense related to this implementation in the third quarter was 625000, and we are expecting 466000 of additional nonrecurring expense by year end. These.
These costs are higher than we originally anticipated due to the expansion of the implementation across our 17, new communities and we are carefully assessing the project results and spend to make the most of each dollar invested.
On the value add front, we delivered 338 renovated units in the third quarter spending approximately $4 $8 million and averaging $206 per unit in premium achieving an approximate your one rois of 16% with respect to both the value add renovations and our expense planning for the remainder of 2021 and then.
Into 2022 we're monitoring supply chain disruption and the rising cost of labor and materials. The effects of inflation are being felt across all areas of our business and will be a headwind in our quest for improved margin.
I'm, so grateful to our teams across the company each individual's contributing to better every day and we truly are better together our efforts show positively for our residents for each other and in our financial results, which I will now ask John to discuss.
Thank you I am.
As Mark and I and I have discussed 2021 has been a year of change as we emerge from the pandemic for some context I would like to start with where we left off 2020, if we made decisions to minimize costs and conserve cash.
Those decisions included not filling open corporate support positions and <unk>.
Changing the form of our incentive compensation, resulting in a 7% decrease in G&A and property management expenses in 2020 versus 2019.
In 2021, we have pressed forward with our technology initiatives.
Which include filling open positions from 2020 to ensure its success.
During the third quarter, we undertook several financings that improved our balance sheet reduced our cost of capital and increased our weighted average maturity. These.
These initiatives included improving and extending our existing line of credit.
Issuing $125 million of unsecured senior notes with a weighted average interest rate of 263% and a weighted average maturity of 10.5 years, while also expanding our bond investor group from one to four investors.
And entering into a $198 9 million dollar secured Fannie Mae credit facility to refinance the debt associated with this quarter's portfolio acquisition.
And which resulted in a weighted average interest rate of $2, 78% and a weighted average maturity of nine years.
During the quarter. We also authorized the 2021 ATM program, which allows us to offer and sell up to $250 million of common shares during the quarter. We issued 199000 shares at an average net price of $98 and 57.
<unk>.
During the nine months ended September 30, we have issued one 1 million common shares at an average net price of $78.63.
For total consideration of $86 million.
As of September 32021, there is $230 million remaining under the ATM.
With that lets look at our results.
Last night, we reported core <unk> for the quarter ended.
September 32021 of 98 per share an increase of four since our four 3% from the third quarter of 2020.
Year to date core <unk> is $2 91 per share representing an increase of 15 cents or five 4% from the prior year.
These increases are primarily due to higher NOI offset by higher fully diluted share count.
Looking at our general and administrative expenses for the nine months ended September 32021, G&A increased by $2 $3 million to $12 million compared to $9 $7 million in the same period of the prior year.
This is primarily attributable to $1 $3 million in incentive based compensation costs and $600000 of nonrecurring technology initiatives.
Property management expense increased $1 $8 billion to $6 $1 million for the nine months ended September 32021, compared to the same period of the prior year.
The increase is primarily due to $900000 in nonrecurring technology initiatives as well as $600000 in compensation cost from the filling of open positions.
Turning to capital expenditures, which is presented on page 15 of our supplemental same store Capex was $5 $7 million for the nine months ended September 32021, which is a decrease of one $4 million from the same period of the prior year.
This decrease is primarily due to the timing of the completion of work in full year same store capex spend is expected to be $885 to $915 per unit.
Which is six 5% lower than our midpoint guidance of $962 per unit at the beginning of the year.
With that reduction due to the disposition of older Rochester outfits during the second quarter.
As presented on page S 16 of our supplemental we have revised our financial outlook for the remainder of 2021, resulting in increasing our full year core <unk> guidance to range of $3 92.
Two $4.02 per share or a 3% increase over the midpoint of our prior guidance.
The guidance increase is driven by continued strength in our core operations, resulting in an increase in the full year outlook of same store NOI growth to a range of three to three 5% from a midpoint of 1.25% in our prior guidance.
The year has been a year of tremendous achievement by our team as we have executed on several initiatives.
We continue to advance our technology platform successfully onboard our new team members and their communities and fortify our balance sheet, while delivering outstanding results.
We'll take this opportunity to thank all of our team members for demonstrating what is possible when we perform as one team.
We will now begin the question and answer session to ask a question you May Press Star then one on your telephone keypad, if youre using a speakerphone. Please pick up your handset before pressing the keys to withdraw your question. Please press Star then two at this time, we will pause momentarily.
To assemble our roster.
Our first question today comes from John Kim with BMO capital markets. Please go ahead.
Yeah.
Thank you I was wondering if I could ask about your new lease growth rate, which looked like it was decelerating during the third quarter and then it sounds like so far in October it's at about 7%, which is below the third quarter as well.
Are there any markets thats kind of.
Driving this deceleration I realize it's still a high growth rate, but many of your peers are seeing accelerating growth in the market.
Yeah, Hi, John Good morning. This is Anne I think you know we saw really good growth even in October in Denver for example, that's at 14, 4%.
But you know I think we have a little more seasonality in our lease expirations in that we really do slow down we have very little exposure in in these months.
And we have seen some deceleration in those kind of colder weather markets like across North Dakota, and Northern Minnesota, where we really captured high rent growth during the second and third quarter.
<unk> you.
The October numbers are still it's still a little bit early.
So we pulled those through I think the 21st of the month I'm. There may have been some we may see some movement in those from the end of the month data as well.
But we feel really good really good about particularly in Denver, and Minneapolis, which had been accelerating them and are a little bit larger portions of the portfolio on an NOI basis.
And then can you remind us.
When concession use Pete was at the third quarter of last year and.
Rough percentages, how much concessions views in the third and fourth quarter.
John first quarter this year.
I mean, we haven't ever used a ton of concessions, but the peak would probably have been.
Yeah, I'd, probably say, it's second second quarter of this year. When we were really starting when we were starting to see the ramp up was probably probably our high point, but as Mark noted.
We are effect, we you know we report out in effective rents and we do try to keep the concessions out of the revenue management system. So you know pretty sparse.
Yeah, John our concessions in Q3 ran about one 3%, but that includes employee confessions.
We give employees a 20% discount so that's including everything.
So it's a pretty low number.
Okay, and then just one more question if I can your leverage increased this quarter to nine nine times is any of this timing related with the Kansas acquisition mismatch of EBITDA with with what's that.
Yeah, I mean, John you got to remember we have all of the Kms data and one month of the EBITDA. So that's a trailing number on it today is that so on a forward basis it would be.
Excuse me lower go ahead, John Yeah on afford.
Basis its in the high seven so its actually by our measurement using forward NOI, it's actually come down from the prior quarter.
How high sevens, including preferred.
Now excluding the preferred.
Uh huh.
Let's say the preferred for debate club yeah.
It would be.
It would be mid eight at essentially a term seven yeah.
Including the preferred.
Got it.
Okay. Thank you.
Thanks, John.
The next question is from Gaurav Mehta with National Securities. Please go ahead.
Yeah good morning.
You talked about improvement in Denver and Minneapolis.
Part of the portfolio, that's improving there.
Yes, the improvement in the twin cities I would say, it's pretty broad based that the urban assets in particular I would say have not had a big snapback I would just say they've stabilized is that fair and yeah, and I think across the rest of the portfolio. We've seen you know as I noted a little bit of a deceleration but in the end.
Most of the markets the growth has been pretty pretty steady so we're still seeing strong growth.
In the other other mountain west and across the Omaha that is that's remained pretty steady. So we're seeing a little bit of deceleration I would say an across north Dakota.
Saint Cloud market and then you know good acceleration in Denver and Minneapolis.
Just to say that lower growth rate is off of a stronger base. So we didn't see.
A big Downdraft last year.
Okay, and then are you seeing cloud portfolio I saw that occupancy dropped back to 90 basis points for that part of the portfolio in <unk> can you provide some color on the drop in occupancy in that market.
Okay.
Yeah sure great questions. So.
We're really our goal is to optimize the revenue and so when the lease rates are growing the way. They have been you know we will give up a little bit of occupancy. We also have our highest amount of exposure at lease expirations during the third quarter, 41% of our portfolio rolls over during that quarter. So you know, we naturally have a little bit of a dip in occupancy at.
That time and really what we're trying to do is optimize the revenue so to the extent we can continue to push push rents up we will wait for the resident who will take that higher rents and leave it open a little bit longer.
Okay. Thank you that's all I had.
Thanks Kara.
Next question is from Rob Stevenson with Janney. Please go ahead.
Hi, Good morning, guys just a follow up on the last question about the occupancy I mean, how did you guys sort of debate.
Given your comments about the leasing sort of materially slowing down in terms of number of leases.
As you hit here in the fourth quarter of driving occupancy higher and does that at least the 90 fives rather than keeping it down to the 90 fours.
For the winter.
Versus continuing to push rental rate and did any of the rental controls.
Measures have you pushing rental rates more aggressively in anticipation of any of that getting put in in sort of the mark on that.
Yeah, so with respect to kind of the debate that we have about optimizing revenue I mean, we really do kind of let the revenue management system work and having lower explorations, we haven't seen a drop of a significant drop off in traffic. So for example October traffic in 2020 one was <unk>.
Almost three times October traffic in 2020, and so you know so we feel confident that leaving some of that occupancy that we still have the traffic to fill those and we don't have as many people expiring so.
So we do really expect to see that occupancy grow in this quarter with strong rates with respect.
With respect to the rent control measures.
Such a small part of our portfolio as Mark noted in the prepared comments only one of our assets would be subject to rent control. If it if in fact it passes today in St. Paul and Minneapolis, Minneapolis is just authority for the city Council to take it up there is actually no measure on the ballot.
St. Paul would have would actually you know have a measure that would.
You know that rate increases at 3%.
But that only affects one of our assets. So you know to date, we have just been running it the way, we always have which is optimize the revenue and that asset has good strong occupancy and is pretty well positioned and so we didn't really change course based on the limited exposure we have to it.
And then it's been a couple of months now since you've closed the.
Minnesota portfolio acquisition any additional upside you're finding here and are you guys thinking about taking advantage of the strong market for assets to sell maybe some of your prior previously.
Previously owned.
Assets in Minnesota to reduce that market exposure. How are you feeling about that market exposures you have heading into 2022.
Yeah. Good morning, Rob I would say we feel.
Very sanguine about our exposure to the.
Twin cities market, we we view that as a lower risk proposition because we know the market very well.
And in terms of selling I mean, listen, we always consider selling everything and anything but.
You know the case for those assets.
We believe what we expected it to be which is they are that there is some operating opportunity within those and.
And while you can probably get credit for a lot of that you wouldn't get credit for all of it and we really didn't buy them to flip them, we bought them to run them better in cash flow. So we'll always make.
Yeah.
Portfolio related decisions in terms of the overall strength and it is our plan and goal over time to <unk>.
The percentage of our NOI.
NOI that comes from the twin cities, but we're.
We're happy with it for now and we'll grow out of it more likely by adding things than selling things.
And any additional upside you're finding out of the acquisition at this point.
I mean, additional Oh look we underwrote a fair amount of upside so I guess, which we havent shared all that with you. So I guess I'll say it.
It is what we think it is and there's a lot of the upside embedded in that as it relates to.
You know opportunity really probably much more so on the revenue side and.
And then there could be overtime, some kind of densification opportunities, which is something we didn't underwrite.
But believe may be there so that would be you know 120 units. It sits on eight acres, that's 49 years old and we might do something different with that over time, but that's all in the future.
Okay, and then last one for me Andrew John When you take a look at the expense same store expense guidance for the year and the sort of high fours at the midpoint how much of that is sticky in terms of upward pressure on wages property taxes et cetera versus temporary or nonrecurring stuff like.
Incremental technology investments and other things that could pull that back down into a more normalized 3% or are we just in an environment right now where in order to drive higher revenues youre going to have to have higher expenses for the foreseeable future.
I'll start with the real estate taxes, and then let Ann.
So oh I don't know real estate taxes will go down I don't expect that I don't remember that happening. So that's definitely sticky I think you know as you know the asset inflation is pretty significant and there's a lot of comp data out there. So so I expect.
There to continue to be pressure.
Pressure on taxes.
We've had a couple of bad years.
And insurance cost increases.
I think that will you know what.
We're hearing now is that will mitigate somewhat but once again, it's not going backwards. So those large increases we've had the last two years will stick.
And our forward run rate and then and as far as the operating yeah, I think I do I do think that what you're seeing on the inflation side. It is really difficult on wage inflation I think we are going to see that a little bit. So I think the answer to your question is yes. Some of it is nonrecurring we do have some technology costs and things built in there that arent.
Recurring but we also are committed to keeping our assets running well and you know it takes both the systems and the people and well a lot of our technology initiatives are aimed at.
Increasing efficiency is that doesn't necessarily automatically translate into into less people and in the meantime wage inflation, Israel and the cost of retention is insignificant. So you know I think we are going to feel some pressure there and and hopefully you know the good news is that we're seeing are really good.
Increases on the rates that that more than makes up for it.
Thanks, guys I appreciate it thanks.
Thanks, Rob.
Next question is from Amanda Sweitzer with Baird. Please go ahead.
Thanks, Good morning.
Your growth in revenue per occupied home exceeded rental rate growth during the quarter, particularly in Minneapolis was that related to rental assistance payments are there any other other revenue initiatives driving that that you think will persist.
Yeah, I think you've got it right and yeah. Yeah. It really is the the rental assistance payments really started to come in during the third quarter. There was a lot of momentum, particularly in Minnesota, where we had seen very little of that actually getting out to our to the residents through from the government program. So.
I think that is a big driver there.
That makes sense and then following up on an earlier question. How are you thinking about your leverage target and following the close of the Cam that transaction I think in the past you've talked about prioritizing and improving your market exposure and driving earnings growth is that still how you're thinking about it today.
Yeah, I mean, as John outlined just a moment ago I mean, we really don't look at this as a leveraging up transaction its leverage neutral so.
While we did put more leverage on those assets and take cash proceeds at the table.
We applied that cash to our line and some of these other.
Unsecured bank loans. So you know on a net basis, we did not that as that portfolio was.
Roughly on par with us with our portfolio in terms of leverage and post all of the different moving pieces. It's in the same spot and cash flow should grow. So we would actually look at that as a leveraging down transaction or are you know, we're going to have less leverage everything else equal.
<unk>.
12 months from now if nothing else happens.
Our leverage will be lower on a multiple basis and it's the same on a percentage of asset basis.
Okay.
And then it.
Yeah. It does makes sense and then as you think about funding some of that additional acquisition activity. You spoke about is it fair to assume that you try to fund that on a leverage neutral basis going forward as well.
Yeah, I mean, I think everything everything equal in a perfect world, we'd over <unk> and drive leverage down.
You know the sort of counter balance is we have in our judgment a pretty strong.
Stream of earnings and where.
We'd like to keep it I mean, I think when we consider our investor base, we definitely have an AAV and leverage focused investors and we have earnings growth investors.
And we have to be mindful of both of those.
Sets of.
The expectations I'd also say, we feel really good about the the duration that we added and the rates so.
We we lengthened our average duration by about three years and lowered the rate. So we're almost at eight years I mean, camden's average duration similar that's an a rated company obviously they have less turns but we feel very good about the composition of our debt. It's not all quantity two times expiring tomorrow and you can't refunded.
Is worse than 14 times it isn't due for several years. So that we think a lot about it and we think about it in a balanced fashion.
That all makes sense I appreciate the time.
Thanks.
The next question is from Barry, Oxford with Colliers. Please go ahead.
Great. Thanks, guys looking at your renovations and getting 16% ROI should we think about that as a good number going into 'twenty, two or look labor cost and materials are going to weigh on that number.
Yeah, I think that is a good number looking into 'twenty two I mean, one of the things that we really try to be disciplined about it as if we're not getting you know more than 15%. We really you know slow that down and monitor them, whether or not we want to continue so and historically, we've run between 16 and 18% So I.
I think 16% is a good number.
Okay, great great and when you look at rental increases that you guys have been able to get over this year.
As you move into 'twenty two can you continue to get those type of rental increases.
Given the markets that you're in and can your tenants kind of continue to absorb those types of increases or look maybe 'twenty two we'll have to kind of slow it down.
I mean that that's a great question you know, we haven't seen a significant amount of supply and while there is in a lot of those secondary markets and while there is some planned you know even planning supply right now or announcing supply those won't be opening for 18 to 24 months.
We also that's on the multifamily side. We also haven't seen a lot of supply on the single family side are really coming quick quick enough to drive.
To drive these rates down and you know we have a pretty significant loss to lease in the portfolio. Now. So we would expect the renewal rates you know really stay pretty high into 2020 two.
And that the new lease rates.
Maybe there's some moderation in growth, but ER, but we're optimistic given the growth we've had this year and where where we've reset and that loss to lease that's embedded in the portfolio.
Right no great perfect that makes sense and then last question on acquisitions, where have the kind of cap rates gone you know lets just say since kind of the beginning of the year or we we down 25.
Seen compression of 25 or 50 basis points and then you know maybe talk about national I know that's been a target market.
Market.
As Nashville, even gotten further away from you because of the cap rate compression or do you think it's coming back to you.
Good question, Barry I think.
The cap rate compression I'd estimated to be 50 to 75 basis points, it's definitely more than 25%. So just I.
I mean, just to consider Union point, which we closed on in January or Parkhouse, which we closed on less.
The fall those were both kind of plus or minus on our you know.
For forward 12, plus or minus four caps as I think we did.
Disclose when we did those and I think that those would be.
Uh huh.
Three and a quarter today.
I don't know.
<unk> Yeah, I mean, it's all it's all who is Matthew are using a lot of a lot of times. The brokerage Committee I'll say Oh, that's a four cap and then when you do the math it looks more like a three six but.
Like how exactly you're calculating it and what growth assumptions and capitals and taxes.
Lots of room for us.
Uh huh.
Discrepancies, but but I would say in general 50 to 75 basis points.
Fields.
It feels right.
Alright.
And in many instances that doesn't mean I mean, the year one cap rate is one thing we sort of thinking about it on a.
10 year, Unlevered IRR basis, which is also fraught with assumptions I think there you know the back end.
Those returns are probably come down 25 to 50, so the front end cap rates gone down people's growth rate assumption.
The assumption in the early years has probably gone up and it it.
The IRR isn't down 50 to 75 basis points and in my opinion.
But b REIT and you're solving for a levered five to get your promote.
Your cost of capital is pretty low.
Correct right right right and then how are you feeling about Nashville.
I Love Nashville, I think it's a fantastic market.
How are you feeling about pricing in Nashville.
Yeah, no listen I think right.
Right right, that's becoming our white whale.
Nashville is still a great market, we still are actively underwriting there I mean, we really are.
The bridesmaid quite a bit and we have the whole discipline on.
On our per share metrics and and so we do that but we are frequently very competitive and we're not.
Not missing by much but where you know we just.
You have to draw the line somewhere and we're we're drawing the line is somewhere between.
0.2 in 1% below where things are clearing right now.
Okay. Okay.
If assets are trading for 105, and we're running out of ink at 94.
If we're excited about it where we can be in the hunt.
Okay, Great no that's helpful color.
That's all for me Thanks, guys. Thanks, Barry Yep.
Yep.
The next question is from Daniel Santos with Piper Sandler. Please go ahead.
Hey, good morning. Thank you. Thank you for taking my questions I'll, just sort of follow up on that on Barry's question and say are there any markets that have sort of performed stronger than expected and that may be kind of moved up your interest list. It seems like you know the outperformance in the sunbelt in the Midwest was pretty broad.
Yeah, you mean, you mean like markets, we arent in.
Yes.
Yeah, I mean, I would say for the most part if its not one of our focused markets. We're really looking at it on an opportunistic basis. So it's probably some portfolio theres something to it you know we're not.
We're not just saying Oh, well that one off asset in Salt Lake City looks great, let's just do it.
We just don't.
Maybe we're not that opportunistic and how it has to be more than just an asset for us to kind of turn our head, but I would say broadly we agree with your point that.
Yeah.
The market strength has been.
Broad based.
And your market, but it hasn't grown.
It has not I mean, I would say were.
We're considering I mean in our last board meeting, we had a long discussion with the team and.
The trustee is about maybe we should broaden that scope a little bit we do a lot of work to kind of land on these market. So.
To say like Hey, we're going to go first.
First we'd go reevaluate the work we did where we did have a list of call. It 10 markets, but I mean.
It's a fair amount of work and I would say the standard is pretty high for our board to say, yes sure.
Named three more markets I will say their view is and we've heard this from investors is maybe we should have a few more play.
Places to hunt.
Yes.
Got it and then I guess now that you're sort of urban assets to stabilize is there some thoughts and maybe you know sort of cycling out of them and making the portfolio truly sort of suburban focus.
Uh huh.
No I mean, you know today, our portfolio is something like 15% urban.
Taking out that's not a same store number that's a total number.
And you know.
I would say long term we believe.
In cities.
Okay.
So I mean, we might actually find things we like in the city because the cash flows are depressed and theres less interest so.
On a.
Live basis, So I would say no we're not.
Uh huh.
Seeking to kind of alter the mix that we have there at.
At this time.
Got it that's it for me thank you.
Thanks.
The next question is from Amy <unk> with BTG. Please go ahead.
Hi, Good morning, everyone. I was just hoping to come back a little bit to the October traffic you sided that October 'twenty. One that's about three times 2020, but I'm wondering how that compares to 2019 or your typical seasonality.
Yeah.
Yeah, I think traffic this year has been a little better that's consistent in October we looked at traffic year over year, it's definitely better. If we look 1921 over 19 I'd say, it's also better yeah. I think we are seeing some strength, particularly in the secondary markets and.
Some of the technology transition has made it difficult for us to kind of track asset to asset over 2019, but 2020 one has had stronger traffic.
Okay, and how has traffic specifically trying to live in Minneapolis.
We've discussed in the past about how this market, particularly in the urban area. It was just taking longer to come back to this in various factors, but what.
What are you seeing on the ground right now are people coming back to the urban centers or is the strength really just continuing in suburban and urban is humbling.
Humbling alone.
Yes.
We are seeing more strength in the urban areas, I'd say, particularly kind of post labor day.
So as office occupancy will come downtown Minneapolis everyday there is there's more traffic on the road and and more people downtown a few more restaurants are starting to open back up we are seeing you know the live music venues are open our professionals.
Teams are back playing them you know in person.
There's a lot more going on so we have seen that translate into our traffic numbers and it's showing up in our rental rates.
Yeah.
And then in a specific three kind of Submarkets, where we are downtown.
They are really they're not they're driven less by being able to walk to your office and being able to walk to things like bars and entertainment and those things are coming back. So that's a positive.
Great. Thank you all my other questions have been answered.
Thanks Amy.
Again, if you have a question. Please press Star then one.
The next question is from Buck Horne with Raymond James and Associates. Please go ahead.
Hey, Thanks, good morning.
Wanted to go back to just the tech initiatives and some of the costs that are kind of going on there. It seems like we've kind of gone on over over budget or a couple of times with the costs.
And just wondering.
What you know based on what you're expecting for the fourth quarter and.
What additional cost might be incurred going into 2022, how quickly could those drop off next year.
Yeah.
You can see the look on John Kurtzman space right now you would laugh out COVID-19.
Because he doesn't like when I go over budget, but.
You know where were over budget slightly but we've done a couple of things that have a increase those costs. During the year that we're very mindful of the first being we did pull forward one of our phases. So something that we had planned to do in 2022 we pulled into 2020 one.
That increase some cost there and then adding the Minneapolis portfolio of 17 new assets.
Did expand the projects pretty significantly.
I think the cost that we're going to see those decrease very rapidly in 2020 three so we're fully live on the new system right now we're working the adoption plan and I'm sorry in 2022, they're going to drop right off. So we really our goal is to have this really wrapped up.
And then moving on to looking at how we might use this platform for other technology enhancements towards efficiencies.
Next year, but but yes. This last of $450 475000 that we expect in the fourth quarter really should be kind of the tail end of of that.
Nonrecurring fees, Yeah, I'll, just add a buck with the portfolio acquisition not only was the extra work for those 17 communities, but that was a big lift for the entire team. So we took some things that we were originally doing internally and we brought some additional consultants.
Relieve some of the.
The workload, so we could focus on the on boarding.
Got it got it very helpful color guys I appreciate that thank you.
And kind of a different tack on an earlier question in terms of can can your customers continued to keep up with the rent increases that you're seeing I'm. Just wondering if you have any extra data or <unk>.
Color you can provide on rent to income ratios that youre seeing or are you seeing the incoming tenants are our applicants.
Coming in with higher income levels or seeing any signs of that.
Economic strength kind of driving that or.
Or are you starting to see those metrics start to tick up.
Okay.
So.
Yeah, I would say, we're generally speaking still in the low twenties, where we require three times to.
Rent to income.
And we haven't seen any drop off in qualified applicants so that would really be the first thing that we would see is a lot more of denials or less applications based on the qualifications and.
We havent started it started to see that yet I do think that you know to the extent that there is inflation and the rents that we're seeing good rental increases I mean people are also feeling it in in their wages. So.
We really haven't seen any deterioration of those those metrics to date.
That's very helpful. That's all that's all for me. Thank you.
This concludes our question and answer session I would like to turn the conference back over to Mark Decker for any closing remarks.
Thanks, So much everyone. Thanks, we appreciate your time and interest in center space, We wish everyone, a safe and healthy holiday season Hope you get out and vote today and look forward to meeting with some of you next week at NAREIT.
The conference has now concluded. Thank you for attending today's presentation you may now disconnect.
[music].