Good morning, and welcome to the Centerspace Third Quarter 2021 Earnings Conference Call. [Operator Instructions] Please note, this event is being recorded. I would now like to turn the conference over to Mark Decker, Chief Executive Officer. Please go ahead.

Good morning, everyone. Centerspace's Form 10-Q for the quarter ending September 30, 2021 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 is important to note that our remarks will include our business outlook and other forward-looking statements that are based on management's current views and assumptions and we cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call. I am joined this morning by Anne Olson, our Chief Operating Officer; and John Kirchmann, our Chief Financial Officer. I'd like to start by welcoming my team members out there on the line, many of whom are shareholders and thanking them for the fantastic efforts as we endeavor to create better every day. It's an incredible time to be in the housing business and the Centerspace team is giving outstanding effort and getting results. 2021 is a big year for the company. So far this year, we've implemented and integrated a new operating system that will enable our team to deliver a consistent resident experience, welcomed over 100 team members and integrated 17 new communities, growing our portfolio by 20% and refinance over one third of our debt outstanding, lowering rates, adding considerable duration and providing greater financial flexibility and certainty all of this in addition to our day jobs. As shareholders, we're so fortunate to have this Centerspace team and these key foundational steps position us for further growth and efficiency. Meanwhile, our business remains resilient. We posted an outstanding quarter, and our outlook for the year…

Thank you, Mark, and good morning. Our third quarter results demonstrate that the improvements to our operating platform are providing us with leverage to capitalize on the strong fundamentals of 2021. Our same store portfolio is performing well with stable occupancy and 6.2% revenue growth in the third quarter compared to the same period last year, driving a year-over-year increase in NOI of 7.5%. Our revenue growth is the result of very strong leasing activity with 10.8% average effective lease-over-lease increases an average effective renewal increases of 7.2% across our same store portfolio. This resulted in blended effective rent increases of 9% in the third quarter, comprising 41% of our total lease exposure. While all of our markets experienced same store sequential revenue growth in the third quarter, our largest market, Minneapolis experienced 7.8% revenue growth and 15.7% NOI growth. This is a positive trend given the slower recovery we have been seeing in Minneapolis and Denver. Across our Minnesota markets we are encouraged by the progress within our portfolio as eviction moratorium has expired and rental assistance programs have gained momentum. Our collections this quarter were 98.7%, a 70 basis point improvement over the second quarter. With strong occupancy, we grew our same store average monthly rental rate per unit to $1,279 a $46 or 3.7% per unit increase over the second quarter of this year. As we head into the fourth quarter initial results are positive. In October we saw significantly increased traffic over 2020 and our same store portfolio achieved 7% average lease-over-lease effective rent increases and 7.4% average effective renewal increases. Our current same store occupancy is 94% and with just 12% of our leases expiring in the fourth quarter, we expect to be able to capture rent increases while boosting occupancy throughout the quarter. These…

Thank you, Anne. As Mark and Anne have discussed, 2021 has been a year of change as we have emerged from the pandemic. Before some context I would like to start with where we left off 2020 we made decisions to minimize costs and conserve cash. Those decisions included not filling open corporate support positions, and changing the form of our incentive compensation, resulting in a 7% decrease in G&A and property management expenses in 2020 versus 2019. In 2021, we have pressed forward with our technology initiatives which include filling open positions from 2020 to ensure its success. During the third quarter, we undertook several financings that improved our balance sheet, reduced our cost of capital, and increased our weighted average maturity. These initiatives included, improving and extending our existing line of credit, issuing $125 million of unsecured senior notes with a weighted average interest rate of 2.63% and weighted average maturity of 10.5 years, while also expanding our bond investor group from one to four investors and entering into a $198.9 million secured Fannie Mae credit facility to refinance the debt associated with this quarter's portfolio acquisition, and which resulted in a weighted average interest rate of 2.78% and weighted average maturity of 9.8 years. During the quarter, we also authorized the 2021 ATM program, which allows us to offer and sell up to $250 million of common shares. During the quarter we issued 199,000 shares at an average net price of $98.57. During the nine months ended September 30, we have issued 1.1 million common shares at an average net price of $70.63 for total consideration of $86 million. As of September 30 2021, there is $230 million remaining under the ATM. With that, let's look at our results. Last night, we reported core FFO for the…

We will now begin the question and answer session. [Operator Instructions] Our first question today comes from John Kim with BMO Capital Markets. Please go ahead.

Thank you. I was wondering if I could ask about your new lease growth rate which looked like it was decelerating during the third quarter and then it sounds like so far in October, it's about 7% in the third quarter as well. Are there any markets that's kind of driving this deceleration? I realize it's still a high growth rate but many of your peers are seeing accelerating growth in the market.

Yes, Hi, John. Good morning. This is Anne. I think we saw really good growth even in October in Denver, for example, that's at 14.4%. But I think we have a little more seasonality in our lease expirations and that we really do slow down we have very little exposure in these months. And we have seen some deceleration in those kind of colder weather markets like across North Dakota, and northern Minnesota, where we really captured high rent growth during the second and third quarter. The October numbers are still, it's still a little bit early. So we pulled those through I think the 25th of the month. There may have been some we may see some movement in those from the end of the month data as well. So we feel really good about particularly Denver and Minneapolis, which have been accelerating, and are a little bit larger portions of the portfolio on an NOI basis.

And then can you remind us when concession use Pete was in the third quarter of last year and rough percentages, how much concessions used in the third and fourth quarter of last year and first quarter of this year?

I mean, we haven't ever used a ton of concessions, but the peak would probably have been –

Yes, I'd probably say second quarter of this year, when we were really starting when we were starting to see the ramp up was probably our high point. But as Mark noted we are affected we report on effective rents, and we do try to keep the concessions out of the revenue management system. So pretty sparse use.

Yes. John, our concessions in Q3 ran about 1.3%. But that includes employee concessions, like we give employees a 20% discount. So that's including everything. So it's a pretty low number.

Okay, just one more question if I can. Your leverage increase this quarter to 9.9 times? Is any of this timing related with the TMS acquisition, a mismatch of EBITDA with that?

Yes. I mean, John, you got to remember we have all of the TMS debt in one month of the EBITDA. So that's a trailing number on today. Is that so on a forward basis it would be significantly lower. Go ahead, John.

Yes. On a forward basis, it's in the high sevens. So it's actually, by our measurement using forward NOI actually comes down from the prior quarter.

High sevens, including preferred?

No, excluding the preferred.

We will save preferred for debate club.

Yes. It would be mid eight, yes, seven yes on including the preferred.

I get it. Okay. Thank you.

Thanks, John.

The next question is from Gaurav Mehta with National Securities. Please go ahead.

Yes. Good morning. You talked about improvement in Denver and Minneapolis. Is that urban part of the portfolio that's improving there?

Yes. The improvement in the Twin Cities, I would say, is pretty broad base to the urban assets in particular, I would say have not had a big snapback. I would just say they've stabilized. Is that fair Anne?

Yes. And I think across the rest of the portfolio, we've seen as I noted, a little bit of deceleration, but in most of the markets, the growth has been pretty steady. So we're still seeing strong growth in the other mountain West and across Omaha, that's remained pretty steady. So we're seeing a little bit of deceleration I would say across North Dakota, [twin city] market, and then good acceleration in Denver and Minneapolis.

I'd also say that lower growth rate is off of a stronger base. So we didn't see big downdraft last year.

Okay, let's say for your St. Cloud portfolio, I saw that occupancy dropped by 290 basis points for that part of the portfolio in 3Q. Can you provide some color on the drop in occupancy in that market?

Yes, sure. Great question. So we're really our goal is to optimize the revenue. And so when the lease rates are growing the way they have been we will give up a little bit of occupancy. We also have our highest amount of exposure, lease expirations, during the third quarter 41% of our portfolio rolls over during that quarter. So we naturally have a little bit of dip in occupancy at that time and really, what we're trying to do is optimize the revenue. So to the extent we can continue to push rents up we will wait for the resident who will take that higher rent and leave it open a little bit longer.

Okay, thank you. That's all I had.

Thanks Gaurav.

The next question is from Rob Stevenson with Janney. Please go ahead.

Good morning, guys. Just a follow up on the last question about the occupancy. I mean, how did you guys sort of debate given your comments about the leasing sort of materially slowing down in terms of number of leases is as you hit here in the fourth quarter of driving occupancy higher into the at least the 95, rather than keeping it down on the 94s for the winner versus continuing to push rental rate. And did any of the rental controls measures, have you pushing rental rates more aggressively in anticipation of any of that getting put in and sort of the mark on that?

Yes. So with respect to kind of the debate that we have about optimizing revenue, I mean we really do kind of let the revenue management system work. And having lower expirations we haven't seen a drop of a significant drop off in traffic. So for example, October traffic in 2021 was almost three times October traffic and 2020. And so we feel confident that leaving some of that occupancy that we still have the traffic to fill those and we don't have as many people expiring. So we do really expect to see that occupancy grow in this quarter with strong rates. With respect to the rent control measures it's such a small part of our portfolio, as Mark noted in the prepared comments, only one of our assets would be subject to rent control if in fact it passes today in St. Paul and Minneapolis. Minneapolis has just authority for the City Council to take it up. There's actually no measure on the ballot. St. Paul would actually have a measure that would set rate increases that 3%. But that only affects one of our assets. So to-date we've just been running it the way we always have which is optimized the revenue and that asset has good strong occupancy and is pretty well-positioned in that. So we didn't really change course based on the limited exposure we have to it.

Okay. And then it's been a couple of months now, since you've closed the Minnesota portfolio acquisition. Any additional upside you're finding here and are you guys thinking about taking advantage of the strong market for assets to sell maybe some of your prior previously owned assets in Minnesota to reduce that market exposure? How are you feeling about that market exposure as you're heading into 2022?

0Yes. Good morning, Rob. I would say we feel very sanguine about our exposure to the Twin Cities market. We view that as a lower risk proposition, because we know the market very well. And in terms of selling I mean, listen, we always consider selling everything and anything but the case for those assets is we believe what we expected it to be, which is, there is some operating opportunity within those and while you can probably get credit for a lot of that, you wouldn't get credit for all of it. And we really didn't buy them to flip them. We bought them to run them better in cash flow. And so we'll always make portfolio related decisions in terms of the overall strength and it is our plan and goal over time to lower the percentage of NOI that comes from the Twin Cities, but we're happy with it for now. And we'll grow out of it more likely by adding things than selling things.

And any additional upside you're finding out of the acquisition at this point?

I mean, additional look we underwrote a fair amount of upside. So I guess which we haven't shared all that with you. So I guess I'll say it is what we think it is. And there is a lot of upside embedded in that as it relates to opportunity, really probably much more so on the revenue side and then there could be over time, some kind of densification opportunities which is something we didn't underwrite but believe may be there. So that would be 120 units that sits on eight acres, that's 49 years old and we might do something different with that over time, but that's all in the future.

Okay and then last one, for me, Anne or, John, when you take a look at the expense, same store expense, a guidance for the year, and the sort of high fours at the midpoint how much of that is sticky in terms of upward pressure on wages, property taxes, etc versus temporary or non recurring stuff like incremental technology investments and other things that could pull that back down into a more normalized 3% or are we just in an environment right now where in order to drive higher revenues, you're going to have to have higher expenses for the foreseeable future?

I'll start with the real estate taxes, and then let Anne. So I don't know real estate taxes will go down. I don't expect that. I don't remember that happening. So that's definitely sticky. As you know the asset inflation is pretty significant and there's a lot of comp data out there. So I expect there to continue to be pressure on taxes. We've had a couple bad years and insurance cost increases. I think that will what we're hearing now is that will mitigate somewhat but once again, it's not going backwards. So those large increases we've had the last two years will stick and our forward run rate and then Anne as far as operating?

Yes. I think I do, I do think that what you're seeing on the inflation side is really difficult on wage inflation. And I think we are going to see that a little bit. So I think the answer to your question is yes, some of it is non-recurring. We do have some technology costs and things built in there that aren't recurring, but we also are committed to keeping our assets running well and it takes both the systems and the people, and well, a lot of our technology initiatives are aimed at increasing efficiencies, that doesn't necessarily automatically translate into less people and in the meantime wage inflation is real, and the cost of retention is significant. So I think we are going to feel some pressure there and hopefully the good news is that we're seeing a really good increases on the rates that more than makes up for it.

Okay, thanks, guys. Appreciate it.

Thanks Rob.

The next question is from Amanda Sweitzer with Baird. Amanda. Please go ahead.

Thanks. Good morning.

Good morning,

Your growth in revenue per occupied home exceeded rental rate growth during the quarter particularly in Minneapolis. Was that related to rental assistant payments? Are there any other -- other revenue initiatives driving that that you think will persist?

Yes. I think you got it right. And –

Yes, it really is. The rental assistance payments really started to come in during the third quarter. There was a lot of momentum, particularly in Minnesota where we had seen very little of that actually getting out to the residents through from the government program. So I think that is a big driver there.

That makes sense. And then following up on an earlier question, how are you thinking about your leverage target following the close of the KMS transaction? I think in the past, you've talked about prioritizing and improving your market exposures and driving earnings growth. Is that still how you're thinking about it today?

Yes. I mean, as John outlined just a moment ago, I mean, we really don't look at this as a leveraging up transaction. It's leveraged neutral. So while we did put more leverage on those assets, and take cash proceeds at the table, we applied that cash to our line and some of these other unsecured bank loans. So on a net basis we did not, that portfolio was roughly on par with us with our portfolio in terms of leverage and posts all of the different moving pieces, it's in the same spot and cash flow should grow. So we would actually look at that as a leveraging down transaction, or we're going to have less leverage everything else equal post 12 months from now, if nothing else happens, our leverage will be lower on a multiple basis. And it's the same on a percentage of assets basis.

Okay. That's fair. And then, it doesn't make sense. And then as you think about funding some of that additional acquisition activity stuck around, is it fair to assume that you try to fund that on a leveraged neutral basis going forward as well?

Yes. I mean, I think everything equal in a perfect world, we'd over equities and drive leverage down. The sort of counterbalance is we have, in our judgment, a pretty strong stream of earnings. And we'd like to keep it. I mean I think when we consider our investor base we definitely have NAV and leverage focused investors and we have earnings growth investors and we have to be mindful of both of those sets of expectations. I'd also say we feel really good about the duration that we added and the rates. So we've lengthened our average duration by about three years and lowered the rate. So we're almost at eight years. I mean, Camden's average duration is similar. That's an A rated company. Obviously, they have less turns. But we feel very good about the composition of our debt. It's not all quantity. Two times expiring tomorrow, when you can't refund it is worse than 14 times it isn't due for several years. So that we think a lot about it and we think about it in a balanced fashion.

That'll make sense. Appreciate the time.

Thanks. The next question is from Barry Oxford with Colliers. Please go ahead.

Great, thanks, guys. Looking at your renovations and getting 16% ROI should we think about that as a good number going into 22? Or look, labor costs and materials are going to weigh on that number?

Yes. Yes, think that is a good number looking into ‘22. I mean, one of the things that we really try to be disciplined about is if we're not getting more than 15%, we really slow that down and monitor whether or not we want to continue. So and historically, we run between 16% and 18%. So I think 16% is a good number.

Okay, great, great. And when you look at rental increases that you guys have been able to get over this year as you move into ‘22, can you continue to get those type of rental increases, given the markets that you're in and can your tenants kind of continue to absorb those types of increases? Or look maybe 22 we'll have to kind of slow it down?

I mean, that's a great question. We haven't seen a significant amount of supply and well there is in a lot of those secondary markets and while there is some planned even planning supply right now or announcing supply, those won't be opening for 18 to 24 months. That's on the multifamily side. We also haven't seen a lot of supply on the single family side, really coming quick, quick enough to drive these rates down and we have a pretty significant loss to lease in the portfolio now. So we would expect the renewal rates really stay pretty high into 2022 and in that the new lease rates maybe there is some moderation and growth but we're optimistic, given the growth we've had this year, and where we've reset and that last two lease that's embedded in the portfolio.

Right, no, great. Perfect. That makes sense. And then last question on acquisitions where have they kind of cap rates gone let's just say, since kind of the beginning of the year are we, we're down 25 seeing compression at 25 or 50 basis points and then maybe talk about Nashville? I know, that's been a target market as market has Nashville even gotten further away from you, because of cap rate compression? Or do you think it's coming back to you?

Good question, Barry, I think the cap rate compression I'd estimate to be 50 to 75 basis points. It's definitely more than 25. So just, I mean, it's just to consider union point which we closed on in January, or Parkhouse, which we closed on last fall; those were both kind of plus or minus on our forward 12 plus or minus forecasts, as I think we disclosed when we did those, and I think that those would be three and a quarter today. I don't know three four. I mean it's all it's all whose math you're using. A lot of times the brokers committee will say, oh, that's a four cap, and then we do the math that looks more like a three six. But so like, how exactly you're calculating it, and what growth assumptions and capitals and taxes leave lots of room for discrepancies. But I would say in general, 50 to 75 basis points feels right.

Right.

And in many instances, that doesn't mean I mean the year one cap rates, one thing, we sort of think about it on a 10 year unlevered levered IRR basis, which is also fraught with assumptions, I think they're the back end, those returns have probably come down 25 to 50. So the front end cap rates gone down people's growth rate, assumption in the early years has probably gone up and it, the IRR isn't down 50 to 75 basis points in my opinion. But if your be read and you're solving for a levered five to get your promote your cost of capital is pretty low.

Correct. Right. And then how are you feeling about Nashville?

I love Nashville. I think it's fantastic market.

How you feeling bad pricing in Nashville?

It sucks. No, listen, I think by becoming our white whale. No, looking at Nashville, still a great market. We still are actively underwriting there. I mean, we really are the bridesmaid quite a bit. And we have to hold discipline on our first year metrics and so we do that, but we are frequently very competitive and we're not missing by much. But we're, we just have to draw the line somewhere and where we're drawing the line is somewhere between 0.2% and 1% below where things are clearing right now.

Okay.

It’s not if assets are trading for 105, and we're running out of ink at 94. If we're excited about it, we were we can be in the hunt.

Okay, great. Now that's helpful color. That's all for me. Thanks, guys.

Thanks Barry.

Yes.

The next question is from Daniel Santos with Piper Sandler. Please go ahead.

Hey, good morning. Thank you. Thank you for taking my questions. I'll just sort of follow up on that on Barry's question and say, are there any markets that have sort of performed stronger than expected and that maybe kind of moved up your interest list? It seems like the outperformance and the Sunbelt in the Midwest was pretty broad.

Yes. you mean like, markets we aren't in?

Yes.

Yes. I mean I would say for the most part, if it's not one of our focus markets we're really looking at it on an opportunistic basis. So it's probably some portfolio, there's something to it we're not saying, oh, well, that one off asset in Salt Lake City looks great. Let's just do it. I mean, we just don't we, maybe we're not that opportunistic. It has to be more than just an asset for us to kind of turn our head. But I would say broadly, we agree with your point that the market strength has been broad based.

Your market having grown?

It has not. I mean, I would say we're considering. I mean, in our last board meeting, we had a long discussion with the team and the trustees about maybe we should broaden that scope a little bit. We do a lot of work to kind of land on these markets. So to say, like, hey, we're going to go we first would go reevaluate the work we did where we did have a list of call it 10 markets. But I mean, it's a fair amount of work and I would say the standard is pretty high for our board to say, yes, sure name three more markets. I will say their view is, and we've heard this from investors, as may we should have a few more places to hunt.

Got it. And then I guess, now that you're sort of urban assets have stabilized. Is there some thoughts and maybe sort of cycling out of them and making the portfolio truly sort of suburban focused?

No, I mean today our portfolio is something like 15% urban taking off, that's not a same store number, that's a total number. And I would say long term we believe, in cities. So I mean, we might actually find things we like in a city because the cash flows are depressed, and there's less interest on a relative basis. So I would say, no, we're not seeking to kind of alter the mix that we have there at this time.

Got it. That's it for me. Thank you.

Thanks.

Your next question is from Amy [indiscernible] with BTIG. Please go ahead.

Hi, good morning, everyone. I was just hoping to come back a little bit to the October traffic. You cited that October ‘21 was about three times 2020. But I'm wondering how that compares to 2019 or your typical seasonality?

Yes. I think traffic this year has been a little better. That's consistent in October. We look at traffic year-over-year. It's definitely better. If we look 1921 over 19. I'd say it's also better.

Yes, I think we are seeing some strength, particularly in the secondary markets and some of the technology transition has made it difficult for us to kind of track asset to asset over 2019. But 2021 has had stronger traffic.

Okay, and how has traffic specifically trended within Minneapolis? I know we've discussed in the past about how this market particularly in the urban area was just taking longer to come back to this and various factors. But what are you seeing on the ground right now? Are people coming back to the urban centers? Or is the strength really just continuing in suburban and urban is fumbling along.

We are seeing more strength in the urban areas, I say particularly kind of post Labor Day. So as office occupants who come downtown Minneapolis every day there is more traffic on the road and more people downtown, a few more restaurants are starting to open back up. We are seeing the live music menus are open. Our professional sports teams are back playing in person. There's a lot more going on. So we have seen that translate into our traffic numbers and it's showing up in our rental rates.

And then in the specific three kind of sub markets where we are downtown I mean, they are really, they're not, they're driven less by being able to walk to your office and be able to walk to things like bars and entertainment, and those things are coming back. So that's a positive.

Great, thank you all my other questions been answered.

Thanks, Amy.

[Operator Instructions] The next question is from Buck Horne with Raymond James & Associates. Please go ahead.

Hey, thanks. Good morning. I want to go back to just the tech initiatives and some of the costs that are kind of going on there. It seems like we've kind of gone over budget a couple times with the costs. And just wondering based on what you're expecting for the fourth quarter, and what additional costs might be incurred going into 2022? How quickly could those drop off next year?

Yes. If you could see the look on John Kirchmann face right now you would laugh Buck but because he doesn't like when I go over budget, but we're over budget slightly but we've done a couple things that have increased those costs during the year that we're very mindful of. The first being we did pull forward one of our phases. So something that we plan to do in 2022 we pulled into 2021. That increased some costs there. And then adding the Minneapolis portfolio of 17 new assets really did expand the project pretty significantly. I think the cost, we're going to see those decrease very rapidly in 2023. So we're fully live on the new system tight now. We're working the adaption plan, and I'm sorry, in 2022, they're going to drop right off. So we really, our goal is to have this really wrapped up and be moving on to looking at how we might use this platform for other technology enhancements towards efficiencies next year, but this last 450,000, 475,000 that we expect in the fourth quarter, really should be kind of the tail end of the non recurring fees.

Yes. and I'll just add Buck with the portfolio acquisition, not only was it the extra work for those 17 communities, but that was a big lift for the entire team. So we took some things that we were originally doing internally and we brought some additional consultants to kind of relieve some of the workload so we could focus on the onboarding.

All right. Very helpful color, guys. Appreciate that. Thank you. And kind of a different tack on earlier questions in terms of can your customers continue to keep up with the rent increases that you're seeing? I'm just wondering, if you have any extra data or color you can provide on rent to income ratios that you're seeing are you seeing the incoming tenants or applicants coming in with higher income levels or seeing any signs of that economic strength kind of driving that or are you starting to see those metrics start to tick up?

Yes. So I would say we're generally speaking still in the low 23, we require three times to rental income. So –

And we haven't seen any drop off and qualified applicants. So that would really be the first thing that we would see is a lot more denials or less applications based on the qualifications and we haven't started started to see that yet. I do think that to the extent that there is inflation in the rents that we're seeing good rental increases I mean, people are also feeling it in their wages. So we really haven't seen any deterioration of those metrics to-date.

It's very helpful. That's all. It's all for me. Thank you.

This concludes our question and answer session. I would like to turn the conference back over to Mark Decker Decker for any closing remarks.

Thanks so much. Everyone thanks. We appreciate your time and interest in Centerspace. We wish everyone a safe and healthy holiday season. Hope you get out and vote today. And look forward to meeting with some of you next week at [indiscernible].

The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.