Q2 2023 Centerspace Earnings Call
Previous mid point.
Speaker 1: Please of 23 cents from the previous midpoint.
Speaker 1: Most of the increase is driven by the strong operating results we experienced during the first half of this year and our expectation that those trends will persist through the rest of the year.
Speaker 1: We expect same store NOI to increase by 9.25% at the midpoint and increase of 1.25% from the previous midpoint. We expect same store NOI to increase by 9.25% from the previous midpoint and increase of
Speaker 1: We now expect to sell two additional properties, increasing our target disposition activity to approximately $225 million from $165 million included in our previous guidance.
Speaker 1: And as Dan mentioned, we now expect to invest approximately $100 million in new acquisitions.
Speaker 1: Another key driver of the increase in our core FFO guidance is that we expect our G&A cost to be lowered by approximately $1 million compared to our initial guidance because we do not expect to fill the COO position that was vacated due to the CEO transition.
Speaker 1: To conclude, we are extremely pleased with our progress through the first half of this year and are optimistic that the positive trends will continue through the rest of the year.
Speaker 1: The entire team has worked extremely hard to execute the operational priorities we set out at the beginning of the year while undergoing a significant change in executive leadership.
Speaker 1: It is a testament to the culture of commitment that defines our company.
Speaker 1: And with that, I will turn it back to the operator to open up the line for questions.
Speaker 2: Thank you. If you would like to ask a question please press star followed by 1 on the cellophane keypad to join the question queue. When preparing to ask your question please ensure that your device is unmuted locally.
Speaker 2: We'll now take our first question from Brad Heffern from RBC. Graduates, the line is now open. Please proceed.
Speaker 3: Looking at the new guide, it seems like you're reading a portion of the second quarter outperformance into the second half of the year, but not all of it. So I'm curious, what are the things that were boosting the second quarter results that you don't expect to be as recurring?
Speaker 1: Morning Brad, this is a.
Speaker 1: You're right, I mean we are expecting some of the trends we saw in the second quarter to continue, although we are kind of building in some room for any changes as we kind of go through the third quarter, mainly where we have heavy expirations. For example, on turn costs, although we saw a dramatic decline in per turn costs, we saw
Speaker 1: in the second quarter. In the third quarter we do, we did build in some room about 10% more than what we saw in the second quarter just to account for heavy expirations as well as some use of contract labor which is typical during the third quarter. So that's one of the line items where we built in some room.
Speaker 1: And the same with utilities. We do expect utilities to continue decreasing on a year-over-year basis, but we did build in some room for some increases in the second half because the increase we saw in the second quarter was pretty dramatic. Hopefully that helps you bridge the gap.
Speaker 3: Yeah, that's perfect. Thanks. And then in the July leasing stats that you talked about in the prepared comments, it seemed like there was a decent-sized reduction in renewals in July . Is that what you would typically see on a seasonal basis, or is there something else driving that? Yeah, I think it's a good question. I think it's a good question. I think it's a good
Speaker 4: Yeah, keep in mind, and good morning Brad, but keep in mind that those renewals, you know, they price 60 to 75 days in advance of the new lease rates, so those a little bit lower renewals are really a reflection of where our lease rates were at the end of the first quarter.
Speaker 4: So those kind of fluctuate, they trail, those renewal rates will trail the new leasing rates. So I would expect that we're going to see that kind of level off and then maybe a slight uptick in those as we head into fall.
Speaker 5: Okay, thank you.
Speaker 2: Thank you Brad. Our next question comes from Barry Oxford from Colliers. Barry your line is now open please go ahead.
Speaker 6: Great. Thanks, guys. On the acquisitions that you're looking at, would you look at any new markets, or are you going to limit it to the markets that you guys are currently in as you indicated on the remarks, the second tier?
Speaker 4: areas? Yeah, good morning Barry. That's a great question. I think one of the things that we are really working on with respect to our portfolio recomposition is expanding our Mountain West portfolio. And so as we look at new acquisitions, you know, we're more heavily targeting Denver than we...
Speaker 4: is really where you might see us pick up some activity.
Speaker 4: Okay, great. So short answer is yes, we would like to expand which would mean new market presence.
Speaker 6: Okay, perfect. Perfect. When I look at the same store expense increase of 3.3.
Speaker 6: A lot of other companies have talked about insurance increases. Have you guys already kind of experienced that and therefore, throughout the rest of the year you shouldn't really see a jump until renewals come? How should I be thinking about insurance costs over the next couple of quarters?
Speaker 4: Yeah, over the next couple of quarters, I think our insurance costs are going to remain steady. Our renewal doesn't happen until November 15th, so towards the end of the year. We are starting to get some indications back on our renewals, and we have a smaller portfolio that will renew in September .
Speaker 4: that we're seeing a pretty significant increase on, but that's really a relatively small part of that. And then into next year, I think we are gonna see a pretty large uptick, consistent with what the rest of the industry is hearing, you know, between 12 and 20% is where brokers are guiding us now.
Speaker 4: I think for this year, we're going to see very little interruption or disruption increase in insurance costs during the next couple of quarters, but next year we're planning on being a different story.
Speaker 6: Right, got it. Okay, that makes a lot of sense. Appreciate the color. Thanks, guys.
Speaker 2: Thank you, Barry. Our next question comes from Quang Mitchell from Piper Sandler. Quang, your line is now open. Please go ahead.
Speaker 7: Hey, good morning. Thanks for taking my question. So just going back to the guidance and the large increase, I guess I was just wondering if
Speaker 7: if the primary difference in the driver of the large increase now versus maybe not having any increase after the first quarter is it's maybe The stronger same store NOI it's safe store revenue. They've been anticipating. I know you guys mentioned that increased demand stronger
Speaker 7: But yeah, I guess I was just curious about what the primary driver was to really increase the guidance to now versus maybe not have any impact in the previous quarter.
Speaker 4: Yeah, thanks Connor. I think, you know, this is a cumulative increase, so we did not increase after the first quarter, even though we had a good NOI experience and really, I'd say, outperformed where our original guidance was for the first quarter as well. But due to CEO transition, that disruption, we were...
Speaker 4: disruption or any loss of other key team members and we haven't. So I think this larger raise represents two things. One, how we feel like the transition has gone and certainty now and how that's going to play out in the GNA and two, you know, the strong operating results. So a big driver is the NOI, that big NOI increase, but we...
Speaker 4: quarter. You know original 2023 guidance was a little more conservative on both revenues and expenses and we've been having favorable experience in both. So it is a big jump but it's both quarters put together and positive results with respect to the transition.
Speaker 1: in the way of little disruption. Rob, is there anything you wanted to add to that? No, I think you covered everything, and Connor, you know, as we kind of spoke last quarter, we were still at the beginning of the first half of leasing season, and as we went through the first half of the leasing season, we did see turn costs, which were, you know, which were what kind of drove us, drove our expenses.
Speaker 1: as we kind of went through the first half of the leasing season, we feel confident about what that is trending at and building that in was another component along with some utilities expenses where we've seen the trend turn positive as well in our favor. Thank you. I appreciate the color. And then just following along with the operating system utility.
Speaker 7: the higher comps in the prior year and year over year comparison? Or does it maybe reflect the rollout of rubs, anything else? Or how should we be thinking about the...
Speaker 7: to operating expenses and utilities included in that going forward, regarding the growth rate of it. We all know that droughtNick in the U.S. some of it's not in the United States but it is
Speaker 1: Sure, yeah, so with respect to utilities specifically, in the first half of last year we saw utilities increased by 25%. So a part of it is really the comparison. And we have seen utilities cost per unit come down.
Speaker 1: Now with respect to the RUBs rollout that you mentioned, that is not in that line. So what you see in the utilities line is purely expense driven by the drop in per unit cost.
Speaker 1: The income that we get with respect to the rub's rollout is in the other revenue section, which is driving a little bit of the outperformance from a revenue standpoint. With respect to the rest of the op-ex, as you mentioned, it's again, confidence in some of the trends that we've seen in the first half of the leasing season, even though we've proven.
Speaker 1: some of these trends through the second half of the year, and that's what's driving most of the change in guidance from an NOI perspective, because as you see from a revenue perspective, our guidance is we did tighten the range a little bit and increase the midpoint, but it's not very different from what we put out last quarter.
Speaker 2: Great, thank you very much. Thank you Conor. Our next question comes from Rob Stevenson from Jamie Montgomery-Scott. Will Pauline Quadileedeaden's March and please go ahead?
Speaker 8: Good morning, guys. And 90 to 100 million of investments, sort of narrow number, is that already under contract identified or is that something that you're just putting in there as a placeholder at the moment?
Speaker 4: Yeah, good morning Rob. We do have an asset under contract in the Mountain West and so we feel pretty confident that we're just starting the due diligence on it so of course there's no certainty yet in it but it is a narrow range because we feel confident.
Speaker 4: We also are looking at our pipeline and seeing what else might be behind that and so really felt a good confidence that we could include it in the guidance.
Speaker 8: Okay, and so that 95 to 100 billion represents that one asset?
Speaker 9: Yeah.
Speaker 8: Okay. And then, Baraf, I mean, I think there was a little, I think it was, you had a little less than 20 million out on the line, which I think on the supplement says 735 interest rate. Where can you get debt cheaper today to finance this acquisition longer term? And how excited are you going to be to finance something at a 735?
Speaker 1: interest rate for anyone at the period of time. I mean, the answer is not where we're excited to finance it long-term at 7%. For Rob likes the challenge, Rob. Yeah, it's respect to this particular asset, as Ann mentioned. We have identified that asset. We are going through due diligence.
Speaker 1: There is the possibility of a loan assumption that we've kind of built into the numbers. So that is expected to be pretty close to where our rated average interest rate is on an overall basis today. So that is kind of built into the numbers. The rest of it is gonna come from, you know, the proceeds from the sales. So overall, as we think about financing this,
Speaker 1: additional assets that we are expecting to sell in the second half of this year. In terms of where we can find good financing, I mean obviously the spreads have widened dramatically between the private placement market which we have tapped in the past versus the secured debt market.
Speaker 1: with spreads being where they are, if you're looking at long-term financing just on a cost basis, you're gonna be forced to kind of look at long-term agency debt, which is the most competitive form of financing based on some recent conversations we've had with folks in the industry.
Speaker 1: But with respect to this acquisition, we have kind of laid out the funding plan.
Speaker 8: All right, that's helpful. Thank you. And then what are you seeing in terms of bad debt trends these days? Any material uptick and skips and a VIX and things like that?
Speaker 1: Bad debt collection rates are holding pretty steady. In the first half we've seen … …
Speaker 1: bad debt at about 20 to 30 basis points. We expect that trend to continue. What we've also seen is less volatility with respect to collections. So all of that kind of bodes well for the second half of the year where we've kind of provided for a little more margin, not a lot more.
Speaker 1: But what we've seen so far and the most encouraging trend is really the less volatility and the higher collection rates relative to what we've seen in the past. And we expect that to kind of hold for the second half.
Speaker 8: All right, and then last one for me. And one of the things that's benefited all of the apartment rates on the OPEX side of last few years is increasing use of technology, not only reduce headcount, but efficiency and maintenance and all sorts of other areas. Where are you guys in terms of that spending and the realization of the benefits?
Speaker 8: and how much more material technology upside is coming to you guys through operations here over the next, you know, four to six quarters.
Speaker 4: Yeah, this is a million dollar question, Rob, but I think we're still at the beginning of really identifying what the efficacy of that technology is. And as you implement these technologies, sometimes you see those boosts in the margin, but you feel it on your DNA side.
Speaker 4: with additional staffing to run those from a centralization perspective. So we're really monitoring that, and I'd say we are just finishing a pilot of smart home technology, which we expect to roll out throughout the portfolio. But we wanna be really careful and disciplined and make sure that we're not just trading dollars between NOI and GNA, number one.
Speaker 4: These technologies are expensive. Most of them come with per door fees that we have to take into consideration into perpetuity. And we also have a portfolio that has a unique footprint where in some of our smaller tertiary markets, the technology isn't as important to driving the revenue as it might be in urban markets. So.
Speaker 4: resident experience and really driving margin. We feel very good about where we are on foundational platform. We made a lot of large investments over the last couple years in our accounting, our business intelligence systems, how we're gonna use data and data analytics from everything to providing information to our community-based teams in dashboard form to how we're doing our forecasting process. So,
Speaker 8: technologies and and our goal is to really stay disciplined and make sure that it gets to the bottom line. All right and is there a material spend coming in the back after this year or next year for the smart home or anything else?
Speaker 4: That would be in our value add numbers. So we did increase our guidance as to what we're going to spend on value add. And some of that is related to smart home technology. Part of our discipline around implementing that is making sure that it does provide a return.
Speaker 4: in line with our value add return thresholds for both, you know, for common areas and units. All right, that's helpful. Thanks guys, appreciate the time this morning.
Speaker 1: specifically in the second quarter and then also driven by some of the GNA savings that we expect as a result of the CEO transition. What markets are showing the strongest and least strongest blended growth as of now?
Speaker 4: Yeah, we're seeing the strongest growth in our markets where we have value add within the SAM store portfolio. So Omaha, St. Cloud, those are really showing the strongest, strongest growth. And that is driven by value add spend over the last 18 months.
Speaker 10: If I can squeeze in one more, could you elaborate a little bit on the dispute in the lawsuit filed by the adjacent property and are there any chances of this being recurring costs going forward? If you can squeeze in one more, could you elaborate a little bit on the dispute filed by the adjacent property and are there any chances of this being recurring costs going forward?
Speaker 1: So this would be fully stabilized and operating, you know, at the time of acquisition. Okay, and do you have the loss to lease of the portfolio today? Yeah, as we sit here today, the loss to lease is close to about 10%. And as we go through the second half of our peak leasing season, we expect to realize some of it as leases kind of roll. Okay, and then the last one, you mentioned not filling the COO position. Is that something you may do next year? And is there any, I guess, until positions throughout?
Speaker 4: senior team has taken on a little bit of different responsibilities and or expanded duties to fill in some of that but with the operational knowledge that I have having been in that role and you know the strength that Bharav brings to the table I think we feel good about that. We have beefed up our team a bit most of you probably noticed that Josh Clutch joined us.
Speaker 4: as a director of investment operations. So we're happy to have him on board and you heard him at the top of the call, tell you that you shouldn't believe anything that we say. I'm a call. But so I think we don't have any unfilled positions and particularly given the fact that we have disposed of a lot of assets this year, we'll have 13 dispositions. It'll be just right around 2000 units.
Speaker 4: We are watching that GNA closely and really focusing on making sure that our support groups provide efficient and effective service to our operations team. So I don't think we're going to see any material increases on that side of the ledger, added positions and our large increases in GNA.
Speaker 2: Fantastic, thanks a lot. There are currently no further questions on the line, so with that, I would like to turn back to Anne Olsen, CEO , for any closing comments. Thank you all for listening today and for your great questions.
Speaker 2: and I hope you all have a great day. That concludes Safe Conference, go everybody. Thank you very much for joining. You may now disconnect your lines. Have a great day.