Hello, everyone, and welcome to the Centerspace Fourth Quarter 2022 Earnings Call. My name is Daisy, and I'll be coordinating the call today. [Operator Instructions] I would now like to hand the call over to your host, Joe McComish, VP of Finance to begin. Joe, please go ahead.

Centerspace's Form 10-K for the year ended December 31, 2022 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 filings under the section titled Risk Factors and in our other filings with the SEC. 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 Mark Decker for the Company's prepared remarks.

Thanks, Joe. Good morning, everyone, and thank you for joining us. With me this morning is Anne Olson, our Chief Operating Officer, and Bhairav Patel, our Chief Financial Officer. 2022 was an ambitious year for Centerspace. We had several large forces at work, multiple large integrations of communities, people, and systems from late in 2021, meaningful labor pressures given that all of our communities are in highly employed markets, inflation, and the reset of the cost of capital. And yet, we did continue to grow the quality of our portfolio and we were able to grow core FFO per share by 11%. I'm confident we're on the right track as I listened to the many earnings calls and speak to private peers. We're in good company as it relates to strong fundamentals and expense challenges, though we are different in terms of our Midwest and Mountain West market exposure that's provided us with leading consistency in revenues and NOI growth since 2018. I get more excited when I consider that we've been able to find accretive ways to grow and our internal growth opportunity remains since we really are just a five-year-old owner-operator. I'm sure Anne will have some depth to the operating commentary, so I'll stop there. But before I move on, I want to say thank you to our teams in operations and support who continue to show incredible dedication to our residents and each other. Moving to capital allocation and balance sheet. We had a quiet first half as we pursued a large strategic portfolio that would have been funded with stocking units that didn't break our way. We got a little more active in the second half of the year and we deployed capital to continue to improve our portfolio, purchasing a newly built property in…

Thank you, Mark, and good morning. I'm happy to say that 2022 was a great year, and like Mark, I'm extremely grateful for our team and their hard work. We ended the year with 9% growth in our same-store net operating income compared to 2021. Revenue was the highlight for the year with our same-store growing at 9.3% in the fourth quarter compared to the same period in 2021 and 10% for the full year. During the fourth quarter, our same-store new lease rates increased 1.8% on average over the prior leases, and same-store renewals achieved average increases of 7.2%. On a blended basis, this is fourth quarter rental rate growth of 4.2% During 2022, overall, our same-store portfolio achieved an average new lease increase of 8% while renewals increased 8.4%. Renewals remain strong, given the significant growth in rates we saw earlier in the year and we are experiencing a return to normal seasonality in new lease pricing. During January, our new leases saw positive increases at 1.4%, while our renewal rents increased 6.5% over the prior lease. Our traffic has returned to pre-COVID trends and is currently up year-over-year. We feel good about the demand in our markets, the financial health of our residents is strong and we increased weighted average occupancy 40 basis points during the fourth quarter to 94.9% while maintaining collections of 99.8%. Expenses came on quickly in the second half of the year, and while we are experiencing our fair share of inflationary effects on labor and materials, utility increases contributed 26% of our overall same-store expense increase in 2022 over 2021. On a controllable expense basis, it was 32% of the total increase year-over-year. We are projecting utility expenses will remain relatively flat in 2023, and as we look forward, we believe that the bulk of the inflationary increases were realized in the second half of 2022, and thus our expense growth will moderate. Of note, we had an increase in eviction and similar activity in Q3 and Q4 with 10% of our expiration is attributable to evictions in Q4. These drive expenses related to legal and administrative fees and often correlate to high return costs. We believe that activity, which was driven by the mid-year lifting of the rental assistance programs in Minnesota will taper this year. As we start 2023, we're focused on systems and processes that will gain efficiencies and contain expense growth. Now, I'll turn it over to Bhairav to discuss our overall financial results and 2023 outlook.

Thanks, Anne, and good morning, everyone. Last night, we reported core FFO for the quarter ending December 31st, 2022 of $1.17 per diluted share, bringing our full year core FFO to $4.43 per diluted share, which represents an increase of 11% over the prior year. The key driver of the increase was strong growth in same-store net operating income. As Anne mentioned, although we felt expense pressure across the board during the second half of the year, same-store revenues established a strong foundation to sustain operating momentum as the impact of inflation and higher energy prices on expenses begins to moderate. I will discuss that in further detail when I cover our financial outlook for 2023. Turning to our financial position. We continue to take steps to further strengthen our balance sheet and broaden our capital options. During the fourth quarter, we repurchased 427,000 shares at an average purchase price of $67.25 per share, which we believe to be a significant discount to the value of our portfolio. Also, during the fourth quarter, we closed on an unsecured $100 million term loan facility with an initial term of one year with a one-year extension option. The loan bears interest at SOFR plus a spread of 120 to 175 basis points based on our leverage ratio. The current spread on the loan is 130 basis points, which is roughly in line with the current spread on our unsecured line of credit. The term loan augmented capacity and provided balance sheet flexibility during a period of extreme volatility and uncertainty in the capital markets as we embarked on a plan to prune the portfolio, as Mark discussed in his remarks. As of December 31st, 2022, we had total debt of $1 billion with a weighted average maturity of 5.8 years and a…

Thank you. [Operator Instructions] Our first question today comes from Brad Heffern from RBC Capital Markets. Brad, please go ahead, your line is open.

Yeah, thank you. Good morning, everyone. On the dispositions, can you walk through exactly where those assets are, the cap rate you expect, and what the dilutive impact was on the guide?

Sure. Good morning, Brad. This is Mark. I'll start with that. The assets are -- two are in Nebraska, one in Lincoln, one in Omaha, five are in St. Cloud, and I think it's three that are in -- yeah, three in Minneapolis, Greater Twin Cities area. I think it's four in St. Cloud. So that was the first. So that's where are they. What was the dilutive impact? I think probably $0.08 to $0.10. And what was the other part of the question, sorry?

Just cap rate.

Oh, cap rate. Yeah, low-six’s on a trailing basis. It's probably higher than that on a forward basis. But on an AFFO, contribution below the line, I think it's actually going to be a net accretive or slick.

Okay, got it. And then on the utility front, can you give an update on the progress that you're making and having the residents be responsible for their own utilities, and I guess is that contributing at all to your expectation that utility expenses will be flat year-over-year?

Anne, do you want to take that?

Yeah, good morning, Brad. So first, with respect to how we're going on rolling out the gas and key utilities into the RUBS, we started that project in May and June, and so it takes about a year, a little bit over a year, to get through all the lease roll. So we are a little less than halfway because we hit some of the lower lease expiration months on that. That contributes to some of our revenue growth, because that comes back to us on the revenue line. The expectation that the utilities will remain relatively flat is really based on our hard look into utility costs and where we think projections are going, and a comparison to the fact that last year they increased so much. So we really expect the increases to moderate and then that brings the year-over-year number down significantly. But the expense line we do -- isn't impacted by the recovery that hits in revenue.

Okay, got it. And are you seeing price sensitivity around that? I know you sort of expected that as you make people responsible for their own utilities that they will become more rate sensitive and there potentially be an offset. I guess, are you seeing a full offset to that or are you still sort of recapturing some uplift from it?

Yeah, we've had very little pushback. In fact, I check with the team pretty regularly to make sure that that isn't happening. When you have renters looking at their full chunk rent, they take into account the utilities. So we haven't had much pushback on it at all. And in fact, it's still feel really good about where our overall rental rate growth is, both from a new lease and renewal given where we are right now in the season

Okay, thank you.

Thanks, Brad

Thank you. Our next question today comes from John Kim from BMO Capital Markets. John, your line is open, please go ahead.

Thank you. Good morning. Your same-store revenue guidance is noticeably higher than most of your peers. I guess, you have a few weeks of additional data, given the timing when you report. But I wanted to focus on the 4.5% blended lease growth rate that's in your assumption. Can you break that down between market rental growth and renewal rate growth that you expect?

Sure, John. This is Bhairav. With respect to the blended rate growth, I would say, about 3% to 3.5% is projected market rent growth. The remainder comes from projected value-add spend in 2023, plus some of the value-add spend we've put into the portfolio in the second half of 2022, which will enable us to capture some of the premium as we go through the lease roll.

Okay. You had a significant delta between renewal and new lease I think in January that Anne had mentioned. Do you think that's going to continue throughout the year?

I do. I think that it's going to take a while to burn that off. Our new lease rates are still significantly higher than our renewal rates, and we had several months last year where our new lease rates were really growing and it just takes time to catch up there. We have seen -- we are I think going to see that moderate down. They just lag those new lease rates by a couple of months, so we should see that come down a little bit as the year continues, but then be bolstered up as we see new lease rates accelerate up to that what we're projecting 3.5% to 4.5% in the prime leasing season.

Have you disclosed your bad debt in 2022? If not, can you say what that is? And also, what you're expecting as far as bad debt in 2023 as well as your occupancy assumptions for the year?

Yeah, so for bad debt in 2023, our projections incorporate about 40 basis points of bad debt. With respect to 2022, you're right about that mark, I think we had about 30 basis points of bad debt for 2022. With respect to occupancy, we expect to stay around 95%. As we go through 2023, obviously, there is going to be some volatility as we go through peak leasing season. But overall, we expect to maintain occupancy around the 95% mark.

Okay. Last question from me. How do you feel about your dividend levels these days? On our numbers, your payout ratio is above 90, I know consensus is below that. But given the cost of debt and maybe some attractive use of proceeds, are you satisfied with your dividend level where it is today or is there a possibility that you can resize it?

So presumably, you're including all capital -- like value-add capitals to get to that number, that's a very high payout number.

Correct.

How do you get to that number, John?

Revenue enhancing CapEx, we typically do that.

Got it. Yeah, so I mean, obviously, the revenue-enhancing capital is discretionary in our view. So we would peg our payout closer to something in the high-70s, and it's been our goal to continue to work that payout ratio down ideally to kind of that minimum in the 60s, 65% level. So -- while also continuing to grow at a little bit, I mean, I don't think we're getting well compensated for it on the one hand, on the other hand, part of our structure and what we're all about is getting cash flow and increasing levels to our shareholders. So it's a Board call. I'm on the Board. And in my mind, the dividend is at no risk. I think we have 50 assets that have about 25% leverage on them if you looked at sort of our unencumbered base versus our unsecured debt. So we've got lots of financial security, in my view, and that's how I look at it. I think the Board has a pretty similar point of view.

Okay, I appreciate it. Thank you.

Thanks, John.

Thank you. Our next question comes from Alexander Goldfarb from Piper Sandler. Alexander, please go ahead, your line is open.

Hey, good morning out there. So first question, in response to the dilution from the asset sales, Mark, you -- I think you mentioned $0.08 to $0.10. Is that inclusive of the debt pay down or is that just on the asset side, so obviously with the debt pay down, the dilutive impact is much less?

Yeah, so this is Bhairav.

Hey, Bhairav.

That $0.08 number is inclusive of the impact of the debt pay down. With respect to 2023, we had some growth from a core FFO perspective program for those assets. So when you kind of consider that and then net it down with the impact of the pay down, that's the number that Mark was referencing

Okay. So the $0.08 to $0.10 is inclusive of the associated debt pay down?

That's correct.

Okay. Then the next question is, Anne, you mentioned on the RUBS that you started basically middle of last year, takes about a year to fully implement. Is this the entire portfolio or are there assets in the portfolio that you're unable to implement RUBS, in which case, you'll still have -- you'll still be exposed to utilities in those assets?

No, this is the entire portfolio.

Okay. So there'll be no assets that are -- that will be sort of free-floating, if you will?

There maybe a few kind of one-off unique situations, but we don't have any -- there is no geography that we operate in where there is regulation that would limit our ability to do it. So to the extent we can and it makes sense, we're doing it.

Okay. And then just the final question. You guys put out a Nareit FFO, you put out core FFO. But in looking at your core FFO, it seems to be a lot of recurring items that seem to be just part of running the business. So just sort of curious, why not merge just to Nareit FFO, especially as these don't seem like one-off items they seem to happen every year?

I mean, fair comment. We'll take it under consideration [indiscernible]

Okay. Thank you, Mark.

Thanks, Alex.

Thank you. Our next question is from Rob Stevenson from Janney. Rob, please go ahead, your line is open.

Good morning, guys. Mark, what's the acquisition pipeline looking like today? Lots of talk in the sector about merchant developer stress coming and positioning to step in as a capital source. Are you guys seeing any of that yet? Are you guys seeing any attractive acquisition opportunities to redeploy capital into, how would you characterize that today?

Yeah, well, good morning, Rob. Thanks. I would say, we are seeing opportunities. I do think, thematically, there will be merchant developers who give up the ghosts by the end of the year, and I think end up taking profits, but less profits than they probably were expecting. So we're in discussions on some of those. We have a few OP unit type discussions going, which we always have. But I would say, that volume hasn't -- has yet to really come. I think I read there were something like $40 billion done in the fourth quarter, which would be a pretty good quarter from most quarters, but it's certainly down over the last couple of years of activity. The talk at NAHC, as has been commented on in some of the other calls was, people were kind of looking to the back half of the year. From the buy side, there's definitely still a disconnect, and when the treasuries are moving around like they are, that certainly throws cold-water on folks I think to some extent. So we expect there to be -- I would say, we expect there to be activity. I would think it comes more towards the second half of the year with our stock in the mid-60s and debt today in probably mid-5s for secured debt and unsecured debt probably six in a quarter. We're probably not a very vibrant participant unless it has some sort of structure to it.

Okay. And then how would you gauge your aggressiveness today on starting new revenue-enhancing CapEx projects today, given what you're seeing in the markets and your outlook for this year and next year internally? Are you -- is it more or less the same as what you would have been sitting here a year ago? Is it a little bit more cautious? How would you characterize that in terms of the dollar amounts that you're willing to green light at this point and those hurdle rate?

I mean, a year ago it was a lot more fun, Rob, with free money or the end of free money. But yeah, no, I think our view of this hasn't changed a whole lot, which is, this is capital we really have to put in to get -- and get returns over the next couple of years and we do it if we think it enhances the product for the resident. I mean, it is the case, if you look at our rents there in the $1.50 a foot range, $1.60 a foot range on a portfolio basis for renewal rents, and there still a pretty good gap between where those rents are and where new product is, and people like nice stuff. So when there continues to be a business case, we're going to continue to make those investments. I would say, we are certainly putting more pressure on the business case, because the sort of start-up costs, if you will, or funding costs are much higher. So it doesn't -- I'd just say, it gives us a little bit more discipline, but that implies we weren't disciplined before and I don't think that's true.

Okay. And then last one to me, you guys talked about the utilities and the natural gas. Are you guys hedging any of that at this point? And how big is the dollar value sort of tied to natural gas?

Yeah, Bhairav.

Yeah, from a hedging standpoint, no, I think, as Anne mentioned, we are with the RUBS program being rolled out, we would be able to capture most of that back through the revenue line item. So it's going to dramatically reduce our exposure to the fluctuation in prices from utility standpoint. I believe overall that accounts for about 40% of the total utilities expense, the gas prices. But again, with the rollout, the exposure on a net basis would be a lot lower going forward once it's fully implemented.

Okay. So once this is fully out, there's not going to be that much of a delta between, if you're talking about natural gas prices that average out to six-something per million BTUs like last year or the $2 to $3 that you saw from basically 2015 to 2020?

That's correct. Because I would say about -- after providing for collections and just common area deductions, we would approximately cover 80% to 85% of the exposure.

Okay. And same in terms of water and other utility costs or is that de minimis compared to natural gas?

Yeah. In terms of water and sewer, I mean, we capture back a lot of that. So overall, that's already factored into the numbers. So the exposure was on the gas side.

Okay, thanks guys. Appreciate the time.

Thanks, Rob.

Thank you. [Operator Instructions] Our next question is from Wes Golladay from Baird. Wes, please go ahead, your line is open.

Hey, good morning, everyone. I just have a quick one. For the casualty loss, is that just a general placeholder for the guide or is that a known event at this point?

I mean, that's -- are you talking about the 2023 guide? That's just --

Yeah, just I think this $1 million net -- yeah, $1 million impact.

Yeah, so that's an estimate at this point in time.

Okay. Thanks, everyone.

Thanks, Wes.

Thank you. We have no further questions. So I'd like to hand back to the team for any closing remarks.

Thanks very much, Daisy. Well, thanks, everyone. We appreciate your continued interest, and we look forward to seeing you next quarter.

Thank you, everyone, for joining today's call. You may now disconnect your lines, and have a lovely day.