Q2 2022 Centerspace Earnings Call
It will drive an increase of nearly 14% in core <unk> and.
And we've now been able to grow same store NOI and core <unk> each consecutive year. Since 2018. This is a track record few can match and a testament to the resiliency of our portfolio.
Turning to investments as you can see we spent over $1 million conducting due diligence on a significant pursuit that we abandoned.
This was a roughly $2 billion portfolio that would have given us scale in several new markets and accelerated our strategy.
We got almost all the way down the road Alas as some of the large portfolio deals got announced in December and January our counterpart looked into the white hot market and concluded that selling things individually versus as a portfolio would result in the best outcome for their constituents and they went another direction just weeks before we got to an announcement.
It was a great effort by our team and we will learn something and take that forward.
We strive everyday to improve the company and while the current capital market environment is choppy. We're encouraged that these conditions may benefit lower leverage longer term oriented investors like center space and we remain active in our pursuit of opportunities large and small.
Our key criteria remain portfolio improvement per share earnings quality greater distributable cash flow.
Our team continues to deliver awesome results and foster a culture of improvement in team orientation.
Two great highlights to bring this point home first for the third year in a row, we were named a top workplace in Minnesota by the Star Tribune Congrats.
Congrats on that as well as a big congratulations to our team for receiving the National apartment Association and novel Award for leading organization in diversity equity and inclusion.
This National award recognizes our work to be a place where people can belong and take risks to improve.
Our reach will always exceed our graph and it never perfect, but as I say the courage to continued accounts well done team and thank you Sir.
Enter space has considerable momentum as 2023 comes into focus.
And now and would you please provide a quick update.
Thank you Mark and good morning revenues continue to drive growth with second quarter revenues, increasing 11, 7% over the same period in 2021 during the second quarter, our same store new lease rates increased 13% on average over prior leases and same store renewals achieved average increases of seven 3% on a blended basis.
Our second quarter rental rate growth was 10, 5%. These John leasing trends continued through July our same store weighted average occupancy was 94, 8% on June 32022, an increase of 90 basis points over the first quarter.
Significant growth nationwide and rental rates has raised the question of affordability, but in our Midwestern and mountain West portfolio. We see average rent household income of 23, 1% for those applicants in the second quarter.
This gives us confidence in our tenant credit and with average monthly revenue per occupied home and $1518. Our communities are affordable to the light segment of the renter population.
While providing a tailwind for revenue growth inflation is also affecting our expenses.
Main driver of our increasing expenses, our utilities labor and material our increased revenue and expense guidance for the remainder of 2020 to reflect the trends we are seeing in both leasing and the pressure on the expense side of the business.
Our goals for the second half of the year include realization of efficiencies from our 2021 technology implementations to assist expense containment and enhancement of our customer experience to drive revenue. It has been a great first half of the year with our same store net operating income increase of nine 7% year to date, and we expect that growth to accelerate in the range of.
10% to 12% growth for the full year.
Now I will turn it over to Brian to discuss our financial results.
Thanks, Dan last night, we reported core <unk> for the quarter ended June 32022 of $1 12 per diluted share an increase of 15 or 14, 3% from the same period last year.
The growth in our core <unk> was primarily driven by strong same store results with our same store NOI, increasing by 11, 5% compared to the same period last year.
G&A and property management expense were $5 2 million and $2 $7 million respectively.
<unk> total of $7 9 million.
Included in G&A is $1 $1 million related to pursuit costs as Mark discussed in his remarks earlier.
Also included is 447000 related to the ERP implementation, which we expect will be completed by the end of this year.
As a result, we have excluded the pursuit and implementation costs from our core portfolio.
Excluding these costs, our combined G&A and property management expense for the quarter was $6 4 million, which is a better representation of our run rate.
It represents an increase of 933000 or 17% year over year and is driven by an increase of 570000 and compensation expenses and 230000 office expenses, mainly from an increase in Nike related costs.
The material increase year over year is in part related to our significant acquisition last fall of the <unk> portfolio.
Including the acquisition since the same period last year, we have acquired a total of 22 properties, which has increased revenues by almost 25% on an annualized basis.
Our balance sheet remains strong and provides us with ample flexibility as of June 32022, we had $196 $2 million of total liquidity, including $183 million available on our lines of credits.
At the end of the quarter the weighted average maturity of our debt was seven years and the weighted average interest rate was approximately three 3% now I will discuss our 2022 financial outlook, which is presented on page S 17 of the supplemental.
Following a strong second quarter.
Raising our same store NOI guidance to an increase of 10% to 12% year over year.
As Dan mentioned revenue growth was extremely strong in the second quarter and the positive leasing trends continued through July , prompting us to raise our revenue guidance to an increase of 975% year over year at the midpoint.
On the other side of the P&L. We saw continued expense pressure during the second quarter, while we do expect the year over year growth rate to moderate during the second half of 2022, we expect expenses to be higher relative to our prior expectations and are accordingly, adjusting our guidance to a year over year increase of 8% at the midpoint.
All of that translates to an increase in our core if you full guidance for 2022 to $4 45 to $4 61 per share with a midpoint of $4 53 per share.
And with that I will turn it over to the operator to open it up for questions.
Thanks Keith.
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 your question. Please.
I tape.
As a reminder, if you are using a speaker phone. Please remember to pick up your handset before asking the question.
Okay.
Last question comes from the line of John Kim of BMO.
Your line is now open. Please go ahead.
Thank you.
Mark you mentioned on this portfolio that you pursued.
Some interesting items.
That it would put you into several new markets I was wondering if you could provide any color to this with this mean in addition to Nashville.
And also about the seller.
Theres not a portfolio premium by selling it in its entirety just wanted to get your thoughts on that.
Sure sure.
Sure. Thanks, John .
Was.
It was several markets.
In fact, it didn't include Nashville.
And as we've said we have focused markets that I'd say, we spend 85 plus percent of our time on and then.
We spend time on things that are opportunistic.
Like this portfolio.
And with with respect to premium because of all the other things that the seller was getting.
And by that I mean.
Yes.
We were going to collaborate with their team I E not cut many of the folks on their team.
They were going to be some tax.
Consideration. So when you look at the whole package it really wasn't about Max price it was about <unk>.
A bunch of different objectives, and I think thematically, that's something we like when we're solving problems and not just paying the most money.
It's easy to pay the most money it's hard to solve problems. So we had I would say a very sort of bespoke solution engineered and in the end they wanted a different solution.
Are you in the running for any parts of the portfolio.
A sale.
No I don't believe so I mean, I would say you know.
Lloyd from dumb and Dumber Theres always a chance.
Our willingness to our desire to take this.
The charge is really a recognition that we don't think anything is going to happen.
Yeah.
With this portfolio.
The sum.
Some of the parts was worth more than all the parts to us it's really about getting scale in markets that were probably not that interested in buying one offs in markets that we're not currently in unless they're strategic markets.
Got it Okay and then just wanted to ask about your current loss to lease in the urban you have for 2023.
Sure and you want to take that yes, I think right now we're looking at a loss to lease right around 12%.
<unk>.
If you if you kind of measure, earning as 50% of that it would be right around six.
We do think that there is potentially some moderation in leases going forward. Although our July results were really strong and we expect.
The blended.
Lease rate growth in July .
Right around 10%, so still really really strong and with that loss to lease we're hoping to keep capturing that.
And the earnings coatings on on lease growth.
Right. Thanks for revenue.
Right on lease growth.
Okay.
Great. Thank you.
Thanks, John .
Thank you.
Yes.
Our next question comes from the line of Brett Feldman of B.
RBC capital. Your line is now open. Please go ahead.
Hey, good morning, everybody.
The $2 billion deal I guess can you give any additional details about how similar it was to the current portfolio in terms of things like price point and geography, and I know you said it would have added a few new markets can you give any sort of broad stroke system, where those where were they sunbelt markets et cetera.
Yes, sure good morning, Brad.
Yes, so a similar product in terms of average rents and kind of <unk>.
Value per.
Home if you will.
No commonality with our existing markets it was kind of south <unk>.
Belt.
Through through Midwest.
Which which again.
Trying to accumulate a large sunbelt presence unless we can find some opportunistic reason way to get their portfolio being a good example.
Yes, Okay got it.
And then it sounded like this was.
A deal that was negotiated before sort of the broader market downturn I guess, given the current cost of capital and cost of debt are you seeing.
Acquisition opportunities that still makes sense.
Theyre, making more sense so yes.
That deal really was negotiated last fall and then the Blackstone purchase of <unk>.
Bts Blue rock and resource all at kind of 300, a door and three handle cap rates was pretty motivating for our counterparty.
And again I think February was kind of the absolute tippy top of market in terms of.
Leverage availability good pricing on leverage lots of product in the market.
The Levered buyer is much less has much less conviction today.
So I think.
Looking to the same call as you did and we see the same things I think youre hearing from other folks which is.
Pricing is off.
Plus or minus 10%, maybe as much as 15% depending on the deal and the location.
<unk>.
Almost always the case strongest assets in the strongest locations see the least amount of price diminution, but.
But I do think.
The market is coming a little bit more our way because we're not.
Reliant on heavy leverage <unk> kind of three to seven year.
<unk> to <unk>.
Get in and get out.
Yes, okay.
And then I guess any thoughts on incremental cost of debt as we sit here today.
It's higher now.
Hi, guys, just the thoughts on that but I think the mathematical.
Reality is we did two pieces of debt that we can pretty reliably reprice today.
We did.
The Fannie line and.
And the three pieces of unsecured both had kind of a little bit more than 10 years of weighted average duration. Both we're right around two seven.
The Fannie piece was obviously the unsecured is Io if we recreated that there was a lot of paper that came into the unsecured market early in the year. So I think that.
When we talk to folks in that market.
It's priced even a little bit wider than just sort of general spreads would dictate because there was a lot of re paper that got done in the first half. So I think that unsecured paper has a five in front of it.
For similar duration.
Any paper similar terms, which was a relatively high advance rate call it 60%.
Is right around four and a half so more than double double or more than double depending on which market you're in.
Fannie and Freddie are behind this year.
On their production goals, so pricing might get a little bit better.
But but that's that's the math today.
Okay. Thank you.
Thanks, Brad.
Thank you.
Our next question comes from the line of Rob Stevenson of Janney. Your line is now open. Please go ahead.
Good morning, guys.
Year to date same store expense growth of 10, seven what changes to get you down into the low to mid five growth rate in the second half to sort of put you in that sort of midpoint of the guidance range.
For the year.
Yeah, sure and I'll take that.
Yes. Good morning, so really in the second half of the year, it's going to be about.
And more about the comparison, although we are really monitoring expenses closely and have a keen eye on what we can do to improve it but if you recall the run up of particularly energy prices happened in the second half of last year.
Our first half comparison was really tough because we had.
Additional as we noted on our last call. We saw some increase in usage, but a significant increase in price.
That increase in price happened in the second half of last year. So.
The growth rate will moderate just simply because of the comparison, we are undertaking a couple of changes to our ratio of utility billing system or <unk>.
The tenants to make sure we're capturing more.
The cost and passing that on to tenants, obviously being mindful of how that impacts kind of our.
Our ability to push rents and our goal is to keep maximizing that revenue and to the extent, we can push some of those costs into into.
Other revenue we will.
What is your utilities exposure at this point in terms of how much are you getting back versus how much you are exposed to.
Well it widely pretty varied.
It varies pretty widely by market. So I would say in Denver, and Minneapolis, we're capturing probably 70% to 80% and in our smaller markets.
In some markets, it's very very low percentages so.
That's a product of a lot of things whether or not the market will take it in.
Comparable properties when when people are shopping if they can get there he paid for next door.
They are paying less rent in order to pay their bill or they want it paid for itself.
It varies pretty widely.
Okay and then what's left for you guys in terms of all of the smart home self touring operating efficiency maintenance.
Et cetera in terms of both upfront spending and also reaping the future gains in <unk>.
Store.
Yes, im going to jump in front of this one.
And on this one Robert I'd say almost all of it I mean, we have.
Employed some technology on the maintenance side, but as we've talked about over the last couple of quarters that.
Implementing that single stack technology solution you already.
It really allows us to.
Integrate a lot of those different things smart rent being a good example.
In a way that we were not able to before.
Not to go overly tech on you and I can't kick.
Very deep on this but we essentially had.
Self hosted virtually bespoke.
MRI solution that no one could really hook into so.
Cause of our heritage as a multi property.
Type owner.
So so that really set the table well for us and that has kind of stabilized. This year. So that's something we're really looking at.
As we go forward.
What's left in terms of what you expect to spend.
And those type of programs over the next couple of years.
Yeah. So.
That's a great question I think it's going to it's not going to hit expenses and the way that.
The technology implementation has so on the on what we have left it's most likely replacing current software as a service with different software as a service or replacing one solution that we've had historically, so I'm not expecting a massive amount of investment in technology spend.
I think probably a general run rate of technology investment would be a couple of hundred thousand dollars, a year, which is pretty close to what our historical was.
And we haven't but we have invested as we've gone along the way we have really great online leasing presence, we have matter port tourism, 100% of our properties online we do.
Online leasing in some markets, that's a pretty high percentage of what we do but to Mark's point, we still have a long way to go we've just started using some AI solutions.
Prospects with lease that's working out really well. So we're just in the beginning of stages of implementing them and really at the beginning stages of optimizing them. So that we can start tracking what efficiencies we are creating in the portfolio.
And what at what point do you get the greatest savings in terms of head count.
And labor costs, there or has that already occurred or is that still to come when you can operate with fewer people et cetera.
Yes, I think I think that comes when we released when we continue to move its not only the technology solutions at the community level that allow that it's really how these technology solutions may enable centralization of some services, so that rather than having a position that only services 300 units because it.
Needs to be on site, we can how does that position anywhere in the country really on the support side and maybe they can support 500 units.
Given the technology and ability to kind of focus.
That's where I think we're really going to see the head count reductions as when we can leverage some of these in order to identify how we might.
Take certain positions and have them support across the portfolio in a centralized way.
And is that more of a 'twenty three event.
Yes, Rob I would also say a lot of that is.
Do you see when assets are clustered I mean for all the talk about technology, which is real.
That is a lot about customer preference and experience and making it easy for the for the resident to access different services or shop your apartments and I think it is also about <unk>.
Increasing the quality of work for the team, but when you kind of cut through it all scale Adjacencies and scale.
Proximate to one another is what I think drives the most efficiencies from a head count perspective.
Yes.
So to your question I do think that we're going to really we're hoping to really accelerate accelerated start.
Figuring out what these efficiencies are in mapping what potential additional centralized services look like for us.
And implementing those in 'twenty three 'twenty.
<unk> three is is when we'd like to start really tracking some.
Some of the metrics that show efficiency.
Other than obviously, we're looking at margin and things like that in the meantime.
Okay. Thanks, guys I appreciate it.
Thanks, Rob.
Thank you.
Our next line comes from the line of Conor Mitchell of Piper Sandler. Your line is now open. Please go ahead.
Hi, Good morning, Thank you for taking my question.
Just following along with the technology implementation costs.
It was mentioned that going forward it might be a run rate of <unk>.
A couple of hundred thousand per year, So just making sure I understand it will there be any more kind of larger.
Costs, such as this past quarter or in 2021, where it was a little bit more or is that run rate starting in 2023 and beyond.
Yes, I don't know that we were trying to give you expense guidance, there, but and you want to take I think a couple of hundred thousand.
Kind of indicate that we are going to continue to make advancements in there is there won't be anything nearly as significant as the CRD implementation that we did I mean this has been 18 months it changing about it changing really the back office systems. So there is.
There is no immediate kind of value add proposition there I would say as we look towards our future technology implementations. How we are assessing those right now as we are expecting a return on those investments so.
Those won't be those will be invested dollars incentive expense expense dollars.
Our next kind of value add project implementation.
Implementation as part of our value add projects.
Where we really do expect to get a return a return on that investment. This was just to set the stage I mean, not that we don't think it's going to give us returns.
But no one looks at your back office and says this is Austin my experience has been better on paying more rent.
It is and it's really about making it easier for our team to spend time on things that our residents do care about because we have a more efficient.
Back office, whereas does go forward will they.
<unk> residents should feel it.
And be willing to pay for it I think if you look at again smart rent, which has been talked about by a lot of our larger peers.
There really is a value proposition there both from the customer side in terms of having greater functionality and from the operations side in terms of leak detection and being able to change out locks.
Automatically and instantly those are those are value drivers for us, but we truly are at the tail end of the day expense on the you already on the RT implementation that we.
We are not expecting that next quarter.
Repeat to the same expense.
Okay. That's helpful. Thank you.
And then going back to the operating expenses.
Based on.
Really the comparison with the first half second half of this year last year.
With utilities rising, but even looking further into the future in 2023 do you guys expect that.
Stay about flat or is there any way that you guys might be able to lower that slightly.
In comparison to.
Kind of are you trying to get 23 guidance, Rob why don't you take that one.
Yes.
Yes.
Yes.
From from a utilities perspective.
That said the second half is really driven by.
Comps, we did see utilities.
The increase in the second half of last year, so from a year over year perspective, that's moderating in terms of.
Usage and <unk>.
<unk> unit costs, we have seen that stabilize a little bit.
Recently, so that trend continues we should be back hopefully in the same range as it was before but again the cost keep increasing we'll have to kind of just wait and watch.
Thank you Ed.
So with the operating expenses. So you guys mentioned that it's mostly utilities and labor is there anything else driving the increase are keeping.
<unk>.
The level, where it is.
Yeah.
Okay.
No.
The bulk of it sorry go ahead.
I think one thing to think about it.
There are some expense increases that do drive revenue so.
<unk>.
When we're seeing really strong lease growth in turnover and a little a little bit higher turnover.
At some of our properties that does drive turnover expense in and some of the repairs and maintenance lines.
Those are those are good expenses to have obviously, our commissions are higher given the higher lease rates, though some of those things are.
Positive because you really want the revenue, but Brian do you want to comment on some others.
Yes, just to figure out I mean I think.
From a first half standpoint, it was really a utility is driving it as we look to the <unk>.
Second half.
Impact of utilities with moderate but from a compensation standpoint.
We do see.
The year over year.
Increase.
Kind of sustain.
As as we go into the second half, but to <unk> point. Some of these expenses that are driving growth are expensive, they're also driving revenue.
Okay very helpful. That's all for me. Thank you.
Yes.
Thank you.
As a reminder, if you'd like to ask a question. Please press star followed by one on your telephone keypad.
Our next question comes from the line of Colin I'll.
Of Raymond James Your line is now open. Please go ahead.
Hey, Thanks, good morning.
Curious if you could share your supply outlook for particularly for Denver and for Minneapolis.
Just how youre thinking about how the back half of the year and maybe going into 2023, how competitive supply and the delivery schedule is going to affect your portfolio or may affect their suburban versus urban core.
Are you still seeing a healthy absorption of the new units or any change in the vacancy rates of new supply out there.
Yes, good morning, Thanks, Bob.
I would say anything thats underway is probably is going to get finished and we're not seeing.
Any cause for concern there in terms of absorption in fact, we've seen some pretty strong absorption in some of the projects. We've we've been tracking.
It does seem pretty clear that the debt markets are tightening.
Depending on.
Probably 65, LTV seems like it's trending lower.
The bank seemed to be.
Pulling some of the risk off.
For a whole host of reasons so.
That probably speaks to supply that.
24 months away, but we're not seeing any slowdown in demand.
And we're not I mean, I think here in the twin cities and I'd say this is probably true in Denver as well.
In town in the city proper assets are still not experiencing quite as much pricing power.
As the suburbs and.
And I expect that that could continue for a while based on work from home and things like that but but having said that we're still seeing good demand.
In those markets on an absolute and relative basis. So.
Yes.
We're not concerned about.
Our unduly concerned I mean, I would say, we're always watching it but.
We're not concerned about supply and as we've talked about I think a lot of NR.
Investor Duction meetings excuse me.
Our portfolio has some of the lowest supply coming.
On a relative basis.
Mhm.
Yes.
No I appreciate that just helpful.
Channel check there I appreciate that.
And going back to the portfolio.
Contemplated transaction.
How are you guys thinking about funding that that deal and it did.
A portion of disposition or you're planning on.
Yes.
A segment of the existing portfolio and accelerating dispositions on that.
And should we possibly anticipate.
Some additional disposition activity later this year.
We are going to issue a ton of equity on an NAV <unk> NAV basis.
So what it works pretty well it would've been balance sheet.
Neutral.
Day, one and probably positive yes, I think from the from the lending markets perspective, particularly the corporate lending markets perspective that.
That extra size and diversity would've probably up teared us a bit in pricing so.
It would've been a positive there from a debt to EBITDA and secured percentage and things like that would have been.
There would have been a little bit of work in the early days to kind of get us to where we are now, but we entered the unsecured market.
North of eight times debt to EBITDA, and we're sort of tracking on a forward looking basis into the mid sixes. So.
We are we're very comfortably in that market when people ask us about how do we think about that.
Frequently say, we think a lot about maintaining that access to the unsecured.
Market in the form of a direct placement of our insurance company market, which.
Which we were comfortably have access there.
As I said earlier when Brian asked the question.
We don't love the pricing of that market right now, but we're certainly not alone in that camp.
Mhm.
Okay. That's helpful. I appreciate that color. Thank you very much.
Thanks, Bob.
Thank you.
Final question comes from the line of Wes Golladay of Baird. Your line is now open. Please go ahead.
Hey, good morning to everyone looking at the supplement it looks like revenue growth meaningfully outpacing rent growth. This quarter can you talk about what is driving the other revenue growth.
Sure Good morning, Wes anyway take that yes, I mean, some of that is the lag in collecting the ratio utility billing so that bill backs from the tenants.
And when we experienced those rising expenses last quarter. There is then it gets build out so I think.
Big driver there in the growth in other revenue as the collection on the road.
Okay. So for I guess, maybe for modeling purposes. This looks like a good run rate as long as utilities are high.
Rob what do you think about that.
Okay.
Sorry, I missed that Russ can you repeat the second part.
Yes, when we look at the other revenues that just take a multi quarter true up where are we looking at the current other revenue for the quarter being a good run rate going forward as long as utility expenses are high.
Yes, so the one thing on the revenue side. In addition to US and said is from a collection standpoint, we were we were over 100%. This quarter. So that's really driving some of the differential as well so after adjusting for that.
It gives you a pretty good sense of what the run rate will look like we collected about 102% of revenues this quarter.
So on a normalized basis going forward, we would anticipate something closer to like 99 point.
5% ish, so that's adding to some of the difference as well.
Okay, and then can you talk about the revenue management strategy for the back half of the year are you looking to push rate for the balance of the year, maybe build occupancy later in the year can you just give us a little bit more color there.
Yes, I think we really do try to build occupancy going into the fourth quarter, we have lower lease explorations and.
And so our goal we feel good about the.
Sequential increase in occupancy was up 90 basis points between end of the third quarter ended the first quarter to end of the second quarter.
We continue to we want to keep building that.
There's always a balance of pushing pushing the rate and being able to being able to capture that loss to lease versus.
Occupancy so we.
We do we do hope that the occupancy can continue to grow and that we can continue to capture really great increases.
That's all for me thank you.
Thanks Ross.
Yes.
Okay.
Thank you no more questions registered at this time I'd like to hand, the conference call over to the management team for closing remark.
Super Thanks, Candice, we just want to thank everyone for your continued interest in center space and enjoy the rest of your summer everyone. Thanks.
Okay.
Okay.
Yes.