Release Date: July 30, 2024
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
Positive Points
- Centerspace (CSR, Financial) reported strong earnings growth with core FFO of $1.27 per diluted share for Q2 2024.
- Same-store revenue increased by 3.4% year-over-year, demonstrating portfolio stability.
- The company successfully issued shares on its ATM, raising approximately $37 million to reduce leverage.
- Centerspace (CSR) recast its line of credit, extending maturity to 2028, enhancing financial stability.
- Resident retention exceeded projections, helping maintain occupancy and drive rental rates.
Negative Points
- Property operating expenses increased by 5.1% year-over-year, driven by higher repairs and maintenance costs.
- Bad debt was up quarter-over-quarter, although year-to-date levels are in line with historical norms.
- The company expects lower core FFO per share in the second half of the year compared to the first half.
- Omaha market occupancy trended lower, driven by ongoing value-add projects.
- Economic volatility and higher interest rates have limited acquisition opportunities over the past 18 months.
Q & A Highlights
Q: You mentioned that the equity issuances are being used to reduce leverage. Do you plan to do more on that? And then what's kind of the underlying leverage target that you're thinking of when you're doing these equity issuances?
A: We have used equity issuance to pay down the floating rate debt that we have on our line of credit. That's a little higher rate debt, mid to high sixes. We have potentially $10 million or $20 million more to pay down on that line of credit to reduce that to zero. So we don't have an unlimited amount of accretive or nondilutive uses for equity issuances. And we're not targeting overall leverage rates. We're trying to balance that with the ability and the opportunities that we have to grow for external growth. So we're really pleased with the equity issuances and reducing both the overall leverage and the exposure to floating rate debt that we had.
Q: You said in the prepared remarks that you're seeing more acquisition opportunities. And I think you said you're more excited about your cost of capital than ever. Can you just talk about specifically what opportunities you're seeing and if the pricing on those makes sense just with this current cost of capital?
A: The transaction volume remains down 65% to 70% from 2022 levels. So there does remain a general lack of transactions, but we have seen an uptick here over recent months in activity. Pricing generally in the 5% to 5.25% cap range that is consistent with our experiences in Denver and Minneapolis kind of a tale of two stories. Some recent urban trades really driven by discount to replacement cost thesis with in-place cap rates there, mid-fours to low-fives. Newer vintage, Minneapolis, suburban is pricing at mid-fives today. We have lines in the water on what I'll call kind of straight acquisitions, OP unit transactions, and mezz funding. So we're casting a wide net and cautiously optimistic that there's going to be some opportunities here in the second half of the year.
Q: Can you talk a little bit about where you're facing the biggest supply issues in the portfolio today?
A: Portfolio-wide, our supply profile remains muted. We continue to see tapering of the under-construction pipeline. Denver is our market with the highest levels of supply at 6.7% of existing stock under construction today, which represents about 20,000 apartment homes. These numbers have been reducing over the past two quarters and next 12 month deliveries in that market in Denver are forecasted at 11,000 apartment homes. That is consistent with the 2022 and 2023 delivery levels in that market. Minneapolis to touch on our other larger institutional market. Supply pipeline continues to taper here and has been tapering over recent quarters. Currently, we're at 3.6% of existing stock under construction. That's down from 6% in midyear 2023. Again, next 12 months deliveries in Minneapolis, 6,900 apartment homes. That's approximately two-thirds of the 2019 to 2023 five-year annual average. And then touch on our secondary Midwest markets really little to no supply in those markets. Pipeline would range from 0.5% to 4.5% of existing stock. So thematically, a very muted supply profile, and we continue to see that pipeline taper.
Q: Omaha occupancy trended lower again quarter over quarter and down, I guess 160 basis points year over year. What's driving that? And what are you guys doing in that market to address that?
A: Omaha is one of the markets where we're just finishing up some value add projects. So some of the vacancy is driven by renovation. And we typically tell you that if you look kind of comparatively St. Cloud have that same kind of deceleration in occupancy and then a pickup. So we do expect that to pick up again as we finish out the last bit of renovation and really focus on pushing occupancy up past that 95 level post that -- post completion of the renovation.
Q: You discussed kind of seeing some more activity nationwide. I was just wondering if you could narrow down to maybe some of your markets where you're seeing some more increased activity in transactions, acquisitions, dispositions, and then maybe with the pricing along with that, where you guys are seeing opportunities, not necessarily in the near term, but maybe more medium or even long term as well?
A: There was some very large transactions nationally portfolio transactions that did have a communities located in our markets. The Lennar portfolio, 19 markets in total, about 11,400 units. Within that, there were three communities in Denver and three communities in Minneapolis that were part of that portfolio. There's a KKR, as we know, has acquired 18 of those communities pricing on their portfolio transaction on a forward basis, nominal cap rate was a 5.1% kind of on our math in our discussions. Really Denver has been the leader in terms of markets within our portfolio for a rebound in transaction activity. We've seen both urban and suburban transactions where buyers and sellers are incrementally getting more constructive on agreeing to asset value. Minneapolis, as I mentioned earlier, some urban trades that really high net worth private individuals and platforms have been most aggressive in pricing on those urban discount to replacement cost thesis, acquisitions. And then in the suburban market overall in Minneapolis, still a lack of suburban trades, but really after 12 to 18 months of no activity in the suburban space, we have seen a handful here over the past three to six months that have transacted.
Q: You also mentioned that you guys fully funded your mezz investment in Denver. And I think you also mentioned that you're constantly looking at other opportunities to put some capital to work in some other mezz investments. Is it possible that you guys could use this type of capital allocation and investment too, maybe venture into other markets. Are you really focused on just on your core markets that you're currently in?
A: That mezzanine investment of $15.1 million that is now fully funded that's in Minneapolis, in our Minneapolis market. We are looking to use the mezzanine financing and as a way to get into other markets and look at have access to development, a development pipeline. However, it has been limited to Minneapolis because just the competitive advantage that we have in Minneapolis, that's also growing for us in Denver given our scale there. This is where we have the deepest relationships. We have the largest team. And so we definitely are starting to see opportunities in other markets and on our radar for sure as a creative way to help some boost the earnings and really get access to new products at a discount to market value with those purchase options on the back end. So we like this structure and certainly are pursuing every opportunity we can.
Q: I just wanted to follow up on your commentary that the new lease pricing peaked in May, which looks like it's about a month and a half earlier there,
For the complete transcript of the earnings call, please refer to the full earnings call transcript.
