Q3 2023 Centerspace Earnings Call
Okay.
Venter spaces Form 10-Q for the quarter ended September 32023 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 center space homes 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 statements are subject to risks and uncertainties discussed in our filing 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.
I'll now turn it over to Anne Olson for the Companys prepared remarks.
Good morning, everyone and thank you for joining centers basis third quarter earnings call with me. This morning is <unk> Patel, our Chief Financial Officer, we're happy to be here today to discuss with you our third quarter results our outlook for the remainder of 2023 and an update on our investment activities.
We're pleased with our results on revenue and expenses and year to date, we've increased <unk> by six 8% year over year.
Starting with revenue in our same store portfolio, we achieved a five 7% year over year increase this was slightly ahead of our expectations as we realized sequential revenue growth, even as new lease rental rates have moderated with respect to revenue trends in the third quarter, we executed one third of our lease exploration and.
On same store new lease trade outs, we achieved two 3% increases and four 9% increases on renewals, resulting in a three 9% blended lease trade out.
Sequentially market rent is declining as leasing slides into the fourth quarter and we expect that trend to continue in October our same store and leasing trade outs look positive at a blended 8%, which is a combination of new lease trade outs of negative two 4% and renewal lease rental rates increasing five three.
Ascent.
This slowdown in leasing has been factored into our revenue guidance and with over 86% of our leases in the books for 2023, we're focusing on occupancy to close out the year and maintain a strong position headed into 2024. This will capitalize on the stability of our portfolio fundamentals with 23, 8% rent to household income levels.
And our collection rate in the third quarter of 99, 6%.
With respect to expenses, we had a six 1% year over year increase the largest driver of increases continue to be real estate taxes and insurance. This quarter non controllable expenses were up 11, 3% year over year, driven by a 21, 4% increase in insurance costs.
We're not anticipating that we'll be seeing any relief on the insurance front into 2024. So we will focus on what we can control.
Cost control measures implemented at the beginning of the year continue to benefit our repairs and maintenance costs. This in lower utilities expense are offsetting the impact of increased onsite compensation. Our overall results also benefit from lower G&A expenses after the CEO transition earlier in the year.
Our results and outlook for the remainder of the year led us to increase our guidance for Rob will cover our guidance projections in more detail in his remarks, but I wanted to highlight that we reduced our estimate of 2023 value add capital spend due to timing of projects. We have seen market specific softening and some leasing that is keeping our eyes sharp on our underwritten premiums and we will.
Maintain discipline and staying nimble into next year. If there are projects that don't hit our expected returns.
On balance, we're focusing our value add capital on our highest return opportunities, which at this time or in the smart home and Smart community category. Our current plan has the implementation of smart home technology and about 50% of our total communities by the end of 2024.
Unknown Executive: Center Spaces formed 10Q for the quarter-end of September 30th, 2023, 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 centerspacehomes.com and filed on form 8K. It's 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 statements are subject to risks and uncertainties discussed in our filing under the section titled Risk Factors and in our other filings with the SEC.
In addition to this implementation during the quarter, we completed 350 in unit renovations as well as associated common area amenity enhancements.
Moving to investment activity earlier this month, we announced that we had sold four communities in Minot, North Dakota, marking our exit from the mine not market for an aggregate sales price of $82 5 million. This disposition included approximately 50000 square feet of commercial space.
Unknown Executive: We cannot guarantee that any forward-looking statement will materialize and your caution not to place undue reliance on these forward-looking statements. Please refer to our earnings release for recommendations of any non-gap information which may be discussed on today's call.
We also closed on an acquisition in Fort Collins, Colorado Lake Vista apartment homes was purchased for $94 5 million approximately a 5% cap rate. The acquisition included the assumption of $52 7 million in mortgage debt with an attractive interest rate of 345%.
Our year to date transactions continue to benefit portfolio quality and we're pleased with the execution of our dispositions and the addition of Lake Vista, which is a 2011 built community with 303 homes.
Unknown Executive: I'll now turn it over to Anne Olson for the company's prepared remarks.
Anne Olson: Good morning everyone and thank you for joining Center Spaces 3rd quarter earnings call. With me this morning is Barack Patel our chief financial officer. We're happy to be here today to discuss with you our 3rd quarter results are all looked for the remainder of 2023 and an update on our investment activity. We're pleased with our results on revenue and expenses and year-to-date we've increased CoreFFO by 6.8% year-over-year. Starting with revenue in our same store portfolio we achieved a 5.7% year-over-year increase.
Our entrance into the four columns MSA creates a broader geographic footprint in Colorado and as an extension of the operating scale and efficiencies. We have built in the mountain West we liked the diverse economic base and four columns, including health care High Tech manufacturing and education cost of Homeownership is high with the median single family home value of 560 <unk>.
And the market features significant outdoor amenities, including being a gateway to Rocky Mountain National Park.
Otherwise transaction activity is slow as price discovery continues and we maintain focus on strengthening our balance sheet for when activity picks up now I will turn it over to Rob to discuss our financial results balance sheet and outlook for the remainder of 2023.
Anne Olson: This is slightly ahead of our expectations as we realize sequential revenue growth even as new lease rental rates have moderated. With respect to revenue trends in the 3rd quarter we executed one-third of our lease expiration. On same store new lease trade-outs we achieved 2.3% increases and 4.9% increases on renewals resulting in a 3.9% blended lease trade-out. So, sequentially market run is declining as leasing flows into the 4th quarter and we expect that trend to continue.
Thanks, Ed and good morning, everyone. We are pleased to report another quarter of strong earnings with quarter four $1 20 per diluted share driven by a five 4% year over year increase in same store NOI.
On a sequential basis same store NOI decreased by three 7% driving the sequential decline in quarter four as revenue was relatively flat while expenses grew due to higher spend in certain categories typical of the summer months, when we have a huge chunk of our leases expiring.
Anne Olson: In October our same store leasing trade-outs look positive at a blended 0.8% which is a combination of new lease trade-outs of negative 2.4% and renewal lease rental rates increasing 5.3%. This slowdown in leasing has been factored into our revenue guidance and with over 86% of our leases in the books for 2023 we're focusing on occupancy to close out the year and maintain a strong position headed into 2024. This will capitalize on the stability of our portfolio fundamentals with 23.8% rent to household income levels and a collection rate in the 3rd quarter of 99.6%.
Our balance sheet remains in one of the strongest positions. The company has experienced we ended the quarter with no balance on our line of credit and a weighted average interest rate of 346%.
Well lathered maturity schedule with a weighted average maturity of approximately seven years and minimal debt coming due in the near term.
Our net debt to EBITDA pro forma for our Lake Vista acquisition and minor dispositions is approximately seven times.
This metric includes the mortgage we assumed as part of the Lake Lister purchase as the coupon of 345% on the mortgage we assumed a significantly below the current market rate and resulted in a fair market value discount of $3 9 million on the date of acquisition.
Anne Olson: With respect to expenses we had a 6.1% year-over-year increase. The largest driver of increases continue to be real estate taxes and insurance. This quarter non-controllable expenses were up 11.3% year-over-year driven by a 21.4% increase in insurance costs. We're not anticipating that we'll be seeing any relief on the insurance front into 2024 so we will focus on what we can control. Cost control measures implemented at the beginning of the year continue to benefit our repairs and maintenance costs.
This discount will be amortized over the remaining term of just under three years at a rate of $370000 per quarter and we will.
Increase our interest expense relative to the coupon payments.
Consistent with our past practice, we will make an adjustment for it in calculating our core ethical historically this adjustment has decreased every quarter for per share as we have been amortizing above market debt.
Anne Olson: This and lower utilities expense are offsetting the impact of increased on-site compensation. Our overall results also benefit from lower G&A expenses after the CEO transition earlier in the year. Our results and outlook for the remainder of the year led us to increase our guidance. Barab will cover our guidance projections in more detail in his remarks, but I wanted to highlight that we reduced our estimate of 2023 value-add capital spend due to timing of projects.
Now I will discuss our financial outlook for 2023.
Based on our Q3 results, we are increasing the midpoint of our full year 2023 quarter for full guidance by two to $4 67 per diluted share.
There were no changes to the expected increases in same store NOI, our revenues at the mid points, where we still expect 9% to 5% and seven 5% increases respectively. As revenues and expenses were generally in line with expectations during the quarter.
Anne Olson: We have seen market-specific softening in some leasing that is keeping our eyes sharp on our underwritten premiums and we will maintain discipline and stay nimble into next year if there are projects that don't hit our expected returns. On balance, we're focusing our value-add capital on our highest return opportunities, which at this time are in the smart home and smart community category. Our current plan has implementation of smart home technology in about 50% of our total communities by the end of 2024. In addition to this implementation, during the quarter, we completed 350 in-unit renovations, as well as associated common area amenity enhancements.
We were able to capture loss to lease in a bulk of explorations before we saw rental rates and demand softened towards the end of peak leasing season, which is something we experienced at the same time last year and generally aligns with our historical trends for the portfolio on.
On the expense side, we have seen decreases in certain controllable categories that grew significantly last year and we expect the trend to continue.
Lastly, after completing our minor dispositions and linked with the acquisition guidance incorporates no further transactions for the year.
Anne Olson: Moving to investment activity, earlier this month, we announced that we had sold four communities in Maynot, Dwork Dakota.
To conclude we are pleased to report another quarter of strong operating results, while simultaneously advancing our key strategic priorities of improving portfolio quality and market exposure through capital recycling.
Anne Olson: Marking our exit from the Maynot Market, for an aggregate sales price of 82.5 million. This disposition included approximately 50,000 square feet of commercial space.
I want to compliment the team for their flawless execution of our plan in an extremely challenging transaction environment.
Anne Olson: We also closed on an acquisition in Forecombe, Colorado. Lake Vista apartment homes was purchased for 94.5 million, approximately a 5% cap rate. That position included the assumption of 52.7 million in mortgage debt with an attractive interest rate of 3.45%. Our year-to-day transactions continue to benefit portfolio quality, and we're pleased with the execution of our dispositions and the addition of Lake Vista, which is a 2011 build community with 303 homes. Our entrance into the Forecombe's MSA creates a broader geographic footprint in Colorado, and is an extension of the operating scale and efficiencies we have built in the mountain west.
And with that I will turn it back to the operator to open up the line for questions.
Okay.
Thank you. Thank you I would like to ask a question today you may do so by pressing star followed by one on your telephone keypad when preparing for your question. Please ensure your device is amit likely and if you'd like traffic. Your question. Please press star followed by chain.
We will now take our first question from Bob <unk> from RBC capital markets. Brad. Your line is now open. Please go ahead.
Yeah. Thanks, Hi, everybody on the new lease number in October brought it sounded like you said that that's a relatively normal number for October is that correct and I guess, just any color as to whether you are seeing.
Anne Olson: We like the diverse economic base in Forecombes, including health care, high-tech manufacturing, and education. Cost of home ownership is high, with a median single-family home value of 560,000, and the market features significant outdoor amenities, including being a gateway to Rocky Mountain National Park.
Any additional pressure versus what you would normally see on lease rates.
Okay.
Good morning, Brad This is Ann Thanks for your question I think Brad did reiterate that is fairly normal we have seen through the second half of the year in particular, a real return to pre COVID-19 seasonality. After a couple of years of.
Anne Olson: Otherwise, transaction activity is slow, as price discovery continues, and we maintain focus on strengthen our balance sheet for when activity picks up.
Bhairav Patel: Now, I'll turn it over to Barab to discuss our financial results, balance sheet, and outlook for the remainder of 2023. Thanks, Ann, and good morning, everyone. We are pleased to report another quarter of strong earnings with $1.20 per diluted share, driven by a 5.4% year-of-year increase in same-store NOI.
Very steep run up.
No we arent concerned about what we're seeing in October it is pretty isolated to.
Markets, where we had a very steep increases in the mountain west and are have more supply pressure on a relative basis than the rest of our markets that would be billings rapid city and the other mountain west a little bit in Denver, We're down in October about nine and new leases so not real estate and then we're about flat in Minneapolis.
Bhairav Patel: On a sequential basis, same-store NOI decreased by 3.7%, driving the sequential decline in Cora Fafo, as revenue was relatively flat, while expenses grew due to higher spending certain categories, typical of the summer months when we have a huge chunk of other leases expiring. Our balance sheet remains in one of the strongest positions the company has experienced. We ended the quarter with no balance on our line of credit, and a weighted average interest rate of 3.46%.
Okay got it and then on supply not something that you typically have to deal with but that's obviously been the theme this quarter. So.
What are the markets, where youre seeing elevated supply I think you just gave a couple.
Bhairav Patel: We have a well-added maturity schedule with a weighted average maturity of approximately seven years and minimal debt coming due in the near term. Our net debt to EBITDA will form up for our Lake Vista acquisition and minor dispositions is approximately seven times. This metric includes the mortgage we assume this part of the Lake Vista purchase. As the coupon of 3.45% on the mortgage we assume is significantly below the current market rate, it resulted in a fair market value discount of 3.9 million on the date of acquisition.
And then what are your expectations for supply in 2024.
Yes, that's a great question. It certainly is a big theme one of the hallmarks of our portfolio as our markets are more insulated from supply there are smaller.
But that also means that they're more susceptible to supply so someplace like billings, which is a small market has very little supply, but it has impacted it slightly there I'd say, our most supply affected markets, our Denver and Minneapolis, we feel good about our position in those markets. Our rents are still at a level below new brand new.
Bhairav Patel: This discount will be amortized with a remaining term of just under three years at a rate of $370,000 per quarter and will increase our interest expense relative to the coupon payment. Consistent with our past practice, we will make an adjustment for incalculating our core effortful. Historically, this adjustment has decreased our core effortful per share as we have been amortizing above market debt.
<unk> to keep us a little bit insulated, but we are feeling pressure there with respect to 2024 I think like most of the industry, we're really expecting supply to moderate and in fact.
Unlikely to see a lot of new products coming on or starting lease up in 2024, but we may have some product.
Bhairav Patel: Now I will discuss our financial outlook for 2023. Based on our Q3 results, we are increasing the midpoint of our full year 2023 core effortful guidance by 2 cents to $4.67 per diluted share. There were no changes to the expected increases in same-store NOI or revenues at the midpoint, where we still expect 9.25% and 7.25% increases respectively, as revenues and expenses were generally in line with expectations during the quarter. We were able to capture a loss to lease in a bulk of expirations before we saw rental rates and demand soften towards the end of peak leasing season, which is something we experienced at the same time last year and generally aligns with historical trends for the portfolio.
Has taken longer to lease that falls into 2024, we expect the effective supply to be much more.
Muted in 2024.
Okay. Thank you.
Yeah.
Thank you Brad our next question comes from John Kim from BMO Capital market. John Your line is now open. Please go ahead.
Good morning, this is robin handle them sitting in with John.
Just to touch on the focus on occupancy for the remainder of the year.
Which what level of occupancy translate to the respective high end low end.
Same store revenue and could you also give us a sense of how occupancy lift between your value add and stabilized same store portfolio.
Bhairav Patel: On the expense side, we have seen decreases in certain controllable categories that grew significantly last year and we expect the trend to continue. Lastly, after completing our MyNotDestositions and LakeVista acquisition, guidance incorporates no further transactions for the year.
Okay.
Hey, Robyn this is Greg.
So with respect to Q4, we expect occupancy to be in the mid 94 range that is what we are kind of built into the guidance.
Bhairav Patel: To conclude, we are pleased to report another quarter of strong operating results while simultaneously advancing our key strategic priorities of improving portfolio quality and market exposure through capital recycling.
I would say $94 five to 94, 8% is what we're kind of.
Factoring into the guidance.
Bhairav Patel: I want to compliment the team for their flawless execution of our plan in an extremely challenging transaction environment, and that I will turn it back to the operator to open up the line for questions. Thank you.
And with respect to value add it's about 25 basis points, which is attributable to value add from an occupancy perspective.
Got it and.
Do you consider for Collins as Standalone market from from Denver, and could we expect future investments into market.
Unknown Executive: If you would like to ask a question today, you may do so by pressing star followed by one on your telephone keypad. When preparing for your question, please ensure your device is unmuted locally. And if you'd like to rotate your question, please press star followed by two.
Yeah.
Yes.
For a comprehensive near Denver, but not but it does have its own MSA and some of its own economic drivers.
Particularly with respect to Colorado State University, and Hewlett Packard has has a large base there so a little less energy and gas concentration than the Denver market.
Brad Huffman: We will now take our first question from Brad Huffman from RBC Capital Market. Brad, your line is now open. Please go ahead. Yeah, thanks, everybody. On the new lease number in October, Brad, it sounded like you said that that's a relatively normal number for October. Is that correct? And I guess just any color as to whether you're seeing any additional pressure versus what you would normally see on lease rates? Good morning, Brad.
The core of the Denver market. So it does have its own demographics and available information a little bit less supply driven there. So we do consider it a separate market. It is an extension for us of Denver from a regional and scale basis on an operations basis. It's within 30 minutes of some of our assets that are in the Denver.
Anne Olson: This is Ann. Thanks for your question. I think broad did reiterate that is fairly normal. We have seen through the second half of the year in particular a real return to pre-COVID seasonality after a couple years of, you know, very steep run-up. So we aren't concerned about what we're seeing in October. It is pretty isolated to, you know, markets where we had very steep increases in the Mountain West and or have more supply pressure on a relative basis than the rest of our markets.
MSA, including our asset in Longmont and I do we are going to look there to continue to scale out that mountain west platform. So.
When we see some transactions come back we would like to see more in Fort Collins.
Okay. Thank you.
Thank you John I have to remind that to ask a question. Please press star followed by one on your telephone keypad.
Our next question comes from Wes Golladay from Bad Weiss. Your line is now open. Please go ahead.
Anne Olson: That would be, you know, Billings Rapid City in the other Mountain West, a little bit in Denver. We're down in October about 0.9 in new leases. So not real steep. And then we're about flat in Minneapolis. Okay, got it. And then on supply, not something that you typically have to deal with, but that's obviously been the theme this quarter. So what are the markets where you're seeing elevated supply? I think you just gave a couple.
Hey, good morning, everyone. Good morning back to the Smart home technology Raw you put into this year, how much of a lift to same store revenue was up this year and would you expect or greater with next year.
Okay.
So this year, we started this year so the increase on the.
Revenue side has been relatively minor.
Anne Olson: And then what are your expectations for supply in 2024? Yeah, that's a great question. It certainly is a big theme. You know, one of the hallmarks of our portfolio is our markets are more insulated from supply. They're smaller, but that also means that they're more susceptible to supply. So some place like Billings, which is a small market has very little supply, but it has impacted it slightly there. I say our most supply affected markets are Denver and Minneapolis.
Simply because we're in the middle of the rollout we think that that will continue into next year. There isn't a large component I think the premiums on those are about 40 to $60 a unit.
So not a massive lift on the revenue side, but we really do expect a lot of expense savings.
Particularly into next year from some of this our return are calculated ROI that we're targeting on those was about 21, 4%.
Anne Olson: We feel good about our position in those markets. Our rents are still at a level below brand new product to keep us a little bit inflated, but we are feeling pressure there. With respect to 2024, I think like most of the industry, we're really expecting supply to moderate. And in fact, I'm likely to see a lot of new product coming on or starting lease up in 2024, but we may have some product that has taken longer to lease that falls into 2024. We expect the effective supply to be much muted in 2024. Okay, thank you. Thank you, Brad.
So great investment is a combination of cost savings for us and and revenue.
Yeah no. Thanks for the return on that as well appreciate that and then you did a lot of capital recycling of late and I'm. Just wondering when you look at the portfolio now Super pricing is is there a chance to do more of that.
Okay.
I think so.
Really taking a keen eye to what in our portfolio is performing well what markets and types of assets. We think have long term growth potential and where we may do some trading out.
The flipside of the coin on the dispositions is that Theres, a real dearth of acquisition opportunities, particularly in markets that we like Theres a lot of capital still waiting to be place, even with high interest rates and a lot of sellers who are holding so.
John Kim: Our next question comes from John Kim from BMA capsule market. John, your line is now open. Please go ahead.
We do see on the disposition side.
Robin Haneland: Good morning. This is Robin Haneland sitting in with John. I wanted to talk Sean to focus on occupancy for the remainder of the year, which, which level of occupancy translates to the respective high and low end on the central revenue. And could you also give us a sense of how occupancy is split between your value add and stabilize the portfolio? Robin, this is rough. Yeah, so with respect to Q4, we expect occupancy to be in the mid 94 range.
We think we can still achieve really good pricing given the amount of capital.
With respect to the mine not sale, we had four full portfolio best and final offers which we thought was a very strong bid pool for those assets and in North Dakota.
So we're keeping a strong eye on it and we'd like to be well positioned to really focusing on the balance sheet right. Now so that we can take advantage of what opportunities come whether those be in the form of capital recycling or new opportunities.
Great. Thanks for the time.
Robin Haneland: That is what we have kind of built into the guidance. So I would say 94 and a half to 94.8% is what we are kind of factoring the guidance. And with respect to value added to about 25 basis points, which is attributable to value I from an occupancy perspective.
Thank you and we now have a follow up question from Bob <unk> from RBC capital markets.
Hey, everybody I'm back.
Just a couple of quick little things.
Rob can you give us a loss to lease on the earn in that you are expecting for 2024 currently.
Robin Haneland: Got it. And do you consider for Collins a standalone market from Denver and could we expect future investments in the market? Yeah, you know, four causes near Denver, but not, but does have its own MSA and some of its own economic drivers, particularly with respect to Colorado State University and, you know, Hula Packard has has a large base there. So a little less energy and gas concentration than the Denver market, you know, the core of the Denver market.
Sure the loss to lease as it stands as of today is about two 8%.
<unk> is about a point and a half now this has kind of declined as you know it's a point in time number. So this has declined over the summer months into today and that's a similar trend that we expected last year into this.
Time as well.
Okay got it.
And then on the expense picture for 24, I think you said no relief expected on insurance not expecting you to give guidance, but would you expect relief overall in expenses next year should we expect them to remain elevated.
Robin Haneland: So it does have its own demographics and available information, a little bit less supply driven there. So we do consider it a separate market. It is an extension for us of Denver from a regional and scale basis on an operations basis. It's within 30 minutes of some of our assets that are in the Denver MSA, including our asset and long month. And I do, you know, we are going to look there to continue to scale out that Mountain West platform. So, you know, when we see some transactions come back, we would like to see more in Fort Collins.
Well I am I, giving direction to you or to the people running my budgets here right.
I think what we're going to see and what we're starting to see as we have started to see some of the budgets come in for next year I think we're going to see some relief on taxes. Those are going to stay relatively flat I think our portfolio is very fully valued and with the with the higher interest rates. We have good reason to.
Robin Haneland: Okay, thank you. Thank you, John.
Believe that those will stay relatively flat insurance no relief other in other places you know over the past couple of years, we've had a lot of pressure on wages and onsite compensation.
Unknown Executive: As a reminder, to ask a question, please press star, followed by one on your telephone keypad.
Wesley Golladay: On next question, come from West Golladay from Badge. Where's your line is now open? Please go ahead.
We could see that moderate some back to normal levels.
3% to 4% there rather than the double digits, we've seen in the past couple of years.
Anne Olson: Hey, good morning, everyone. Come back to that smart home technology role that you put into this year. How much of a lift has seen for revenue was that this year, and would you expect a greater lift next year? So this year, we started this year, so the increase on the revenue side has been relatively minor, simply because we're in the middle of the rollout. We think that that will continue into next year.
But repairs and maintenance and turn costs continue to be a struggle as vendors are difficult to find and are and they are still.
Feeling some inflationary pressure in those services professional professional services category. So.
Think we're optimistic that we'll be able to hold revenue and grow NOI next year. That's that's really our core goal and focus right now is making sure that we can grow the NOI.
Anne Olson: There isn't a large component. I think the premiums on those are about 40 to $60 a unit. So not a massive lift on the revenue side, but we really do expect a lot of that. Accent saving, particularly into next year from some of this, our return, our calculated ROI that we're targeting on those is about 21.4%. So great investment is a combination of cost savings for us and revenue. Yeah, no thanks for the return on that as well. Appreciate that.
Okay I appreciate the follow ups.
Thank you Brad our next question is from Buck Horne from Raymond James Your line is now open. Please go ahead.
Hey, Thanks. Good morning, just wondering if you could comment on any recent update on leasing traffic trends either physical traffic in the communities or online.
Has that been trending through the end of October.
Okay.
Yes sure.
Anne Olson: And then you did a lot of capital recycling of late. And just wondering when you live at the portfolio now, super price is, is there a chance to do more of that? I think so, we're really taking a keen eye to what in our portfolio is performing well, what markets and types of assets we think have long-term growth potential, and where we may do some trading out. The flip side of the coin on the dispositions is that there's a real dearth of acquisition opportunities, particularly in markets that we like.
Starting in June and July we really saw kind of a slowdown in leasing traffic, we have been able to offset that slowdown which.
Through the third quarter was about 20% year over year less leasing traffic and that would be a combination of online foot traffic phone.
And we've been able to offset that with higher retention and more people are staying in place that makes sense less people are are looking and so theyre staying where they are and also with higher closing ratios. So we've really been focused on making sure that our leasing techniques are effective that we're meeting the customer where they are and really getting those leases in the door.
Anne Olson: There's a lot of capital still waiting to be placed even with high interest rates and a lot of sellers who are holding. So we do see on the disposition side, we think we can still achieve really good pricing given the amount of capital. With respect to the mine out sale, we had four full portfolio best and final offers which we thought was a very strong bid pool for those assets in North Dakota.
In into October we're seeing that same slowdown it feels seasonal.
And a lot of our markets people don't like to move on though in the winter and generally people are looking a little bit further out so people coming in today are looking for apartments for November December were feeling a seasonal slowdown there, but nothing that's concerning to us from an occupancy standpoint, we feel like we're going to be able to meet our goals. This year.
Anne Olson: So we're keeping a strong eye on it and we'd like to be well positioned, really focusing on the balance sheet right now so that we can take advantage of what opportunities come, whether those be in the form of capital recycling or new opportunities.
Got it very helpful. Thanks for the color and just following up on the.
The personnel or just the cost youre seeing in terms of just weighed in on site costs.
Wesley Golladay: Great. Thanks for the time.
Just curious how youre thinking about how you may be competing against more lease up properties next year.
Unknown Executive: Thank you, Wes.
John Kim: We now have a follow-up question from the other fund from all BC capital markets. Hey, everybody. I'm back to pick up a little quick little things.
Is there an issue with other developers or other properties potentially coming in and trying to poach. Some of your employees to get their properties leased up if they are familiar with those markets or how do you manage that.
Bhairav Patel: Rob, can you give the lost to lease in the earning that you're expecting for 2024 currently? Sure. The lost to lease as it stands as a today is about 2.8%. The earning is about a point and a half. Now, you know, this has kind of declined. As you know, it's a point in time number. So this has declined over the summer months into today. And that's a similar trend that we expected last year into this time as well.
Process and maintain good retention with your onsite staff.
Bhairav Patel: Okay, got it.
Yes, that's a great question and you're highlighting an issue that I think is.
Facing all operators across the country, which is there is no pipeline of new leasing team and our maintenance professionals or anyone who works on site for us and so as new supply is delivered and the amount of units in communities out there. It does stretch the same staffing pool. So we have been focused on retention in the way.
Bhairav Patel: And then on the expense picture for 24, I think you said no relief expected on insurance, not expecting to give guidance, but would you expect relief overall on expenses next year? Should we expect them to remain elevated? Well, am I giving direction to you or to the people running my budgets here, Brad? I think what we're going to see and what we're starting to see as we have started to see some of the budgets come in for next year.
Professional development additional training opportunities and really trying to get some career pathing going for our onsite personnel to make sure and culture is huge for us making sure that this is a great place to work and then also on the replacement side, we're really focusing on talent acquisition, Onboarding and making sure.
Sure that we can get the right candidates and give them the tools to be successful right out of the gate. Another huge thing for US as you know is trying to leverage the technology that we've invested in to make it what is can be a very simple business easier to execute on site and I think the easier we can make it for them to be successful in their jobs, the better chance, we're going to have to.
Bhairav Patel: I think we're going to see some relief on taxes. Those are going to stay relatively flat. I think our portfolio was very fully valued and with the higher interest rates, we have good reason to believe that those will stay relatively flat. Insurance, no relief, other in other places, you know, over the past couple years we've had a lot of pressure on wages and on-site compensation. I think we could see that moderate some back to normal levels, you know, 3 to 4% there rather than the double digits we've seen in the past couple years.
Keep them from going to that lease up down the street.
Got it alright, thanks, guys. Good luck.
Thank you Paul our next question comes from Michael Gorman from BP.
Michael Your line is now open. Please go ahead.
Yeah, Thanks, and I was wondering if you could just talk about some of the new supply in some of your markets and the possibility that given the financing challenges that might turn into potential opportunities. If the developers can't roll the financing or maybe you can't get police have done quickly enough and then maybe if youre seeing that in.
Bhairav Patel: And but repairs and maintenance and turn costs continue to be a struggle as vendors are difficult to find and are and they are still feeling some inflationary pressure in those services, professional, professional services category. So I think, you know, we're optimistic that we'll be able to hold revenue and grow NLI next year. That's that's really our core goal and focus right now is making sure that we can grow that NLI.
What your appetite would be to take on.
Lease up potential through acquisitions.
Yes, I think there's two facets to what we're looking at from an opportunity perspective for investment to your question. One is existing developments that might have refinance risk and ore.
Bhairav Patel: Okay. Appreciate the thoughts. Thank you, Brad.
Buck Horne: Our next question is from Buck Horn from Raymond Jane. Buck, your line is now open. Please go ahead. Hey. Hey, thanks. Good morning.
A developer who wants to redeploy that capital because of timing or otherwise we are interested in stepping in probably not at an early stage lease up but we have before taking properties that are between 75% to 90 or just coming into stabilization, where you really have that first full year of lease explorations to work through.
Anne Olson: Just wondering if you could comment on any recent updates on leasing traffic trends, either, you know, physical traffic in the communities or online, how's that been trending through the end of October? Yeah. Sure. You know, starting in June and July, we really saw kind of a slowdown in leasing traffic. We have been able to offset that slowdown, which, you know, through the third quarter was about 20 percent year over year, less leasing traffic and that'd be a combination of online foot traffic, you know, phone.
Anne Olson: And we've been able to offset that with higher retention. More people are staying in place. That makes sense. Less people are looking, and so they're staying where they are. And also with higher closing ratios. So, you know, we've really been focused on making sure that our leasing techniques are effective, that we're meeting the customer where they are and really getting those leases in the door. In fact, hope we're seeing that same slowdown.
That would've been the case for us with Lira, which we acquired in Denver in September of 2022 that had just finalized lease up had a developer that for numerous reasons needed to get out of it. So we are looking for those opportunities. We think that pipeline is going to grow and then the other side as developers who are who are needing additional <unk>.
<unk> were really.
Theyre looking for opportunities to place mezzanine financing that might give us an opportunity to own the asset upon stabilization. So we've taken a few of those full circle in the past couple of years and that's another place where we see opportunities in that development pipeline for us.
Anne Olson: It feels seasonal, you know, in a lot of our markets, people don't like to move in the winter. And generally, people are looking a little bit further out. So, people coming in today are looking for apartments for November, December, you know, we're feeling a seasonal slowdown there. But nothing that's concerning to us from an occupancy standpoint, we feel like we're going to be able to meet our goals this year. Got it. It's very helpful. Thanks for the color.
Okay, great. Thank you.
Thank you Michael we will now take a follow up question from John Kim from beef and Mar to market. John Your line is now open. Please go ahead.
Hi, Robin here again.
Of course, Omnichannel application fraud with anything you've seen in your markets.
What is your bad debt today, and where do you see it going in the near term.
Anne Olson: And just following up on the personnel or just, you know, the cost you've seen in terms of just wage and on-site cost, I'm just sure you're thinking about how, you know, you should be competing against more lease-up properties next year. You know, is there an issue with other developers or other properties potentially coming in and trying to poach some of your employees to get their properties leased up if they're familiar with those markets or how do you manage that process and maintain good retention with your on-site staff.
Yeah, we haven't seen very much fraud, historically, we've had a little we when we did the new implementation with Yardy, we really beefed up.
Processes.
So we have kind of a dual verification process and we haven't seen very much fraud there.
The bad debt side, Bob can comment on that yes, so I mean for Q3.
Anne Olson: Yeah, that's a great question and you're highlighting an issue that I think is, you know, facing all operators across the country which is there's no pipeline of new leasing team and or maintenance professionals or, you know, anyone who works on site for us. And so as new supplies delivered in the amount of units and communities out there, you know, it does stretch the same staffing pool. So we have been focused on retention in the way of professional development, you know, additional training opportunities and really trying to get some career path in going for our on site personnel to make sure and culture is huge for us making sure that that this is a great place to work.
That was about 30 basis points to 40 basis points.
That is consistent with pre COVID-19 trends. So we have seen a return to normalization over there you typically see that fluctuate between 25, and 50 basis points and we have been towards the lower end of that throughout the year.
Got it thank you.
Thank you John we have nice all other questions registered so with that I'll hand back to you Hey, Allison for final remarks.
Thank you thanks, everyone for joining and I would like to thank our teams for the tremendous work they've done it's been a year of uncertainty and everyone. Here at center space have continued to prioritize what is really important to drive results. So I'm grateful to be here and for all of you that joined US. This morning have a great day.
Anne Olson: And then also on the replacement side, you know, we're really focusing on talent acquisition onboarding and making sure that we can get the right candidates and give them the tools to be successful right out of the gate. Another huge thing for us, as you know, is trying to leverage the technology that we've invested in to make it, you know, what is can be a very simple business easy. To execute on site. And I think that easier we can make it for them to be successful in their jobs, the better chance we're going to have to keep them from going that lease up down the street.
Okay.
This concludes today's call. Thank you for your participation you may now disconnect your lines.
Yeah.
Yes.
Buck Horne: All right, thank you guys. Good luck.
[music].
Michael Goldman: Thank you, Buck. Our next question comes from Michael Goldman from BPIJ. Michael, your line is now open. Please go ahead. Yeah, thanks.
Anne Olson: And I was wondering if you could just talk about some of the new supply and some of your markets and the possibility that given the financing challenges that might turn into potential opportunities if the developers can't roll the financing or maybe can't get the lease up done quickly enough. And then maybe if you're seeing that and then what your appetite would be to take on lease up potential through acquisitions. Yeah, I think there's two facets to what we're looking at from an opportunity perspective for investment to your question.
Okay.
Okay.
Anne Olson: One is existing developments that might have, you know, refinance risk and or, you know, a developer who wants to redeploy that capital because of timing or otherwise. We are interested in stepping in, probably not at an early stage lease up, but we have before taken properties that are, you know, between 75 and 90 or just coming into stabilization where you really have that first full year of lease expiration to work through.
Anne Olson: That would have been the case for us with Lyra, which we acquired in Denver in September of 2022 that had just finalized lease up had a developer that for numerous reasons needed to get out of it. So we are looking for those opportunities. We think that pipeline is going to grow. And then the other side is developers who are who are needing additional equities. We're, you know, really out there looking for opportunities to place mezzanine financing that might give us an opportunity to own the asset upon stabilization. So we've taken a few of those full circle in the past couple of years and that's another place where we see opportunities in that development pipeline for us.
Anne Olson: Okay, great. Thank you.
John Kim: Thank you, Michael. We will now take a follow-up question from John Kim from the MO capsule market. John, your line is now waiting please go ahead.
Robin Haneland: Hi, Robin Haregan. We've heard reports on new tenant application fraud. Is there anything you've seen in your markets and what is your bad debt today and where do you see it going in America? Yeah, we haven't seen very much fraud. Historically, we've had a little. We, when we did the new implementation with Yardi, we really beefed processes. So, you know, we have kind of a dual verification process and we haven't seen very much fraud there on the bad debt side.
Robin Haneland: Barab can come in on that. Yeah, so I mean, for Q3, our bad debt was about 30 basis points to 40 basis points. That is consistent with pre-COVID trends. So we have seen a return to normalization over there. We typically see that fluctuate that we have seen 25 and 50 basis points and we've been towards the lower end of that throughout the year. Got it. Thank you. Thank you, John.
Unknown Executive: We have no further questions registered.
Anne Olson: So with that, I will hand back to you, Hi, Anne Olson, for final remarks. Thank you. Thanks everyone for joining and I'd like to thank our teams for the tremendous work they have done. It's been a year of uncertainty and everyone here at Center Space has continued to prioritize was really important to drive results. So I'm grateful to be here and for all of you that joined us this morning. Have a great day.
Unknown Executive: This concludes today's code. Thank you for your participation. You may now disconnect your lines. Thank you.