Centerspace Q1 2025 Earnings Call Transcript

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May 2, 2025

There are 10 speakers on the call.

Operator

Good afternoon, and thank you for attending today's CenterSpace first Quarter twenty twenty five Earnings Call. My name is Jasmine, and I'll be your moderator today. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. I would now like to pass the conference over to your host, Josh Klatch with You may now proceed.

Speaker 1

Good afternoon. CenterSpace's Form 10 Q for the quarter ended 03/31/2025 was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package as well as an updated investor presentation have been posted to our website at centerspacehomes.com and filed on Form eight ks. 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 filings under the section titled Risk Factors and in our other filings with the SEC.

Speaker 1

We cannot guarantee that any forward looking statements 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 CenterSpace's President and CEO, Ann Olson, for the company's prepared remarks.

Speaker 2

Hello, everyone, and thank you for joining us. With me today are Bharat Patel, our Chief Financial Officer and Grant Campbell, SVP of Investments and Capital Markets. It is Friday, and I know you are all anxious to ask us questions about what our plans are for the weekend. But first, we'd like to provide some brief highlights for the quarter. Our first quarter demonstrated our team's ability to drive exceptional results with strong occupancy and expense control bolstering our performance and setting us up well for the remainder of 2025.

Speaker 2

Multifamily fundamentals are strong with sustained demand driving net absorption across the industry. For us, strong demand translated into our results in several ways, most notably the 120 basis point year over year improvement in our weighted average occupancy for our same store portfolio. As we sit today, our average physical occupancy is 96% with April renewal retention coming in around 57. Our blended leasing spreads shown on Page eight of the investor presentation filed in connection with our earnings release and supplemental were up 70 basis points in the first quarter and the positive trend continued into April. Renewal increases have remained steady at a high 2% to mid 3% level while new lease spreads are improving.

Speaker 2

After being down 3.5% in Q4 twenty twenty four, they increased sequentially to negative 1.1% in Q1, and in April, they moved to a positive 2.4%. Resident health remains strong with growth in income levels keeping the rent to income ratio at 21.6%. Bad debt remains in line with expectations at roughly 40 basis points, while low unemployment rates and healthy regional economies point to the continuation of this trend. Much of our footprint with its differentiated focus on Midwest and Mountain West regions of the country continues to benefit from a lack of new supply. Notably, North Dakota is again leading our portfolio with blended leasing spreads of 5.3% year to date and Omaha has delivered similarly positive results.

Speaker 2

In our largest market of Minneapolis, leasing spreads are coming in ahead of our portfolio average and while we are still seeing the impact of supply pressure in Denver, we are optimistic that the demand trend is strong enough to improve new lease rates as the year progresses. We feel great about the first quarter even if it was uneventful. When considering the macroeconomic environment and its impact on our results and strategic direction, we are reaffirming our guidance for the full year. We're going to maintain discipline on all areas within our control and be ready to take advantage of opportunities to advance our platform. Grant will now share an overview of the state of the market and how it plays into our continued growth.

Speaker 3

Thanks, Ann, and good afternoon, everyone. Within the investment landscape, we are seeing apartment demand remain resilient while new supply additions continue on a downward trend. As we look forward to the next twelve months, we expect only a 2.2% expansion of apartment stock in our markets. This is down from a 3.8% increase over the prior year and compares favorably to historical absorption levels. We anticipate this dynamic will continue to shift in our favor.

Speaker 3

Recent macroeconomic events have brought real time volatility to capital markets, though the amount of capital desiring to be in the multifamily space remains high, driven by forecasts for near term strengthening of underlying rent growth and the long term durability of the asset class. This continues to bolster pricing on most transactions even in an environment where broader uncertainties persist. In Colorado and Minneapolis, where 59% of our NOI is generated, institutional quality assets are pricing at mid to high 4% and low 5% cap rates respectively. This represents favorable private market pricing compared to that implied by our stock price. On the capital allocation front, we will remain focused this year on enhancing our differentiated Mountain West and Midwest geography.

Speaker 3

We have fortified our balance sheet, enhanced our capital positioning and will continue evaluating a variety of new investment opportunities to advance our strategic plan. Current public market pricing and private market pricing are experiencing a disconnect, and this will have to be considered in any transaction we explore. On top of this, we are mindful that market exposures, leverage, share liquidity, and scale are important considerations for investors. These variables sometimes compete with each other, and we will continue holistically evaluating and managing all of these considerations as we further implement capital allocation strategies to increase the quality of our cash flow. We are up to the task based on our track record of execution and pursuit of better every days.

Speaker 3

And with that, I'll turn it over to Bharav to discuss our overall financial results for Q1 and outlook for the remainder of 2025.

Speaker 4

Thanks, Grant, and hello, everyone. Last night, we reported core FFO of $1.21 per diluted share for the first quarter, driven by a 2.1% year over year increase in same store NOI. NOI and earnings growth were right in line with our expectations and represent a solid start to the year. Revenues from same store communities increased by 3.5% compared to the same quarter of twenty twenty four and benefited from 120 basis point year over year increase in occupancy to 95.8%. That along with exposure at all time lows optimally positions us heading into leasing season.

Speaker 4

The growth in revenue was offset by the expected increase in same store expenses, which were up 5.8% year over year. The primary driver of the increase was property taxes as we received $680,000 in property tax appeal refunds in the first quarter of last year, creating a challenging year over year comp for the current quarter. A slight increase relative to expectations and initial assessments received in a couple of jurisdictions also contributed to the increase. However, total expenses were in line with expectations due to offsetting savings across the board on the controllable side. Turning to guidance, we reiterated our 2025 expectations in last night's press release.

Speaker 4

Our Q1 operating performance was right on top of our projections for the quarter and the leasing trends evolving as expected, we remain on course to achieve the midpoint of $4.98 per share for core FFO and year over year same store NOI growth of 2.25%. Other components of our guidance are substantially unchanged. On the capital front, our debt maturity profile remains well laddered with minimal maturities this year, a weighted average debt cost of 3.6% and a weighted average time to maturity of five point four years. In the face of continued broader market volatility, our access to capital remains robust with over $223,000,000 of total liquidity between our cash on hand and our line of credit. To conclude, Q1 was a great start to our year and positioned us to build upon these results throughout 2025.

Speaker 4

And with that, I will turn the line back to the operator for your questions.

Operator

Thank you. We will now begin the Q and A session. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking a question. We will pause here briefly if questions are registered. Our first question comes from Brad Heffern with RBC Capital Markets.

Operator

You may now proceed.

Speaker 5

Hey, everybody. Thanks for taking the question. You said in the prepared comments that operations are trending as expected, but I think the Midwest apartment market as a whole seems to be having a really strong start. Your occupancy is at record levels. So I'm just wondering, you know, are you being conservative and modest early in the year, or is there something that I'm missing?

Speaker 5

Because it it just seems like things are actually ahead of plan.

Speaker 2

Yeah. Thanks for the question, Brad, and happy Friday. You know, this we did expect that the Midwest was going to be strong this year. And in fact, you know, we're seeing that, as I mentioned, in areas like North Dakota and Omaha, even Minneapolis, which has had positive new lease spreads since February in our portfolio. So I think we expected really strong growth, particularly given the strong performance last year, and therefore, we are right on plan.

Speaker 2

You know, we are seeing, know, really strong numbers that's leading to a a pretty big loss to lease in some of in some of those markets. So, you know, not only thinking about this year, but into next year, you know, we think there's quite a bit of runway in those Midwest markets.

Speaker 5

Okay. Got it. And then I think with last earnings, you said, the guidance included flat occupancy for '25. I think you said it's up 120 basis points in the first quarter. So, are you planning for that, you know, to give away a lot of that occupancy, in the peak season in favor of of rate?

Speaker 5

And then, Anne, I you mentioned you would tell us what you're gonna do for the weekend, so I wanna hear that too.

Speaker 2

Of course. Happy to answer both of those. So we are our projections include occupancy around 95%. As you noted today, we sit at 96. That positions us really well as we head into those peak leasing, but we do expect it to come off so that the overall average for the year will be 95.

Speaker 2

If demand continues, you know, we will continue to, you know, push rate and keep occupancy strong. For the weekend, I have some good family plans, Brad. I have some time with my mom and, and my sister's plan for tomorrow. So, hopefully, some relaxing.

Speaker 5

Great. Enjoy that. Thanks. Thank

Operator

you. Our next question comes from Ami Fobant with UBS. You may now proceed.

Speaker 6

Hi, thanks. There was some lumpiness in the OpEx this quarter, particularly with elevated increases in real estate taxes and utilities. Understand that real estate taxes, some of that was due to a tough comp last year. But how should we be thinking about growth for the remainder of the year in these two lines? And should we expect any additional lumpiness?

Speaker 2

I'll ask Bharat to take that one.

Speaker 4

I'll take that one. Yes. So there is some lumpiness. The lumpiness is expected to be in the first and the fourth quarters. That's when we received most of our appeals last year.

Speaker 4

There is another component of the increase and that is basically some increased assessments that we received recently in a couple of jurisdictions. For example, in Denver, are a couple of assessments that came in slightly higher. So we have increased our expectations for the year for tax increases to reflect that. The Denver increase at two parts. One was a true up of 2024 and another one was related to 2025 because we base 2025 expectations on 2024 results.

Speaker 4

But that should now be smooth going forward. There's some lumpiness, as I said, that you'll see in Q4 because we had some appeals that came in Q4 of last year as well. But overall, we have increased the midpoint of our noncontrollable spend by 2.25. That's a $650,000 increase and that's really a result of the new assessments we've received, most of it in Denver, but also a few in Minneapolis and Nebraska.

Speaker 6

Got it. Thanks. And retention came down in the quarter. So can you talk through some of the moving pieces that might be leading to you seeing a little bit higher turnover?

Speaker 4

Yeah. I can start and Anne can chime in. Mean there's nothing really specific from a trend perspective that concerns us based on Q1 retention levels. It's also a period where we have the least number of leases expiring. It's about 14% of our portfolio turns in Q1.

Speaker 4

There was some noise in Nebraska as we're close to the last we're basically rolling out the last phase of value add project over there at a couple of properties. That's forced some move outs. So normalizing for that, we will be in the low 50s. And most importantly, April jumped to about 58%, fifty nine %. And the expirations in April were about 1,100 compared to $18.50 for Q1 in total.

Speaker 4

So overall, we do believe that retention will tick up. We've already seen that happening in April. We do expect second quarter to have strong retention. So not really concerned about the recent trend.

Speaker 6

Great. Thank you. Have a good weekend.

Operator

Thank you. Our next question comes from Jamie Feldman with Wells Fargo. You may now proceed.

Speaker 7

Great. Thank you. I was hoping you could talk more about Denver with its lowest new and renewal rate growth in your portfolio year to date. How do you see that market playing out over the rest of the year? When do you think we might see an inflection in rents there, particularly new rate growth?

Speaker 7

And do you think Denver stays weak in the twenty sixth?

Speaker 2

Yeah. Great great questions, Jamie. I think a lots of eyes on Denver and some good data points from our other, public peers as well. So we've seen you know, as we look at April, we have about a 200 basis point improvement in newly spreads, you know, between March and April alone. So, you know, some really good traction there.

Speaker 2

It's about 270 basis points better than q one as a whole as we look just at the April results. So when we think about peak supply, you know, really being kind of end of second in the third quarter later in the year, I think, you know, twelve months out is where we believe we'll really start to see the inflection point in in the rates. So, you know, hopefully, in the q three, we start seeing that those newly those projects that were delivered in the fall of last year are starting to get stabilized. The demand we is very strong in Denver. The absorption has been pretty good.

Speaker 2

And the the demand at our properties has been strong, helping us to keep occupancy higher. So, you know, part of that is is that the new the new projects do have higher rates overall, and so we're we feel really well positioned to see an inflection yet this year and believe that our lease rates will turn positive, you know, towards the end of the year. But we've seen strong demand for our products in Denver. We don't think that will taper off, and we think that they will, you know, bring us into the end of the year positive and positive into 2026.

Speaker 7

Okay. Thank you for that. And then just thinking about North Dakota, which is continues to be one of your strongest markets with the highest new and renewal rate year to date. Does this change your view at all on capital recycling there into more institutional markets? And you consider weaker fundamentals in markets like Denver and probably much more competitive pricing on transaction?

Speaker 2

Yeah. You know, that's a great question. It doesn't change our thinking on that overall. You know, we do like the stability that the Midwest provides because, you know, when there's supply elsewhere, you know, there's usually not as much in the Midwest, and the demand has stayed strong. There are still you know, those markets still remain small, and so they can have sometimes a little bit more volatility.

Speaker 2

You know, a little bit of supply in a in a town like Bismarck can impact our results. The liquidity is still more limited in those in those markets. And, I mean, there are reasons why North Dakota didn't see as much supply last year, and those are really related to the underlying fundamentals of job and population growth. So, you know, being there has been great for us, and it's, really provided a good balance to our markets like Denver where the supply really did impact our new lease rates. But it's still we still are thinking about capital recycling into markets that have stronger liquidity, more visibility for our investors, you know, and longer term growth prospects related to underlying fundamentals of population and job growth.

Speaker 7

Okay. Thank you very much.

Operator

Thank our next question comes from Rob Stevenson with Janney. You may now proceed.

Speaker 8

Afternoon, guys. Anne or Grant, Page 20 of the slide deck has supply in second quarter spiking back up in your markets. Can you talk about what markets or submarkets where you still have significant supply to deal with over the remainder of the year? And any markets where you're not yet on the backside of the supply wave?

Speaker 3

Yes. Good afternoon, Rob. Good question. I think most notably you know, recent supply in Denver, as Anne alluded to in her earlier comments, we're still working out the backside of that as we work through 2025. You know, roughly 18,000 units were delivered in Denver over the past twelve months.

Speaker 3

A little over 50% of those were in urban and urban adjacent neighborhoods, and about 47% of those deliveries were in suburban locations. So that is one market where, although the go forward pipeline has significantly shrunk to below historical averages, we we still are working through that tail. Rochester, Minnesota would be another market within our portfolio where if you look at our markets outside of Minneapolis and Denver, next twelve months forecasted deliveries are very minimal. I'd call it zero to two and a half percent of existing stock. The exception would be Rochester at about four and a half.

Speaker 3

That equates to about 500 new units delivering to that market. And anecdotally, I would comment on the other side of that equation, if you look at job growth within our portfolio, Rochester ranks as a top five metro in all of The United States in terms of job growth as of March. So I think you're seeing the dynamics there of healthcare and education, bringing a lot of employment to that region, some supply is

Speaker 8

coming. Okay. And then in the deck where you were showing the second quarter to date same store leasing update, the 2.4% on new lease growth, what percent are you guys done with second quarter sitting here on May 2? Is that 50% or 66% or more given that leases are signed well in advance of move in?

Speaker 2

Yeah. We're we're probably, I'd say, 30%. We've sent out through, you know, July 26, but not all of those have come back in yet. So, you know, we probably have a good half of the expirations out quoted, but but we won't have those all back in. So I I'd say between 2530%.

Speaker 8

Of second quarter? For April, May, June?

Speaker 2

Yes. Yes. That's right.

Speaker 8

Okay. So there's 80% of the leases

Speaker 2

Oh, yes.

Speaker 8

Left to deal with at this point?

Speaker 2

That where where they still have time to to provide us their indication. I mean, April was in the in the books, but, you know, people people do take time. It it might be a little bit higher than 30, but

Speaker 8

Okay. And then last one for me. What drove the 220 basis point sequential decline in Omaha occupancy?

Speaker 2

Yeah. As Barab mentioned, we did have some forced move outs there related to the last wave of value add. So when we complete value add on a turn, you know, you get to the end of the project and you have units that may not have turned, we do nonrenew those residents so that we can complete the evaluation. So that that created a little bit of noise in Omaha. Barab mentioned that earlier.

Speaker 8

Okay. Alright. Thanks, guys. Have a good weekend.

Operator

Thank you. Our next question comes from Alexander Bofarp with Piper Sandler. You may now proceed.

Speaker 1

Hey, good afternoon out there. One, I have to say always love the strong North Dakota. That's been those markets have been good over the years. But my first question sort of goes against that. Given we're all learning about trade tariffs and roughly 17% of agriculture exports go to China, just sort of curious how outside of Denver and Minneapolis, I'm talking, how agriculture affects sort of the local economies in the markets that you're in?

Speaker 1

Is it a big impact where there's some pullback in exports that would ripple through those other Upper Midwestern markets or it's pretty far away from the employment centers that, you know, drive your properties?

Speaker 2

Thanks, Alex. I think it's the latter. So while there is an awful lot of agriculture as a base in states like North Dakota and even Nebraska, those aren't the driving drivers of the economy in the areas we're in, which is Bismarck and Grand Forks. Those are really driven by health care and education. Now, obviously, agriculture has a big impact because they're also regional centers.

Speaker 2

So to the extent there's an impact in the outer areas or the more rural areas of those states, you know, that is where those people would normally come for shopping, you know, help to obtain health care. So there's probably a little bit more of a secondary effect on the on the economy up there. And over time, North Dakota has shifted a little bit less agriculture and more onto the oil and gas. So, you know, the rural parts of the state are still, you know, very focused on oil and gas. Okay.

Speaker 2

If you would like to continue to buy buy North Dakota pasta and sugar made from the sugar beets, that helps.

Speaker 1

I will add that to my weekend, you know, list of activities. Going back to retention, looking historically, I appreciate that you said it jumped up to 58% in April. But over the past year, it's been sort of in the 54%. So it's been it seems to be trending below what your other peer REITs are. So just sort of curious, are

Speaker 5

you

Speaker 1

seeing like either uncompetitive housing, so people can't find a house or economic nervousness as to doesn't seem to be something that's in your portfolio. I'm just trying to understand the slight difference more than just a few properties in Nebraska, why your retention rates are sort of a different level than what we're seeing in the coastal and Sunbelt REITs.

Speaker 2

Yeah. I think one one driver, you know, in addition to Omaha, which we already covered, one driver would be our Denver retention was lower. You know, as we talked about that has higher supply, so there are more choices in the market. So overall, the q one retention in Denver was in the mid forties. That then is offset by, you know, really strong retention in some of our other markets.

Speaker 2

Our forecast and guidance, you know, includes, an estimation of full year retention at, like, fifty one five. So we're still, you know, particularly with April running right in line with where we think. There may be some upside there, we believe, but we really do you know, Denver being a large portfolio, you know, it really does it really will help us when there's some more absorption in that market of the new product, and we can get those retention rates back up.

Speaker 1

So the housing market, the dynamics that you're experiencing in the unaffordability, same in your markets that we're seeing in the other markets. Is that right?

Speaker 2

Yeah. I I think that's right. And if you look at the the investor deck, you know, we do some work and provide some data on housing affordability across our markets. It's it's very, very similar to what you would see in some of the the other market, you know, Sunbelt markets and coastal markets. And our people number of residents who are moving out, who are saying they're moving out to buy a home was just 6%.

Speaker 1

Wow. Okay. Thank you.

Operator

Thank you. Our next question comes from Mason Gould with Baird. You may now proceed.

Speaker 9

Hey, good afternoon, everyone. Going back to the solid positive inflection you're seeing for new rates in the second quarter, can you kinda talk about how you expect new lease rates to play out for the year? And has there been any change to expected blends for the year?

Speaker 2

Yeah. It's playing out just about how we thought it would fix. Sorry, Bravo. I'll start and then you can jump in here. It's playing out just about how we thought it would with respect to where we expected new lease rates to be, where we expect the blend to be.

Speaker 2

And we think that that will continue to improve and then taper off into the fall. Typical seasonality would have us, you know, back negative on new lease rates slightly towards the end of the year. We that's still intact. So I think we our original thesis of how we thought the year would progress is is playing out, and we don't have any reason to, you know, make any big changes in that, which is part of the reasons why we're we're affirming the guidance. So, Barabh, anything to add there?

Speaker 4

I think you covered it. It's, it's in line with expectations with, you know, with us expecting the peak to happen in the May, June, you know, time frame, and then kind of flattening out from there before it kind of tapers off towards the end of the year. So, you know, everything that Anne said.

Speaker 9

Got it. And what are you seeing in terms of attractive uses of capital or investment opportunities? And when would you expect to get back into acquisitions?

Speaker 2

We'll we'll let Grant take that one.

Speaker 3

Yeah. Good good afternoon, Mason. We certainly do wanna take advantage of investing opportunities when it makes sense with opportunities where we can advance our strategic plan. We do like the long term fundamentals of the Mountain West, and we're gonna continue to focus on ways where we can enhance the differentiated offering that we can provide in that region. For us, you know, we really like the Colorado portfolio that we've assembled over recent years.

Speaker 3

I think our goal in any new market would be execute in a manner consistent with our Denver and Fort Collins growth. In terms of what form does that take, acquisitions, acquisitions that could come with attractive embedded financing. It could be potential mezz executions. It's harder to make development math pencil today, but we continue to have those conversations. We're also talking to folks about potential mezz executions on recaps of existing assets.

Speaker 3

And then we always have lines in the water on the OP unit transaction front. So we're we're turning over a lot of rocks. And when we find something that makes sense, we wanna move on it.

Speaker 9

Thanks for the color. Have a great weekend, everyone.

Operator

Thank you. There are currently no questions registered. There are no questions waiting at this time. So I'll pass the conference back over to the management team for any further remarks.

Speaker 2

Well, thanks everyone for joining us. We hope you all have a great weekend, and we look forward to seeing many of you in the coming weeks.

Operator

That concludes today's conference call. Thank you for your participation. You may now disconnect your line.

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