Q1 2022 Centerspace Earnings Call
Good morning, and thank you for attending today's center space Q1, 2022 earnings call. My name is Jason and I'll be the moderator for todays call. All lines of you either during the presentation portion of the call with an opportunity for questions and answers at the end if you'd like to ask a question. Please press star one on your telephone keypad.
I'd like to pass the conference over to Emily Millar. Please proceed.
Good morning, everyone that is basic Form 10-Q for the quarter ended March 31st 2022 was filed with the SEC yesterday after the market cloud. Additionally.
Additionally, our earnings release and supplemental disclosure package has been posted to our website at center stage Collins Dot Com and filed on form 8-K.
It is important to note that today's remarks will include statements about our business outlook and other forward looking statements that are based on management's current views and assumptions. These.
These statements are subject to risks and uncertainties discussed in our Form 10-K filed for the year ended December 31st 2021 under the section titled Risk factors and in our other filings with the SEC.
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 with me. This morning is Mark Decker, our Chief Executive Officer, and <unk> Patel, Our Chief Financial Officer, Mark I will now turn it over to you. Thank.
Thank you Emily and good morning, everyone quick note I'm going to cover an olefins operating commentary this morning since she's a little under the weather.
It was around this time a year ago that the housing business really took off and our portfolio with it for the first quarter, we achieved NOI growth of seven 8% and core <unk> growth of over 3%. Despite some headwinds from the combination of a colder than average winter combined with a dramatic spike in energy prices.
Even so we remain on track and we are reiterating our guidance for the full year.
As we look forward the health of our business and our customer are outstanding.
We have a loss to lease of over 9% strong employment and relatively balanced supply.
Our residents are earning more wages and our homes remain affordable with rent to income ratios in the low to mid twenties.
This is an excellent backdrop to continue our retooling of operations after converting all of our systems in late 'twenty, one we're still training and optimizing in 'twenty two.
These investments will yield easier to access and more actionable data better compatibility with some of the new prop tech offerings efficiency and scalability.
Turning to capital markets, it's been a volatile few months, we've seen our debt costs nearly double from high twos for 10 year money to high force. Fortunately, we have been aggressively refinancing over the past few years. So we sit today with low maturities through 2025, and an outstanding ladder beyond that.
The meaningful movement in that cost has not changed the desirability of high quality apartment assets.
Asset pricing has not moved at this point.
There are a lot of cash buyers, who remain confident in light of strong underlying fundamentals in housing.
We believe we may see better opportunities given our balance sheet strength through the rest of the year in the meantime, we will continue to be opportunistic and maintain our focus on the balance between the quality of the portfolio and quality of earnings.
Despite the competitive nature of the investment markets Center space has had our most active 12 months and enjoys more capacity than ever our debt to EBITDA on a forward looking basis is now in the mid sixes and we are demonstrating our enhanced ability to compete on value versus price.
Our first quarter LP unit purchase of the NIM three assets and then no co development financing round trip acquisition are perfect. Examples of our ability to get higher returns in an ultra competitive market.
To date over 43% or $580 million of the investments. We've made since 2017 included intelligence structuring that drove value to us and the seller in a manner that was superior to cash.
Turning to operations, we continue to see strong revenue growth.
During the first quarter, our same store new lease rates were up six 9% over the prior leases and same store renewals achieved increases of nine 6%.
On a blended basis. This is first quarter rental rate growth of seven 9%.
Increases have continued in April with new leases, increasing 12, 3% and renewals increasing eight 8% for a blended rate increase of 11%.
Our same store weighted average occupancy was 93, 9% on March 31, and continues to climb as we head into prime leasing season.
As we progress with the integration of our non same store portfolio consisting of 23 communities. We're pleased with the rental rate growth, we're seeing with respect to our Ams portfolio, new lease and rental rates have meaningfully outpaced our same store portfolio in the Minneapolis market, where we grew at 8% per K m's versus four 9%.
On a blended basis. This is proving out our investment thesis that there was a significant opportunity in this portfolio.
All of this good revenue and wage news comes at a cost and we are also monitoring expense growth, which was nine 6% higher than the first quarter than the same period last year.
Kris utility costs are driving the majority of this increase but we're also seeing inflationary pressures on wages and materials.
We realised utility expense increase of over 25% versus the same period last year due to both higher rates and increased usage as our Midwest markets experienced more severe weather than 2021.
Our increased expense outlook for the remainder of 2002 is primarily a reflection of these increased costs offset by better than expected revenue projections as we realized strong rental rate across the portfolio.
Of course, all of these great results would not be possible without an incredible team an incredible teamwork and I'm. So grateful to work with our 450 dedicated associates. Thank you all for what you do towards better every day and now I'll turn it over to Bob to discuss our financial results.
Thank you Mark today, I will cover our first quarter results for 2022 and touch on our outlook for the full year.
Last night, we reported core <unk> for the first quarter ending March 31, 2022 of <unk> 98 per diluted share an increase of <unk> <unk> or three 2% from the same period last year.
The increase in year over year core <unk> is primarily attributable to strong same store results and the accretive acquisition of 23 properties since the beginning of 2021 offset in part by higher G&A and property management expenses from the investment we made in our operating platform to service our growing portfolio.
Total G&A was $4 5 million for the current quarter, an increase of 15, 2% compared to the $3 9 million in the same period last year, which was primarily attributable to an increase of 473000 and compensation expenses and 273000 in professional and consulting fees offset by a decrease of $300.
70 sales and technology related expenses, mainly driven by the relatively larger investment in the early stages of the you already implementation last year.
Property management expense, which includes property management overhead and property management fees increased to $2 3 million in the three months ended March 31, 2022, compared to $1 8 million in the same period last year.
The increase was primarily due to 265000 and compensation expenses.
Turning to capital expenditures, which is presented on page S. 13 of our supplemental same store Capex was $1 6 million for the quarter ended March 31 2022.
That translates to a $145 per unit and we expect this to ramp up over the next couple of quarters as we typically schedule most of the projects during Q2 and Q3 when the weather is warmer and more conducive.
Looking at our balance sheet as of March 31, 2022, we had $223 3 million of total liquidity, including $210 million available on our lines of credit.
Our balance sheet remains strong at the beginning of April we paid off $22 3 million in mortgages with those payoffs. We now have just 5% of our total debt maturing over the next three years.
As of the end of the first quarter the weighted average maturity of our debt was seven one years and the weighted average interest rate was approximately three 3%.
In the first quarter of this year, we grew our portfolio by purchasing four additional properties for total consideration of $114 5 million.
One of the properties acquired was previously financed by us through a preferred financing program with $43 4 million of construction and mezzanine loans.
Additionally, during the quarter, we issued 321000 shares at an average price of $98 89 per share net of commissions for total consideration of $31 7 million.
Now I will discuss our 2022 financial outlook, which is presented on page S 14 of the supplemental.
We are maintaining our core <unk> guidance for 2022 or $4 45 per share at the midpoint of the range in our same store NOI projected growth of 8% to 10%. Please.
Please note that our first quarter results are typically impacted by seasonality and the impact was particularly strong during the first quarter of this year from an expense standpoint.
As Mark mentioned, our utilities cost increased by almost 25% due to a combination of higher per unit costs and higher usage due to a harsher winter.
Additionally, we experienced more snowfall the unusual in our markets, which drove our snow removal cost by another 25% year over year.
We do expect that to abate as we enter the warmer months, while we do expect expense growth to be higher than previously anticipated and increased by six 5% at the midpoint. We continue to see strong revenue growth as mark highlighted in his remarks, and expect that to offset the impact of expense increases.
We have updated our expectations for revenue growth by raising the midpoint for year over year same store revenue growth by 1% to 8% at the midpoint.
That keeps us on course to achieve the <unk> growth. We included in the initial guidance range, we provided at the beginning of the year.
As a result, our guidance range for core <unk> remains unchanged and at the midpoint of $4 45 per share equates to an increase of 11, 5% over last year.
To conclude I wanted to commend the entire center space team for another strong quarter.
We're off to a great start to the year driven by strong rental growth and expect to sustain the momentum as we enter peak leasing season.
With that I will turn it over to the operator to open it up for questions.
Thank you if you'd like to ask a question. Please press star followed by one on your telephone keypad if for any reason you'd like to remove that question. Please press star followed by two again to ask a question press Star one.
And as a reminder, if you're using a speaker phone. Please remember to pick up your handset before asking your question. We will pause you briefly as questions are registered.
Our first question comes from Brad Heffern with RBC capital markets. Please proceed.
Yeah.
Bradley you're asking a question we can't hear you.
Operator, it sounds like.
He may not be in this line or something.
Hello, Brad.
Can you hear me.
There we are yes.
Okay Alright.
I was asking on the April leasing spreads. So it seems like there was a pretty significant inflection higher.
Can you talk about what was driving that is that just seasonality or is there something else going on.
Yes, I think.
We don't have any specific.
Certainty around I think it is just certainty the winner is particularly slow here and it really starts to pick up on it.
Once you get to March in terms of traffic and demand to move.
As you heard in our prepared comments.
It was a pretty tough winter.
But we're pretty excited about what we're seeing there.
Some of our best.
New and renewal and blended lease rates, we've seen since 'twenty one.
Yes, Okay got it.
And it seems like you're generally.
And really outperforming the underlying growth across your markets is that partially a came off benefit or what could be driving that.
Besides just management excellence, Brad no I'm kidding.
I think it's a combination of things I mean in some of our markets. We are the most.
Okay.
<unk>.
I'll say disciplined and focused operator that cuts both ways I mean in some markets, we kind of wish everyone else were on revenue management.
Because that might help.
Move market rates, but in Minneapolis, specifically I think it is K MFS.
Where that portfolio really was.
Under optimized on the revenue side.
And outside of that I would say, it's a combination of.
Probably us being a little bit more focused I mean, we're one of the only companies in our market to us to tell everyone. What we're doing every 90 days I'm sure that helps us keep on our toes a little bit.
Yeah, Okay. Thank you.
Thanks, Brad.
Yeah.
Yeah.
Thank you for your question.
Our next question comes from Buck Horne with Raymond James. Please proceed.
Hey, Good morning, guys I was curious about the occupancy trends youre seeing from month to month I note.
Last call you guys highlighted that at least through the first part of March.
Weighted average occupancy was trending at like $94 four and ended up the quarter at 93, nine so kind of wondering what what.
Transpired in March in terms of occupancy trends and has that stabilized through April .
Yes, it has stabilized through April .
It took a bit of a dip in the fourth quarter.
Driven in part by.
The eviction moratorium being lifted and.
I would say since then.
Slow traffic months to get back to occupied in the first quarter.
We are.
We are rising now we've got great traffic, so I would expect that.
To continue to climb up from 94.
Okay, Alright, I appreciate that.
I was wondering if you could drill down a little bit further.
Just in terms of what happened sequentially between looks like Minnesota, I'm, sorry, I mean Minneapolis.
In North Dakota, both took a sequential step downs and please at the same store level in terms of their monthly rental rates.
Just wondering is that just a function of a severe winter or is that just is there any signs of market weakness in Minneapolis, where north Dakota.
I would say.
Listen in North Dakota for all intents and purposes didn't have COVID-19, So north Dakota is.
Kind of going along like it was in typically in that fourth quarter, we see negative trade outs and a weak first quarter.
Minneapolis.
I think it's a little bit more just driven by.
The eviction moratorium.
And as we add more vacancy we needed to lower price to fill back.
Bill.
Okay.
Alright, Thanks, guys I appreciate it.
Thanks, Bob.
Thank you for your question.
Our next question comes from Connor Mitchell with Piper Sandler. Please proceed.
Hi, Good morning, Thank you for taking my questions.
Two questions. So first it seems like there's a decent amount of seasonal.
Seasonality between quarter to quarter.
So without giving quarterly ethical guidance, what's a good way for us to think about modeling the seasonality of it.
The portfolio.
And Brad Brad.
Conor this is Rob.
Yes, I mean from a seasonality standpoint.
Utilities costs.
We're up 25% they makeup.
About 35% of our first quarter expenses on the controllable side. So going forward, we would expect expense growth to moderate on a on a year over year basis as the.
The impact of some of the expenses that have hit us harder than the first quarter due to seasonality.
Just kind of becomes a lower proportion of our overall.
Our overall expense structure.
And an interesting fact usage was up about 10% the price of the underlying commodity was up over 70%. So.
Pretty pretty surprising.
But I think to your question on <unk>.
We probably don't plan to give quarterly guidance.
I guess, we will make a better effort to just check.
Jack where people's models are in and try to offer feedback, but you can see our first quarter is typically our worst our fourth quarter is typically our best in the second and third.
Yes.
Usually are pretty consistently better than the first and not as good as the fourth.
Okay. That's helpful. Thank you.
And then my second question.
Could you also just drill down a little bit on what guidance assumes for interest rates and then also energy cost for the balance of the year.
Yeah.
Yes, so for interest rates I mean, just a portion of our debt is floating so.
Our spot weighted average interest rate is three 3% it probably goes up a little bit because LIBOR, who youre expecting LIBOR to go up but other than that because most of it is fixed it kind of stays there are LIBOR assumption is.
I believe it's two 5%.
He is priced out on the curve. So we just kind of pricing around the curve.
For energy and for energy as I said.
The impact that we felt for utilities cost was because the price per unit.
Went up.
In Q1 versus the prior year.
But then the price.
Stabilized in the last year's overall going forward from an expense standpoint, we don't really expect that to drive much of the expense increase most of the expense increase is going to come from.
Items, such as compensation, which overall were expecting.
To be up about.
5% year over year for the rest of the year.
That's helpful. Thank you that's it for me.
Thanks.
Thank you for your question.
Our next question comes from Rob Stevenson with Janney. Please proceed.
Hey, good morning, guys.
Energy stuff is all natural gas you don't have oil heating do you.
That's correct, it's all natural gas.
Okay and have you guys thought about hedging I know when you know.
Property is used to have this.
Issue in the past they wound up.
Doing some hedging on that is that something that you guys are looking into or make sense or given the magnitude.
Well, I'd say worth considering and under consideration that there are probably more likely Tac we take is to just.
Rob those expenses to pass those through to the user which isn't happening in every instance, obviously and an area where we can focus.
Challenge gets to be.
When you are pushing rents 10% to also push rubs.
It's like squeezing a balloon is you can only squeeze so much so.
We're going to thoughtfully approach how to lessen our exposure and put that exposure on the end user, but we've got to balance that with with.
Our desire to push revenue.
Was this exposure in the new KBS portfolio was this in the legacy portfolio of mix, how should we be thinking about that.
It was yeah. It was in both.
Not one, particularly in one versus the other.
Okay and as of today, what percentage of the portfolio is either unable to be sub metered or where you are prevented from doing rubs.
Continue to have exposure to utility cost no matter what.
I can't that's a great question I don't have the answer to that needed as Rob off the top of his head and might but.
We will have to circle back on that one.
Okay, I mean, most and then at least proportionately Delta.
Dealt with.
Okay, I, just didn't know whether or not there are municipalities that didn't allow that et cetera.
Yeah, what a month last thing, so, but again thats a better one for grant.
Alright, okay.
What months last year did you guys have the biggest jump in terms of rental rates trying to figure out when the comp the year over year comps get tougher for you as we go throughout the year.
Yes, so our best our best quarter I don't have that by month I do have it by quarter, our best quarter was the third quarter were.
New was 10, eight and renewal was seven 2% blended was nine.
So I guess I'd say the third quarter is going to is going to begin our toughest comparison.
I mean on a relative relative to the coastal names. We did have positive NOI growth in the first quarter of 'twenty. One so tougher comparison for us than some of those names some of the southeast names Likewise had growth so.
So we don't have that fact pattern there but.
April at a blended 11.
It is among our best months.
Okay.
Then I'm sorry, if I missed it but did you guys talk about what happened in Saint cloud from a revenue perspective, what's that.
Something abnormal because the occupancy went up quarter over quarter, but the revenue went down 9%.
Yes, that's a sequential are you talking sequential I think thats a rent health yes.
The rate goes up the occupancy goes up but the revenue per occupied home goes down and it was just a little weird.
Yes, I think thats the.
In the fourth quarter, we had a lot of Minnesota rent helps so essentially our bad debt.
Not bad debt, but the state funded portion of folks.
Our rent who are behind came in in a pretty large way in the fourth quarter and that was definitely.
Affected the St Cloud numbers I think that's what we're looking at there is that right on a sequential basis, that's exactly right we collected.
More revenue in that market than than the than we booked. So it was a result of timing from a bad debt standpoint.
Okay, because that was helpful. Because it was it was just weird to sort of see occupancy and rental rate up but revenue down.
Normally those things go in concert and then last one from me what does your acquisition pipeline look like today and.
From a standpoint of are you guys still.
Adding as looking to add assets in Minneapolis. After the continued move is that still.
Obviously your biggest market is that still a market where you are comfortable increasing the exposure.
Yes, good question.
Rob we really are.
Most opportunistic in in Minneapolis, because it is our greatest concentration it's also.
I think one of the feedback we get from investors frequently is we would love to see them being in more markets. So we're mining we're mindful of that.
It's also where we have some of the deepest roots, so I'd say Minneapolis, and Denver are definitely our best too.
Hunting ground, if you will so we would continue to.
Invest in many you might see US change, maybe we hold the count unit count or home count steady but.
But do some swap outs, we would be interested and we'll continue to fund.
Development that we.
We really liked the way to <unk>.
Iron Ironwood deals have worked out which were both started as financing deal. So so yes, we'll still be active there obviously, we bought the what we call them in three portfolio.
And no co.
Which I mean those are good examples where if we were looking at Unlevered year, one yields in.
Nashville, Denver, many newco.
On a year one yield was north of four unlike property in Denver might be mid threes in Nashville might be three and our year five and our year 10 would be likewise.
Spread out so it's pretty hard to look at those and say well, we should allocate capital to the to the one with the least amount of yield so it's a bit of trapped because obviously the more we do that the more we get criticized for that.
The concentration, but short answer yes, we're still looking in many we'd probably be more aggressive on asset rotation there.
And the market continues to be.
Pretty pretty robust I mean, just this morning, I got alert from a broker.
1986, or 1985 product Gray star bought it.
$600 rents.
Underground parking and unit washer dryer it looks a lot like park place, which is a like asset sold for $3 five on trailing four two on the brokers going in number which we would probably discount.
And.
$276000 a door so.
Theres still lots of good demand for property out there that that's a benefit if youre recycling, it's a challenge if youre going to recycle into something new.
Okay. Thanks, guys I appreciate the time.
Thanks.
Okay.
Thank you for your question.
There are no further questions waiting at this time, so I'll pass the conference back over to Mark for any final remarks.
Super Thanks, well, we appreciate everyone's continued interest in center space, We hope to see you at NAREIT in June and and happy mother's day to all the mothers out there.
Thank you.
Okay.
That concludes the center space Q1, 2022 earnings call. Thank you for your participation you may now disconnect your lines.
Uh huh.