Thank you all for joining. I would like to welcome you to Centerspace Q1 2023 Earnings Call. All lines have been placed on mute to prevent any background noise. And after the speakers’ remarks, we will conduct a question-and-answer session. [Operator Instructions] Thank you. I would now like to hand the conference over to your host, Joe McComish. Please go ahead, Joe.

Centerspace's Form 10-Q for the quarter ended March 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 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. 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 Anne Olson for the company's prepared remarks.

Good morning, everyone, and thank you for joining our call. With me this morning is Bhairav Patel, our Chief Financial Officer. Notably missing this morning is, Mark Decker, who led Centerspace for the last six years and transitioned out of the CEO role at the end of March. Mark is a tremendous leader, who was key in building the foundation of our culture and drove a strategy that provided our team opportunities to learn and grow. Mark's accomplishments over the last six years are many, and I know Mark and the Board have confidence in the opportunity ahead for CSR. I share that confidence and I'm both humbled and excited to lead the company into its next chapter. We will miss Mark and wish him the best. Today, I have great results to share for our company. The first quarter was very strong. The stability of our markets and operations resulted in core FFO growth of 9% over the same period last year. Revenue growth is still the highlight as we capture the loss to lease from large rental increases throughout 2022. Same-store revenue growth was 10.5%, driven by increases in scheduled rent leading to NOI growth of 11% over the prior comparable quarter. The expense pressure we experienced in 2022 is leveling off. The first quarter same-store expenses were flat over Q4 of 2022, a sign of easing inflation and efficacy of our cost control measures. Our positive operational results, coupled with the impact of the CEO transition and associated reduction of G&A, give us confidence that we can reiterate our guidance for this year. Bhairav will provide more detail in his remarks. With respect to our revenue trends, in the first quarter, we achieved 2.5% increases on same-store new lease trade outs and 5.8% increases on same-store renewals.…

Thanks, Anne, and good morning, everyone. In my comments today, I will review results for the first quarter of 2023, highlight actions we have recently taken to optimize our balance sheet and liquidity and discuss our outlook for 2023. Last night, we reported core FFO for the quarter ending March 31, 2023 of $1.07 per diluted share, which was in line with our expectations and driven by another strong quarter of operating performance with same-store NOI increasing 11% year-over-year. As Anne mentioned in her remarks, leasing trends remain positive across our portfolio, showcasing the stability of our markets. Please note that G&A expenses during the quarter included one-time expenses and charges totaling $3.2 million related to the CEO transition, which we have excluded from core FFO. Turning to our balance sheet. We took several steps during and subsequent to the first quarter of 2023 to enhance our balance sheet strength and maximize financial flexibility. First, we used the initial proceeds from the asset sales to fully repay the $100 million term loan we put in place at the end of last year. We received approximately $48 million of proceeds from the sales subsequent to quarter end, which we promptly used to pay down the outstanding balance on our line of credit. Second, we further reduced our floating rate exposure by repaying another $90 million of our line of credit balance with proceeds from fixed rate secured financing we closed last week. The financing has a term of 12 years at a fixed rate of 5.04%, which represented a spread of under 140 basis points on the then existing 10-year treasury rate. We are extremely pleased with the execution as we were able to close it ahead of schedule despite the disruption in the capital markets caused by the onset of…

Thank you. [Operator Instructions] We have the first question from Brad Heffern of RBC Capital Markets.

Yeah. Thank you, operator. Good morning, everyone. Anne first of all, congratulations on your first call as CEO. I'm wondering if you can talk about your vision for the company and call out any potential differences in either focus or strategy versus how things were done under Mark's leadership?

Yeah. Good morning, Brad. Thank you. I think I've been here for six years and really worked closely with Mark on the strategy of the company and how we execute. And so we're not expecting a lot of huge changes. I do think that as we moved into 2023 as a team, we refocused our execution standards and accountability systems in line with some of the transformation we had done to our back office with respect to technology enhancements and investments that we had made over the past couple of years. So I do think it feels a little bit different. That was planned as part of both our 2023 goals when Mark was here and as part of the transition that we would really accelerate our focus on our internal opportunity to better the company and better the results and then also strategically really think about incremental improvements to continue to enhance both the platform and our portfolio construction. So it might feel a little bit different, but it's all kind of part of the same plan and vision.

Okay. Thank you for that. And then on the repurchase, obviously, you did a little bit in the first quarter. I'm curious how you think about doing more in the context of it either increasing leverage, if you do it on the balance sheet or potentially reducing scale if you did it through dispositions?

Yeah. That's a great question. I mean our approach has been to be very judicious. We really want to keep an eye on the balance sheet and be very careful with how we use that balance sheet and what the best investment for us is at the time. I do think, as we guided at the beginning of the year and reiterated, we do have a couple more dispositions that we would like to undertake this year, and that will have an impact both on our ability -- some additional paydown of debt and potentially make sure we have enough dry powder to take advantage of any external opportunities that come our way.

Okay. And then finally, on the rent growth side of things, what's been the change in market rent in your market so far this year and can you talk about where that sits relative to what the expectation was in guidance?

So I think we're running a little bit ahead on market rents of where our expectations were. But with only one quarter behind us, that's not a lot of our lease expirations. I think the first quarter is actually our smallest lease expiration profile at 16%. And so we really want to get into the meat of the leasing season. We feel good about the April results. As you probably noted in our remarks, April was a little bit ahead on new lease trade outs than the first quarter. So that bodes well. It remains to be seen. The big chunk of leasing comes in the middle of the year for us and that's when we're really going to see -- the projections that we have in our guidance are full year projections. So running a little bit ahead of them at the beginning of the year, it doesn't tell us too much about how the rest of the year is going to go.

Okay. Thank you.

Thank you. We now have Barry Oxford of Colliers.

Great. Thanks, guys. Just to build on that question regarding debt paydown. You clearly have taken care of any short-term maturities. But what type of debt would you be going after in your capital stack when you guys do dispositions should you choose to pay down more debt?

Yeah. I mean, Barry, this is Bhairav. So we -- yeah, I mean, I think as we look at dispositions, Anne mentioned, we have a couple more dispositions included in our guidance. We do expect that as we go through the year, we will have a little more floating rate debt on the line of credit that we would be able to pay down. So that is really the only debt that we are looking to pay down because the fixed rate debt is fixed, and it doesn't really give you a lot of flexibility in terms of paydowns. So we would be looking to pay down more floating rate debt, which we expect will kind of ramp up a little bit as we go through the year. So with the planned dispositions that would be the goal.

Right. Okay. Great. And then, Anne, a question for you with the 7.5 implied cap rate, when you look at acquisitions, are they -- are acquisitions kind of bumping up or at least relatively close to that to make acquisitions look opportunity or make them look opportunistic or are you going to be kind of viewing your stock is probably the best place to, I guess, to buy your own portfolio?

Yeah. I think we are not seeing acquisitions at that level right now that would be accretive. I mean we're still seeing in our targeted markets sub-4 cap transaction -- or sub-5 cap transactions, sorry. And I do think you're right that are the best use of our capital right now is to look internally, not just our stock, but also our value-add program, where we are really getting the returns that we envisioned. And so as the year progresses, we're hopeful that the transaction market picks up and there's some leveling off of price. There's a pretty big disparity right now between the bid and ask. And as that maybe works itself out, we think that acquisitions hopefully will become a little bit more accretive with -- and also that, that stock price can move as well to help us out.

Great. Thanks for the color, guys.

Your next question comes from Rob Stevenson of Janney.

Good morning, guys. And just to pick up on Barry's question there. How many units are there left in the portfolio that you have targeted for redevelopment today and where the numbers make sense? And what's the aggregate dollar value of those investments? I think you guys have $25 million, $26 million at the midpoint in guidance for '23. What's behind that?

Yeah. So we have quite a few projects in the pipeline now. And with respect to the pipeline, it's always growing because four years ago, we buy an asset that was built in 2010 that looks clearly stable. That right now is becoming -- coming into the value add pipeline. So -- and you're right on, we have about $25 million scheduled for this year. Our value add pipeline is not only unit renovations, it's also things like additions of smart home technology, which that can affect the entire portfolio. So all 14,000 units are kind of right for that, those kind of investments. So I feel good, if I look at both the pipeline now, which I think we have about a little over 1,000 units kind of under renovation or being touched, that will continue to change and grow. So over time, it's kind of -- it's never ending, never ending pipeline as product gets older or new enhancements come out that we're able to implement into the communities.

And what's the likelihood that, that $25 million or so for this year increases dramatically if you don't see any material upward expansion in cap rates and that becomes your best source of deployment other than stock repurchases? I mean how big could that be in any given year, given your staffing, given your subcontractors, et cetera.? I mean how much more can you do than 1,000 units in a year?

Yeah. I mean we would really have to ramp up on the staffing side and that really increases the execution rent. So we feel really good about $25 million. To the extent that does -- would -- might get increased, it would have to be a large kind of portfolio wide implementation such as a portion of smart home technology and that's not -- we're taking that kind of rolling through the portfolio rather than doing it all at once. So we feel really good about the $25 million. I think we feel great about where that puts us with respect to the dispositions this year and how we fund those. So I don't expect that there's going to be a big ramp up past that amount.

Okay. And then what's your exposure these days going -- looking forward to utility costs? I know that you guys have put a bunch of stuff in place over the last year or so. But how much -- when you look forward and to the fall of '23 and into '24, should your exposure there be reduced as a result of all these programs?

Great question. As you probably recall, last year, we started rolling out in our ratio utility billing system RUBS the gas portion, which will decrease our -- the volatility of our own expenses with the offsetting revenue. And at the end of the first quarter, we're 26% of the way through the portfolio and rolling that out. And so we really feel like there -- as the year goes on, and particularly as we get to fall, we should be about 75% of the way through the fall, maybe even 80%, given the larger lease exposure. And that's really going to help us generate that offsetting revenue to mitigate the volatility in utility costs that we saw in -- particularly in 2022.

And how much is your exposure to water and electric or is it all basically just natural gas for the most part?

Yeah. The majority of our exposure was in natural gas. Water, sewer, trash, those things had already been part of our RUBS program across the portfolio.

Okay. Thanks, guys. Appreciate the time.

Thank you. We now have [indiscernible] of Baird.

Hey. Good morning, everyone and congrats, Anne. Could you talk a little bit more about your revenue management strategy over the next few months? And is the plan to continue pushing our rate or really focus more on maintaining occupancy?

That's always a balance and the argument that we have internally here just about every day on revenue management. So I think we would like to run a little bit more occupied during this time where we have heavy lease expirations. It's typical that our occupancy just slightly because we really are trying to maximize revenue overall, which means that you have to watch closely pushing rate versus occupied. And we really have to take into account this year more so than years past, the experience we had with turnover costs. As an industry, those costs have increased significantly, which really makes keeping our residents in place and the resident experience to drive retention, particularly important as we balance those two factors.

Awesome. Thank you for your time.

We now have Buck Horne of Raymond James.

Hey. Good morning. Thanks, everyone. Wanted to get some extra color on bad debt trends. If there's been any changes recently in delinquency patterns or skips in a VIX, and was there any benefit in the quarter from lower bad debt?

Hey, Buck. This is Bhairav. Yes. I mean we do see stabilization in those trends. So with respect to the first quarter, bad debt was about 25 basis points, which is in line with historical averages and that did benefit us from a year-over-year perspective because last year it was higher than the 25 basis points. Yeah. We do see some return to pre-COVID trends from a bad debt perspective. And at 25 basis points, it's slightly ahead of where we had kind of projected it. So -- but again, bad debt tends to be volatile. So we feel pretty good about what we've kind of factored into the numbers at this point.

All right. Appreciate that. Very helpful. And post the portfolio disposition here of those nine properties, how is the CapEx profile of the remaining portfolio change? What would be a good run rate, would you say, for kind of annualized recurring CapEx for the remaining portfolio?

Well, when we guided and gave our per door number at the beginning of the year, we had estimated in those dispositions. So I think that guidance remains unchanged about $1,100, or $1,150 a door. We had already factored that in when we made our projections. It is helping getting some of those older properties off of the books.

Understood. And is the -- the elevated level of turn cost, is that just a function of kind of a legacy effect of COVID trends or just very extended tenant days and when will turn costs kind of normalize as those units come back available?

Yeah. I think the driver of high turn cost is really the increasing inflation on services, in particular, and also cost of goods. So we really saw that last year and then also Bhairav, do you have a comment on that?

Yeah. I mean last year was also elevated because we had some units from -- overall turnover costs were elevated because we had units from the KMS portfolio that were turning for the first time. A lot of those units were occupied for a long, long time by the residents. So we spent a decent amount of turnover capital and expense just to kind of bring it up to CSR standards. Now some of that has already rolled into the existing portfolio. So we do expect the impact of that to kind of moderate over time. So at this point, if you -- in our guidance, we have factored churn costs being lower this year versus last year and a lot of it is a result of some of the cost control measures that we've put in place. And a lot of that is a reflection of some of these units that we've already turned last year.

Got it. Thanks, Bhairav. I appreciate it.

Thank you. [Operator Instructions] I can confirm, we have had no further questions registered. So I would like to hand it back to the management team.

Well, thank you all for joining us today and a special thanks to our team who are helping us get these great results and we'll see you hopefully, all at NAREIT.

Thank you all for joining. I can confirm this does conclude today's call. Please have a lovely rest of your day and you may now disconnect your lines.