Q4 2023 Centerspace Earnings Call
Hello, everyone and welcome to the Center Space Q4, 2023 earnings call. My name is Harry and I'll be coordinating your call today.
Operator: Hello everyone, and welcome to the Centerspace Q4 2023 earnings call. My name is Harry, and I'll be coordinating your call today. If you would like to ask a question during the presentation, you may do so by pressing star one on your telephone keypad.
If you would like to ask a question. During your presentation. You may do so a question star one on your telephone keypad now.
Josh Clinch: Now I'd like to hand the call over to Josh Clinch from Centerspace. Josh, please. Centerspace's Form 10-K for the year ended December 31, 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 8-K. 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. We cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements.
Now I'd like to hand, the call over to Josh.
Census space. Please go ahead.
Dennis based on its Form 10-K for the year ended December 31, 2023 was filed with the FCC yesterday. After the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at <unk> 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.
Statements are subject to risks and uncertainties discussed in our filings 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.
Ann Olson: Please refer to our earnings release for reconciliations with any non-GAAP information, which may be discussed on today's call. I'll now turn it over to Ann Olson for the company's prepared remarks. Thanks, Josh. And good morning, everyone.
Please refer to our earnings release for a reconciliation of any non-GAAP information, which may be discussed on today's call I'll now turn it over to Ann often for the company's prepared remarks.
Thanks, Josh and good morning, everyone. Thank you for joining our call with me. This morning is brought the tell our Chief Financial Officer, and Grant Campbell, who leads our investment and capital markets activities.
Ann Olson: Thank you for joining our call. With me this morning is Bharat Patel, our chief financial officer, and Grant Campbell, who leads our investment in capital markets activity. Last night, we reported $4.78 of core FFO per diluted share for 2023, representing growth of 7.9% over 2022. These excellent results were driven by strong year-over-year same store growth of 9%, together with significant outperformance of our projections on GNAI. During 2023, we face macroeconomic uncertainty, softening multifamily fundamentals, and a CEO transition. This is a lot of uncertainty.
Last night, we reported $4.78 of core <unk> per diluted share for 2023, representing growth of seven 9% over 2020 to these excellent results were driven by strong year over year same store NOI growth of 9% together with significant outperformance of our projections on G&A items.
During 2023, we face macroeconomic uncertainty.
Multifamily fundamentals and a CEO transition.
This was a lot of uncertainty I'm. So pleased with how our teams responded our financial performance and the efficiencies that we have harvested on the G&A side of the business.
Ann Olson: I'm so pleased with how our teams responded, our financial performance, and the efficiencies that we've harvested on the GNA side of the business. We feel well positioned as we head into 2024, although it will be a difficult year given continued economic volatility and multifamily supply pressures.
We feel well positioned as we head into 2024, it will be a difficult year, given continued economic volatility and multifamily supply pressures, but we feel great about the relative position of our portfolio with attainable average rents and geographic exposures in the Midtown West, which we think will translate into growth in 2024.
Ann Olson: But we feel great about the relative position of our portfolio with attainable average rents and geographic exposures in the mid and mountain west, which we think will translate into growth in 2024. At the midpoint, our 2024 projections include same store NOI growth of 2.5%, driving overall core FFO growth of 0.4%, with guidance at $4.80 per diluted share for the full year. While Brad will provide more detail about our 2024 guidance, I want to share some recent results and trends that give us confidence that we will be able to achieve growth in 2024, even after the sale activity and repositioning that we undertook in 2023. We ended the year with a weighted average occupancy of 94.8%.
At the midpoint. Our 2024 projections include same store NOI growth of two 5% driving overall core <unk> growth of 4% with guidance at $4.80 per diluted share for the full year, well, Brad will provide more detail about our 2024 guidance I wanted to share. Some recent results and trends that give us confidence that we will be able to.
To achieve growth in 2024, even after the sale activity and repositioning that we undertook in 2023.
We ended the year with weighted average occupancy of 94, 8% during the fourth quarter, we realized an average decrease of two 9% on same store new lease trade outs and an average increase of three 7% on same store renewal, resulting in a 4% blended rate increase janney.
Ann Olson: During the fourth quarter, we realized an average decrease of 2.9% on same store new lease trade outs and an average increase of 3.7% on same store renewals, resulting in a point 4% blended rate increase. January provided optimism for 2024 as we are pleased to see market rents holding. With 5% of our leases expiring in January, we realized an average decrease of 1.9% on same-store new lease trade-outs and an average increase of 3.2% on same-store renewals, resulting in a 0.1% blended rate increase. While Q4 in January showed negative new lease spreads, this is not uncommon historically, and it is worth noting that the percentage change in January was 100 basis points stronger on average new lease rates than December.
January provided optimism for 2024, as we were pleased to see market rents holding with 5% of our leases expiring in January we realized an average decrease of one 9% on same store new lease trade outs and an average increase of three 2% on a same store renewals, resulting in a 0.1% blended rate increase.
Well Q4 in January showed negative new lease spreads. This is not uncommon historically and it is worth noting that the percentage change in January was 100 basis points stronger on average new lease rates in December.
Ann Olson: We have prioritized physical occupancy over rent growth through much of Q4 and Q1 to date, and we'll continue to do so until we see renter demand rebound to a level sufficient to drive the necessary new lease volumes and put us in a position to implement more aggressive pricing on both new leases and renewal. Less so than some other parts of the U.S., we are seeing supply pressures in Denver and Minneapolis. However, to date, both of those markets have shown resiliency and absorption. Particularly notable, CoStar cited Minneapolis as having the second strongest absorption in the nation in 2023 through the third quarter, with it ranking in the top three nationally for both 2022 and 2023.
We have prioritized physical occupancy over rent growth through much of Q4, and Q1 to date and we'll continue to do so until we see renter demand rebound to a level sufficient to drive the necessary new lease volumes and put us in a position to implement more aggressive pricing on both new leases and renewal.
Less so than some other parts of the U S. We are seeing supply pressures in Denver and Minneapolis.
Over to date, both of those markets have shown resiliency and absorptions, particularly notable costar, because I didnt Minneapolis as having the second strongest absorption in the nation in 2023 through the third quarter with a ranking in the top three nationally for both 2022 and 2023 at the same time most of our secondary Midwest markets have minimal.
Ann Olson: At the same time, most of our secondary Midwest markets have minimal, if any, new supply and range from 0 to 3% of existing stock under construction. With the industry experiencing challenging operating fundamentals due to elevated supply and moderating but continued expense pressures, there's a dearth of transaction activity. We focused on portfolio improvement in both operations and through disposition, and it was a busy year on that front. During 2023, we sold 13 communities for an aggregate price of $226.8 million. The communities sold were located in St. Cloud, Minnesota, Omaha, Lincoln, Nebraska, and Minot, North Dakota.
If any new supply and range from zero to 3% of existing stock under construction.
With the industry experiencing challenging operating fundamentals due to elevated supply and moderating but continued expense pressures. There's a dearth of transaction activity, we focused on portfolio improvement and both in operations and through disposition and it was a busy year on that front. During 2023, we saw 13 communities for the.
Price of $226 8 million the community sold were located in Saint cloud in Minneapolis, Minnesota, Omaha, and Lincoln, Nebraska and might not North Dakota.
Ann Olson: The proceeds of the sales were used to acquire a community in Fort Collins, Colorado, and for the repayment of debt. Additionally, during the fourth quarter, we were able to successfully close on a mezzanine loan that includes a purchase option, funding a new multifamily development of 244 homes in Inver Grove Heights, a demographically strong submarket of the Twin Cities. To date, we have funded approximately 40% of our $15.1 million commitment. This community is scheduled for delivery in summer 2025. These transactions highlight our commitment to continued refinement of our portfolio, its age, quality, and market exposure, as well as maintaining a strong balance sheet. Subsequent to year end, we entered into sale agreements for two communities in the Minneapolis market comprising 205 homes for an aggregate consideration of $18.9 million. Limited by size and age, these communities were not able to provide us with the NOI margin or growth we expect from our portfolio.
The proceeds of the sales were used to acquire community in Fort Collins, Colorado and for the repayment of debt. Additionally, during the fourth quarter, we were able to successfully close on the mezzanine loan that includes the purchase option funding a new multifamily development of 244 homes, an integral height demographically strong submarket of the twin cities.
To date, we have funded approximately 40% of our $15 1 million dollar commitment. This community is scheduled for delivery in summer 2025.
These transactions highlight our commitment to continued refinement of our portfolio, it's age quality and market exposure as well as maintaining a strong balance sheet.
Subsequent to year end, we entered into a sale agreement for two communities in the Minneapolis market, comprising 205 homes for aggregate consideration of $18 9 million.
Limited by size and age these communities were not able to provide us with the NOI margin or growth, we expect from our portfolio. The transaction should close in the next week and proceeds of these sales will be used to pay down our line of credit.
Ann Olson: The transaction should close in the next week, and the proceeds of these sales will be used to pay down our line of credit. Regarding share buybacks, since we reported our Q3 results, we have acquired approximately $9.5 million of our common stock at an average price of $53. With continued lack of asset transaction volume and our demonstrated execution on 2023 sales of certain of our less efficient and lower growth assets at a weighted average cap rate of 6.5% based on prior 12 month NOI, we like buying our current portfolio at an implied cap rate of 7.6%. We do have some capacity remaining in our authorized buyback program, but we'll prioritize maintaining balance sheet flexibility while calibrating market factors affecting relative asset valuation.
Regarding share buybacks since we reported our Q3 results we have acquired approximately $9 $5 million of our common stock at an average price of $53 with.
With continued lack of that that transaction volume and our demonstrated execution on 2023 sales of certain of our less efficient and lower growth assets at a weighted average cap rate of six 5% based on prior 12 month NOI, we like buying our current portfolio at an implied cap rate of seven 6%.
We do have some capacity remaining in our authorized buyback program, we will prioritize maintaining balance sheet flexibility, while calibrating market factors affecting relative asset valuation.
As I mentioned earlier this may be a tough year for the multifamily sector, but we believe we will perform well on a relative basis given the work we've done on our portfolio composition and operating platform.
Ann Olson: As I mentioned earlier, this may be a tough year for the multifamily sector, but we believe we will perform well on a relative basis given the work we have done on our portfolio composition and operating platform. Our board shares the belief that we will have strong results coupled with discipline in executing our strategy and has declared a two cent per common share increase in our next quarterly dividend, raising it to 75 cents per common share. Before I turn it over to Bharath, I want to thank our team.
Our board shares the belief that we will have strong results coupled with disciplined on executing our strategy and has declared a <unk> <unk> per common share increase in our next quarterly dividend raising it to 75 cents per common share.
Before I turn it over to Brad I want to thank our team 2023 was a great year because of our organizational commitment to better every day and I appreciate their hard work and dedication now ask Rob to discuss our overall financial results in details of our 2020 for outlook.
Thanks, Dan and good morning, everyone last night, we reported core for flow of $1 22 per diluted share for the fourth quarter of 2023, which was driven by another strong quarter of operating results with same store NOI, increasing by seven 6% over the same quarter last year.
Bharath Patel: 2023 was a great year because of our organizational commitment to getting better every day, and I appreciate their hard work and dedication. Now I'll ask Bharath to discuss our overall financial results and details of our 2024 outlook. Thanks, and good morning, everyone.
Bharath Patel: Last night, we reported core FFO of $1.22 per diluted share for the fourth quarter of 2023, which was driven by another strong quarter of operating results with same store NOI increasing by 7.6% over the same quarter last year. Our operating results for the quarter were in line with our expectations, while core FFO exceeded expectations. The outperformance in core FFO during the quarter was driven by lower than projected GNA, primarily due to lower IQ related spend and higher interest income, including approximately 150,000 and the origination fee received upon the close of the mezzanine loan that Anne discussed in her remarks earlier.
Our operating results for the quarter were in line with our expectations while of course, if we exceeded expectations.
Performance in core for flow during the quarter was driven by lower than projected G&A, primarily due to lower Archie related spend and higher interest income, including approximately 150000, an origination fee received upon the close of the mezzanine loan that and discussed in our remarks earlier.
This capped off another strong year of earnings growth for the company. The same store NOI growth of 9% for the year and of course, the full $4 78 per diluted share an increase of almost 8% compared to the previous year.
Are there notable activity during the quarter included an impairment charge of $5 2 million related to the two communities in Minneapolis that Ed mentioned, we expect to sell next week and an additional charge of $1 million for pre judgment interest related to the litigation settlement earlier in the year.
Bharath Patel: This capped off another strong year of earnings growth for the company, with same-store NOI growth of 9% for the year and core FFO of $4.78 per diluted share, an increase of almost 8% compared to the previous year. Other notable activity during the quarter included an impairment charge of $5.2 million related to the two communities in Minneapolis that Anne mentioned we expect to sell next week and an additional charge of $1 million for prejudgment interests related to the litigation settlement earlier in the year. Both charges are excluded from the core FFL.
Oh charges are excluded from core infrastructure.
On the capital front, we are well positioned with a strong and flexible balance sheet. We ended the year with $235 million of liquidity and leverage at seven one times net debt to EBITDA, which is half a turn lower than at the beginning of 2023, because it's for a capital repositioning activities during the year.
In addition, do you have a well lettered debt maturity schedule with no debt maturities until the middle of 2025 weighted average term to maturity of six three years and weighted average cost of three 5% to 4%.
Bharath Patel: On the capital front, we are well positioned with a strong and flexible balance sheet. We ended the year with $235 million of liquidity and leverage of 7.1 times net debt to EBITDA, which is half a turn lower than at the beginning of 2023 because of our capital repositioning activities during the year. In addition, we have a red ladder debt maturity schedule with no debt maturities until the middle of 2025, a rated average time to maturity of 6.3 years, and an rated average cost of 3.54%.
This balance sheet strength allowed us to Opportunistically repurchase shares, which we believe are currently trading significantly below the true value of our assets in the portfolio do.
During the quarter, we repurchased nearly 92000 shares bringing our 2023 repurchases to 216000 shares at an average price of $53 44 per share.
After year end, we repurchased an additional 88000 shares at $53 62 per share.
Turning to guidance, we introduced our 2024 expectation in last Night's press release.
For 2024, we expect same store NOI growth of one 5% to three 5% that's relatively healthy top line growth of 4% at the midpoint.
Bharath Patel: This balance sheet strength allowed us to opportunistically repurchase shares, which we believe are currently trading significantly below the true value of our assets in the portfolio. During the quarter, we repurchased nearly 92,000 shares, bringing our 2023 repurchases to 216,000 shares at an average price of $53.44 per share. After year-end, we repurchased an additional 88,000 shares at $53.62 per share.
They're projected revenue growth is driven by an earn in of one 7% at year end and projected blended lease growth of two 5% at the midpoint.
It is further fueled by incremental revenue following the completion of our rubs rollout and continued investment in our value add program.
We spent almost $30 million in 2023 and expect to invest an additional $25 million to $27 million on value added initiatives in 2024.
Bharath Patel: Turning to guidance, we introduced our 2024 expectations in last night's press. For 2024, we expect same store NOI growth of 1.5% to 3.5% with relatively healthy top line growth of 4% at the next. The projected revenue growth is driven by earnings of 1.7% at year-end and projected blended lease growth of 2.5% at the mid-term. It is further fueled by incremental revenue following the completion of our ruby rollout and continued investment in our value add program. He spent almost $30 million in 2023 and expects to invest an additional $25 to $27 million on value-add initiatives in 2024. Although expense pressures have moderated, we still expect expense growth of 6.25% at the midpoint to exceed revenue growth in 2024. The growth is primarily driven by onsite compensation as the labor market remains remarkably resilient, and insurance expenses are driven by premium increases of over 25% year over year.
Although expense pressures have moderated we still expect expense growth of 625% at the midpoint to exceed our revenue growth in 2024.
The growth was primarily driven by on site compensation as the labor market remains remarkably resilient and insurance expenses driven by premium increases of over 25% year over year.
We expect core flow of $4.68 to $4 92 per diluted share with a midpoint of $4.80 per diluted share a slight increase year over year. Despite the impact of approximately 130 million of net dispositions during 2023.
Please note that although our guidance equates to core of it for $1 20 per share per quarter. Our core support during the first quarter is expected to be below that average and projected to increase in each subsequent quarter.
This is primarily a result of sequential revenue growth from lease explorations during peak leasing season in Q2 and Q3.
The guidance range incorporates all the buyback activity since the end of 2023 that I highlighted earlier and approximately $19 million of proceeds from the sale of two communities in Minneapolis.
Bharath Patel: We expect core full $4 and 68 cents to $4 and 92 cents per diluted share with a midpoint of $4 and 80 cents per diluted share, a slight increase year over year, despite the impact of approximately 130 million ultimate dispositions during 2023. Please note that although our guidance equates to core FFO of $1.20 per share per quarter, our core FFO during the first quarter is expected to be below that average and projected to increase in each subsequent quarter. This is primarily a result of sequential revenue growth from lease expirations during peak leasing seasons in Q2 and Q3. The guidance range incorporates all the buyback activities since the end of 2023 that I highlighted earlier and approximately $19 million of proceeds from the sale of three communities in Minneapolis.
So it seems that the mezzanine loan of $15 1 million will be fully funded by early Q3.
No further investment our disposition activity is assumed in the guidance.
Lastly, as noted in our press release, our board of Trustees announced an increase of <unk> <unk> per share in our quarterly common dividends to 75 per share.
The common dividend will be paid on April eight 2024 to shareholders and unit holders of record at the close of business on March 28.
To conclude we are proud of the results we achieved in 2023, not just on the earnings growth front, but even more so in advancing our key strategic priorities of improving our balance sheet portfolio quality and market positioning.
This was only possible because of a considered effort commitment and discipline across the organization and I would like to thank our entire team for their hard work and focus throughout the year.
We look forward to building upon these results in 2024 and with that I will turn the line back to the operator to open it up for questions.
Bharath Patel: It also assumes that the me million will be fully funded; no further investment or disposition activity is assumed in the guidance. Lastly, as noted in our press release, our Board of Trustees announced an increase of $0.02 per share in our quarterly common dividend to $0.75 per share. The common dividend will be paid on April 8, 2024 to shareholders and unit holders of record at the close of business on March 28.
Thank you if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by two and when preparing to ask you. A question. Please ensure your phone is on mute locally.
And our first question today is from the line of Brad Heffern of RBC capital <unk> got your line is now open.
Operator: To conclude, we are proud of the results we achieved in 2023, not just on the earnings growth front, but even more so in advancing our key strategic priorities of improving our balance sheet, portfolio quality, and market position. This is only possible because of a concerted effort, commitment, and discipline across the organization, and I would like to thank our entire team for their hard work and focus throughout the year. We look forward to building upon these results in 2024. And with that, I will turn the line back to the operator to open it up for questions. Thank you. If you would like to ask a question, please press star followed by one on your telephone keypad. Now, if you change your mind, please press the star followed by two.
Yes, Thank you morning, everybody.
Robert You gave a couple of pieces of the revenue guide in the prepared remarks, but I was wondering if you could also give occupancy loss to lease and market rent growth as well.
Sure Good morning, Brett.
Yeah, so with respect to occupancy we are projecting about 95%, which is roughly in line with what we had for the year.
With respect to loss to lease at the end of January we were sitting at about three 5%.
This is roughly in line with where we were about 12 months ago. So we.
We do expect rents to grow from here.
However, we don't really expect them at this point in time to reach the same peak that they did last year. So the market rent growth will be a little bit muted, but it will still grow from here as we enter the leasing months.
Brad Heffern: And when preparing to ask your question, please ensure your phone is unmuted locally. And our first question today is from the line of Brad Heffern of RBC Capital. Brad, your line is now open. Yeah, thank you. Morning, everybody.
Okay got it and then on the repurchase I guess, how do you think about weighing the attractiveness of that versus some of the downsides like obviously shrinking the company and increasing leverage et cetera.
Bharath Patel: Bravo, you gave a couple pieces of the revenue guide in the prepared remarks, but I was wondering if you could also give occupancy loss to lease and market rent growth as well. Sure. Good morning, Brett.
Okay.
Okay.
That's a great question, Brian and one we spend a lot of time on so we really are looking to balance what the best use of our capital is.
Bharath Patel: Yeah. So with respect to occupancy, we are projecting about 95%, which is roughly in line with what we had for the year. With respect to lost leases at the end of January, we are sitting at about 3.5%. This is roughly in line with where we were about 12 months ago. So we do expect rents to grow from here. However, we don't really expect them, at this point in time, to reach the same peak that they did last year. So market rent growth will be a little bit muted, but it'll still grow from here as we enter the. Transcribed by https://otter.ai Okay, I got it.
Hum.
Particularly paired with a year, where we had a lot of dispositions and so a lot of proceeds.
And and how we want to effectuate a strategy of external growth and maintained real balance sheet strength. So we felt like this was a good time, we had the proceeds from the sales.
Two more sales this year schedule, but as I stated.
In the prepared remarks, we really are trying to balance.
That maintaining balance sheet flexibility and I think youll see us really pull back on the on the buybacks going going forward here.
Ann Olson: And then on the repurchase, I guess, how do you think about weighing the attractiveness of that versus some of the downsides, like obviously shrinking the company and increasing leverage, etc.? That's a great question, Brad, and one we spend a lot of time on. So we really are looking to balance what the best use of our capital is, you know, particularly paired with the year where we had a lot of dispositions and so a lot of proceeds, and how we want to effectuate a strategy of external growth and maintain real balance sheet strength. So, you know, we felt like this was a good time, we have the proceeds from the sales, and we have two more sales this year scheduled.
Into the into 2024.
Okay. Thank you.
Our next question today is from the line of Conor Mitchell of Piper Sandler. Your line is now please go ahead.
Hey, good morning, Thanks for taking my question.
First maybe just following that line of questioning.
And your next statement there.
As you guys are going to slow down on the buybacks could you just.
Give us a better idea, maybe youll allocate that more towards acquisitions or paid outs aboard debt.
Whenever you guys see the best use of capital in that case.
Yeah, we really are looking to have very strong capital allocation and so as we look into 2020 four we would really be prioritizing opportunities for external growth with not a lot of transaction volume and still a pretty big disconnect in the market on pricing.
Ann Olson: But as I stated in the prepared remarks, you know, we really are trying to balance that by maintaining balance sheet flexibility. And I think you'll see us really pull back on the buybacks going forward here into 2024. Okay, thank you. Our next question today is from the line of Conor Mitchell of Piper Sandler. Conor, your line is now open. Please go ahead. Hey, good morning.
That may be difficult, but we want to make sure that we fund our value add program sufficiently we have a $25 million to $27 million this year slated for that.
And with no maturities until mid 2025, it's a little bit difficult for us to get at any debt pay down. So that is one of the considerations that we had when we looked at doing the buyback was that opportunity wasn't as available to us as it might be into the future, but external growth is really a priority of ours.
Ann Olson: Thanks for taking my question. Um, first, maybe just following that line of questioning and your next statement there, as you guys are going to slow down on the buybacks, can you just give us a better idea of maybe you'll allocate that more towards acquisitions or paid-out support debt, whatever you guys see as the best use of capital in that case. Yeah, we really are looking to, you know, have very strong capital allocation. And so as we look into 2024, we would really be prioritizing opportunities for external growth. But with not a lot of transaction volume and still a pretty big disconnect in the market on pricing, that may be difficult. But, you know, we want to make sure that we fund our value-add program sufficiently; we have, you know, 25 to 27 million this year slated for that.
Al you out as well and and keep you know strategically.
Repositioning the portfolio getting better market exposure, increasing the quality of the portfolio I think is high on our priority list.
Okay I appreciate the color there.
And then maybe just thinking about the Colorado deal.
So you guys executed back in the fourth quarter.
I just want to make sure we understand the GAAP implications on earnings it seems.
Amortization of the assumed debt has become an add back to core. So just curious if you guys can give us any more details.
What we may have missed regarding the gap applications already bigger pictures on the impacts from from an earnings perspective.
Ann Olson: And with no maturities until mid 2025, it's a little bit difficult for us to get at any debt paydown. So that was one of the considerations that we had when we looked at doing the buybacks was that opportunity, you know, wasn't as available to us as it might be into the future. But, you know, external growth is really a priority of ours, value add as well, and keeping, you know, strategically repositioning the portfolio, getting better market exposures, increasing the quality of the portfolio, I think is high on our priority list. Okay, appreciate the color there.
Sure good morning.
On page S 16 of our supplement you kind of breakdown the components of our guidance.
The adjustments to the non core you will see the amortization of assumed debt that's about $1 1 million.
And that's the amount that will be added back to core.
With respect to the debt amortization.
Does that answer the question.
Yes, I guess just to make sure.
I understand that is primarily related to the Colorado deal in the fourth quarter that was executed.
Bharath Patel: And then maybe just thinking about the Colorado deal that you guys executed back in the fourth quarter. Just want to make sure we understand the gap implications on earnings. It seems the amortization of the assumed debt has become an ad back to core. So just curious if you guys can give us any more details of what we may have missed regarding the gap implications or any bigger picture on the impact from an earnings perspective. Sir, Connor, good morning.
That's correct.
Most of that amortization relates to the deal that we're talking about.
Okay, great. Thank you very much.
Our next question today is from the line of John Kim of BMO capital markets.
John Your line is now open.
Thank you.
I had a question on the Mezz loan.
The rate of the law.
Loan I think Rob mentioned that origination fee and I'm, assuming that's paid by the borrower.
And if it's your intention to exercise the purchase option on the asset.
Bharath Patel: On page 16 of our supplement, we kind of break down the components of our guidance. In the adjustments to non-core, you will see the amortization of assumed debt. That's about 1.1 million, and that's the amount that will be added back to port. With respect to the debt amortization, does that answer the question? Yeah, I guess just to make sure I fully understand that is primarily related to that Colorado deal in the fourth quarter that was executed. That's correct. That's most of that amortization relates to the deal that we are talking about. Okay, great. Thanks very much.
Good morning, John I'll have a grant take that one.
Hey, good morning, John we're earning a 10% interest rate.
With the crude or excuse me with interest accrued and compounded monthly on that transaction.
On the back end related to the purchase option.
That option to acquire the stabilized community comes with pre negotiated terms that include a 7% discount, but then market value of the community at stabilization.
Our intent to exercise the purchase option.
We enter entities with a desire to acquire the completed stabilized community on the backend.
John P. Kim: Our next question today is from the line of John Kim of BMO Capital Markets. John, your line is now open. Thank you. I had a question on the MERS loan, the rate of the loan, I think Barad mentioned an origination fee, I'm assuming that's paid by the borrower, and if it's your intention to exercise the purchase option on the MERS loan.
We will continue to sit in the lender chair monitor funding monitor asset performance and make that decision.
In mid 2025.
Are there opportunities for Mezz investments in some of your other markets.
Grant Campbell: Morning, John. I'll have a grant take that one. Hey, good morning, John.
I realized in the past you'd looked at Nashville, as a potential entry market, but it seems like you're overweight twin cities exposure already so I was just wondering if.
Grant Campbell: We're earning a 10% interest rate with accrued, or excuse me, interest accrued and compounded monthly on that transaction. On the back end related to the purchase option, that option to acquire the stabilized community comes with pre-negotiated terms that include a 7% discount, but then the market value of the community at stabilization. Uh, our intent to exercise the purchase option. We enter into these with a desire to acquire the completed stabilized community on the back end. We will continue to sit in the lender chair, monitor funding, monitor asset performance, and make that decision in mid-2025. Other opportunities for investments in some of your other markets, and, you know, I realized in the past you looked at Nashville as a potential entry market, but it seems like you're overweight Twin Cities exposure already. So I was just wondering if it would be possible.
Similar investment opportunities and some of the other markets that you're interested in.
Yes, we are talking to folks.
And other market about this execution.
Broadly speaking, it's harder to make development underwriting pencil in this environment. We will continue to seek opportunities with this book of business that do make sense, we do view it as a complement to our other capital allocation strategies. These opportunities provide good returns in direct visibility on asset performance and potential.
Future acquisition timeline via that purchase option that we referenced.
This direct visibility is beneficial when we think about portfolio re composition initiatives. So.
So yes, we are having conversations in other geographies, it's very hard to make these pencil in today's environment, but we'll continue to seek them.
And John from a purely financial standpoint, we'd like to have a certain portion of our capital allocated in the mezzanine funding. These are difficult deals for us to get done at our size and so you have seen us do them in Minneapolis, because this is a place where we have very deep connection. Our headquarters are here, we have a large team and so we probably.
Grant Campbell: If you saw similar investment opportunities in some of the other markets that you're interested in, yeah, we are talking to folks in other markets about this. But, broadly speaking, it's harder to make development underwriting pencil in this environment.
Grant Campbell: We will continue to seek opportunities with this book of business that make sense. We do view it as a complement to our other capital allocation strategies. You know, these opportunities provide good returns and direct visibility on asset performance and potential future acquisition timeline via that purchase option that we referenced. This direct visibility is beneficial when we think about the Portfolio Recomposition Initiative. So yes, we are having conversations in other geographies. It's very hard to make pencils penciled in today's environment, but we'll continue.
We just see more opportunities here and have more relationships with developers that have longer standing, but but it definitely doesn't per crude grade preclude grant from spending a lot of time trying to find those deals and in other target markets of ours.
And you mentioned Minneapolis has the second highest net absorption or had sickness.
And then absorption last year, which I didn't fully appreciate until you mentioned it.
Whats driving that demand I realize theres a lot of supply in that market as well, but what is.
Ann Olson: And John, from a purely financial standpoint, we'd like to have a certain portion of our capital allocated to mezzanine funding. These are difficult deals for us to get done at our size, and so you have seen us do them in Minneapolis because this is a place where we have very deep connections. You know, our headquarters are here. We have a large team.
What's driving this.
I mean, there's probably a lot of answers to whats driving it but I'd say a couple of things and then grant can jump in here too but.
Really strong economy low unemployment, we have Minneapolis has a very good job base lots of fortune 500 companies. So the market itself is a little bit more stable. So while we are seeing good a good amount of supply here, we have the fundamentals.
Ann Olson: And so we probably just see more opportunities here and have more relationships with developers that have been around for a longer time. But it definitely doesn't preclude Grant from spending a lot of time, you know, trying to find those deals and other target markets of ours. And you mentioned Minneapolis has the second highest net absorption or had the second highest, and then Absorption last year, which I didn't fully appreciate until you mentioned it. What's driving that demand? I realize there's a lot of supply in that market as well, but what is driving it? I mean, there's probably a lot of answers to what's driving it. But I'd say a couple of things. And then Grant can jump in here too.
Fill that space and drive absorption I think we've also seen less single family home starts than we have in the past, though theres been a little bit of shift in permitting from.
If you look at the total multi are.
Housing universe, we have left you know single family home communities and a shift into the apartment communities, which is you know.
Driving some.
Lack of availability of single family home option grants, yeah, Yeah, I would echo <unk> comments on incomes in that market.
Depending on.
How you cut it.
We consistently ranked top 10 in terms of income profile that income relative to the affordability of renting apartments.
Ann Olson: But, you know, really strong economy, low unemployment, we have Minneapolis has a very good job base, lots of Fortune 500 companies. So the market itself is a little bit more stable. So while we are seeing a good amount of supply here, we have the fundamentals to fill that space and drive absorption. I think we've also seen fewer single-family home starts than we have in the past. So there's been a little bit of a shift in permitting from, you know, if you look at the total multifamily or, you know, housing universe, we have less, you know, single-family home communities and a shift into the apartment communities, which is, you know, driving some. Thank you. Our next question today is from the line of Rob Stevenson, oh, from Channy. Rob, your line is now open; please go ahead, www.realestate.com. Thanks. Good morning.
Very attractive high presence of.
Med Tech banking.
Finance et cetera jobs are very prevalent in our market and then just to touch on the supply comment.
<unk> pipeline in Minneapolis has we've seen a taper over recent quarters.
So currently we're sitting on about four 5% of existing stock under construction that is down from 6% year over the last couple of quarters. So a measured supply story that again has been tapering.
Great. Thank you.
Our next question today is from the line of Rob Stevenson of Janney. Your line is now if you. Please go ahead.
Thanks. Good morning can you talk about how much of the 3% to 5% same store revenue growth guidance for 'twenty four is from marking to market rents versus the continued uplift from some of the operational technology and other improvements that you've been instituting within the portfolio.
Rob Stevenson: Can you talk about how much of the three to 5% same store revenue growth guidance for 24 is from marking to market rents versus the continued uplift from some of the operational technology and other improvements that you've been instituting within the portfolio? Morning, Rob. I'll give you the components and then, you know, and may chime in on some of the other components. But overall, from 4% at the midpoint, 3% is really what's being driven by market to market rent. About half a person is being driven by the rub fill out, which is not fully complete.
Good morning, Rob.
Give you the components and then.
And may chime in on some of the other components.
But overall right at four.
4% at the midpoint, 3% is really whats being driven by mark to market rents.
About half a percent is being driven by.
Which is not fully complete so we have about 80% Bill back Rubs and then the remainder is being driven by some of the value add initiatives.
Bharath Patel: So we, you know, we have about 80% built back from the rubs. And then the remainder is being driven by some of the value-add initiatives. We obviously expect to invest about $25 million this year, but we've invested over the course of the year. So the impact on revenue for the year is going to be about half a percent. And I, on the technology front, you know. Go ahead, Rob.
We obviously expect to invest about $25 million this year, but we invested over the course of the year. So the impact on revenue for the year is going to be about half a percent.
And on the technology front.
Go ahead Rob.
Ann Olson: No, no, I was going to say that was a very helpful thing. Yeah, and just on the technology front, we did, In 2023, I think we really saw some great strides in, you know, gaining efficiencies and making sure that we're fully executing on the platform. That work is going to continue. But in our projections, we're not projecting that it's going to materially move anything.
No no I was going to say that was very helpful. Thank you.
Yeah, and just on the technology front, we did.
In 2023, I think we really saw some great strides on gaining efficiencies and making sure that we're fully executing on the platform that work is going to continue but in our projections, we're not projecting that it's going to materially move anything we do have a couple of initiatives that may provide.
Ann Olson: We do have a couple of initiatives that may provide some cushion and or outperformance for us, but we're very early on very early on in some of those. So, you know, I would say, really, we feel stabilized on the platform that we implemented over the past 2 to 3 years and feel like we're in good shape and using. Okay, that's helpful.
Good.
Some cushion in <unk> outperformance for us, but we're very early on very early on in some of those though.
I would say really where we feel stabilized on the platform that we implemented over the past two to three years and feel like we're in good shape and using that.
Okay.
Helpful. And then can you just give a quick.
Ann Olson: And then can you just, you know, give a quick review of your markets? I mean, other than Denver, there's not a lot of markets that you guys have that, you know, there's other public peers in. So you know, less data there.
Review of the markets I mean, other than Denver or is there not a lot of markets that you guys have there.
The other public peers, and so less data there.
Ann Olson: I mean, which of these markets are you expecting, you know, same store revenue growth to be above the three to 5% guidance for the company overall, and which below? Can you just talk a little bit about that as to how we should be thinking about the markets individually? Yeah, that's a good question.
These markets are you expecting same store revenue growth to be above the 3% to 5% guidance for the company overall.
<unk> below can.
Can you just talk a little bit about that as to how we should be thinking about the markets individually.
Yes, that's a good question one of the we are a good data provider on some of those markets. We're the largest owner in a couple of them.
Ann Olson: You know, one of the things we are is a good data provider on some of those markets. We're the largest owner in a couple of them. As we look to 2024, I think we're going to continue to see some outperformance in Omaha, Nebraska; North Dakota has been performing really well. And then you know, I'd say Minneapolis and Denver kind of coming in at the middle of the pack there. A place where we're seeing some softness is what we call the other Mountain West. That would be Rapid City and billing. They had, if you recall, just a massive run-up in rents from 21 into 22. We really started to see that cool last year.
As we look to 2024, I think we're going to continue to see some outperformance in Omaha, Nebraska.
North Dakota has been performing really well.
Then I would say Minneapolis, and Denver kind of coming in in the middle of the pack. There are places, where we're seeing some softness in what we call. The other mountain west that'd be rapid city and billing.
Had if you recall just the massive run up in rents in 'twenty one into 'twenty, two we really start to see that accrual last year and and we are seeing that continue to cool off and believe that will hold through 2024, So I would say.
Ann Olson: And we are seeing that continue to cool off, and we believe that'll hold through 2024. So I'd say, you know, Omaha at the top and then probably Billings Rapid City at the bottom. Okay, and then just Rochester and St. Cloud, are they in the middle or the bottom?
Omaha at the top and then probably billings rapid city at the bottom.
Okay, and then just Rochester, St cloud or they middle bottom, how should we be thinking about those.
Ann Olson: How should we be thinking about those? Yeah, I'd say they're right in the middle. You know, Rochester has had some supply, a little bit of supply there, but nothing that has concerned us. And we have come off some great value-add projects there that really raised our rent, renter profile, and our customer experience there. So I think that that'll continue to perform well. And St.
Yeah, I'd say, they're right in the Middle Rochester has had some supply a little bit of supply there nothing that has concerned us and we have come off some great value add projects, there that really raised our rent renter profile and our customer experience. There. So I think that that will continue to perform well in Saint cloud that.
Ann Olson: Cloud, that portfolio, as you know, we sold some of the assets out of that this year. So we feel really well positioned there to kind of be right, right on the average. Okay, that's extremely helpful.
Portfolio.
We sold some of the assets out of that this year. So we feel really well positioned there to kind of be right right on the average.
Okay. That's extremely helpful. And then when you take a look where was bad debt for you guys in 'twenty three and what do you have baked into 2000 and for guidance.
Bharath Patel: And then, Brav, when you take a look, where was bad debt for you guys in 23? And what do you have baked into the 24 guidance? Sure.
Yeah.
Sure with respect to 2023.
Bharath Patel: With respect to 2023, we were about 25 to 30 basis points, which we consider normalized pre COVID. And with respect to 2024, we are at the midpoint, projecting about 35 basis points and are kind of sticking around what we experienced in 2023, as we haven't really seen anything that makes us think otherwise. Okay, and then in a similar vein, what did you guys do this year or last year in terms of unit turnover? And are you expecting any, you know, real upticks or downticks in that, given, you know, what you're seeing today in terms of the renter profile? Sure.
We were about 25% to 30 basis points, which we consider normalized pre COVID-19 and with respect to 2024, we are at the midpoint projecting about 35 basis points of kind of sticking around what we experienced in 2023 as we haven't really seen anything that makes us think otherwise.
Okay, and then I guess, a similar vein what did you guys do this year 23 in terms of unit turnover and are you expecting any.
Will uptick or downtick in that given what youre seeing today in terms of the rental profile.
Sure.
Bharath Patel: You know, with respect to unit turnover, we saw a lot of costs escalating at the end of 2022. So with respect to 2023, we were slightly down versus 2022. With respect to 2024, what we are seeing is material prices have kind of, I would say, normalized in the sense that we can expect some inflationary increases there. And then labor, though, is running a little bit harder than we would like.
With respect to unit turnover, we had seen or cost escalating at the end of 2022, so with respect to 2023.
We're slightly down.
Versus 2022 with respect to 2020 for what we are seeing as material prices have kind of I would say normalized in the sense that we can expect some inflationary increases there.
And then labor, though is running a little bit hotter than we would like so we would still expect a slight increase over 2023 within 2023 itself was a reduction over 2022.
Bharath Patel: So we would still expect a slight increase over 2023, but then 2023 itself was a reduction over 2022. And with respect to Reverend Rick Henson, Yeah, we did see a little bit of an uptick during 2023 in resident retention. So just overall, we had fewer turns in 23 to 22.
And with respect to it.
Okay.
Yeah, we did see a little bit of an uptick during 2023 and resident retention. So just overall had fewer turn in 23 to 22.
Ann Olson: But our projections do include kind of our standard that fits about 50% of the units will turn during the course of the year. And what, you know, given material labor costs these days, what is a turn typically cost you x downtime? Um, I would say roughly that the cost would be about $1,000 a turn there about.
Our projections do include kind of the standard that fits about 50% of the units will turn during the course of the year.
What given material labor costs. These days what is the turn typically cost you X the downtime.
I would say roughly about the cost will be about a thousand.
A term thereabouts.
Bharath Patel: Again, you know, from a portfolio perspective, that, you know, it can differ as you look at different markets, but roughly, that's what we kind of see on an average. Okay, that's incredibly helpful. Thanks guys, appreciate the time.
Again from a portfolio perspective that.
Can differ as you look at different markets, but roughly that's that that's what we kind of see.
On an average okay. That's incredibly helpful.
Thanks, guys I appreciate the time.
Thank you.
Barry Oxford: Thank you, and our next question today is from the line of Barry Oxford of Colliers. Barry, your line is open. Great, thanks guys.
Okay.
Thank you and our next question today is from the line of Barry Oxford of <unk>. Your line is open.
Great. Thanks, guys.
Bharath Patel: One thing I was looking at was same store expenses being down in 4Q. What should I be looking for as it relates to same store expenses in 2020? Good morning, Barry.
One thing I was looking at was same store expenses being.
Being down and for Q1.
What can I be looking for as it relates to same store expenses in 'twenty four.
Yeah.
Good morning, Barry.
Bharath Patel: You know, so with respect to 2024, there are two major line items that will be driving our expenses in 2024. One is on-site compensation. And as I said, the labor market is still pretty strong. You know, we are in a much better place in 2023 compared to 2022, but it's still hard to fill some of those positions. So we do expect that to run slightly above what you would consider normalized or inflationary, and then the other line item that is really driving up costs is insurance. Our premiums, year over year, increased by 25 to 30%. That's two thirds of the insurance line.
So with respect to 2024.
There's two major line items.
That will be driving our expenses in 2024, one is on site compensation as I said, the labor market is still pretty strong.
I mean, although we are in a much better place in 2023 compared to 2022, it's still hard to sell some of those positions. So we do expect that to run.
Slightly above what you would consider normalized through inflationary.
And then the other line item that is really driving up costs as insurance premiums.
Premiums year over year increase by 25% to 30%.
Two thirds of the insurance line. So those are the two major categories driving year over year expense growth.
Bharath Patel: So, you know, those are the two major categories driving year over year expense growth. Great. And what was causing some of those numbers to be negative in some of those cities? Some of the negative numbers related to some real estate tax-related accrual adjustments.
Yeah.
Okay.
Great.
And then what was causing some of those numbers to be negative and some of those cities like Omaha.
<unk> some of the negative yes, sure some of the negative numbers related to some real estate tax related accrual adjustments on certain years, we have.
Bharath Patel: In certain years, we have uptakes; in certain years, we have some credits from appeals. So that's really what's driving some of the credits that you see on a year-over-year basis in Omaha. The other line item that is also comparing favorably is the non-reimbursable losses, where we really had an uptick in those losses in the fourth quarter of 2022, and they kind of normalized in 2023. So that's what is driving the Q4'23 versus Q4'22 credit.
Upticks in certain years, we have some credit.
From some credits from from appeal, So that's really what's driving.
Some of the credits that you see on a year over year basis in Omaha.
Other line item that is also compare comparing favorably as the non reimbursable losses, where we really had an uptick in those losses in the fourth quarter of 2022.
They kind of normalize in 2023 so.
Thats what is driving the Q4, two three versus Q4 'twenty two comparison.
Okay, great. Thanks, so much guys.
Barry Oxford: Great. Thanks so much, guys. Thank you.
Thank you as a reminder, if you'd like to ask a question. Please dial star one on your telephone keypad now.
Operator: As a reminder, if you would like to ask a question, please press star 1 on your telephone keypad now. And our next question is from the line of Wes Holliday from Baird. Wes, your line is open. Hey, good morning, everyone.
Our next question is from the line of Wes Golladay of Baird. Your line is open.
Hey, good morning, everyone. A quick question on the Denver market were starting to see some slowing out there the job growth. But then you did make the comment that multifamily there's fear maybe taking share with the.
Wes Holliday: I have a quick question on the Denver market. We're starting to see some slowing in job growth out there, but then you did make the comment that you know, multifamily this for your maybe taking share with the fewer single family starts in one of your markets. Is that happening there as well? Just overall, what are you seeing from the demand side in Denver? We'll have Graham help you out on that one.
The fewer single family starts in one of your markets is that happening there as well just overall what are you seeing from the demand side in Denver.
We'll have a we'll have grand help you out on that one yet so I agree with your your job growth comment.
Grant Campbell: Yeah, so I agree with your job growth comment and have seen some slowing in that market here recently. But we do think, long term, the demand fundamentals in Denver and Colorado more broadly are very robust, and continue to believe that, over time, what we've seen in the past decade will continue to play out. When I think about Denver, in a couple of ways from a fundamentals perspective that we think about it, you know, on the supply side, it is our market with the highest levels of existing supply and existing new construction. So I referenced four and a half percent in Minneapolis earlier; that would be about nine and a half percent today in Denver. It may be the case in this environment that all of that supply in that pipeline does not materialize given capital markets and fundamental headwinds.
<unk> seen some slowing in that market here recently, we do think long term the demand fundamentals and Denver, and Colorado more broadly a very robust and.
We continue to believe that over time, what we've seen in.
In the past decade, we will continue to play out.
When I think about Denver couple ways from a fundamentals perspective that we think about it on the supply side.
It is our market with the highest levels of existing supply.
And existing new construction, so I referenced four 5% in Minneapolis earlier that would be about nine 5% today in Denver.
It may be the case in this environment that all of that supply in that pipeline does not complete given capital market and fundamental headwinds.
Grant Campbell: You know, concessions is another way that we really focus on what we are seeing in all of our markets, including Denver. And I would say our concession profile and concession story on the ground in Denver today is very favorable. We've been using concessions and very targeted and specific instances today in Denver, that one community in our portfolio, which is a function of new supply in some markets, so we have seen a slowdown in job growth. Fundamentals are tapering, but that isn't unique to Denver; that is happening nationwide, and long term, I believe that the demand profile remains. Thanks for the time, everyone.
Session is another way that we really focus on what are we seeing in all of our markets, including Denver, and I would say our concession profile and concession story on the ground in Denver today is very favorable we've been using concessions in very targeted and specific instances today in Denver.
That one community in our portfolio, which is a function of new supply in that submarket. So.
Have seen slowdown in job growth.
Fundamentals are.
Okay.
Our tapering, but that isn't unique to Denver that is happening nationwide in long term believe that the demand profile remained.
Thanks for the time everyone.
Thank you and we have no further questions in the queue at this time, so I'd like to hand back over to Allison for any further remarks.
Ann Olson: Thank you, and we have no further questions in the queue at this time, so I would like to hand back over to Ann Olson for any further remarks. Thank you everyone for joining us, and have a great day. This concludes today's call. Thank you all for joining us. You may now disconnect your line, www.cdc.gov35 sauce www.cdc.gov35.gds.gov www.emedia.gds.gov www.cdc.gov35.vl www.cdc.gov35.drjdvesiverwebs.gds www.cdc.gov35.tliv size www.cdc.gfm.net cd
Thanks, everyone for joining and have a great day.
Yeah.
This concludes today's call. Thank you all for joining you may now disconnect your lines.
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