[Call Starts Abruptly] …Centerspace's Form 10-Q for the quarter ended June 30, 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 Centerspace's third quarter earnings call. With me this morning is Bhairav Patel, our Chief Financial Officer. We're happy to be here today to discuss them with you our third quarter results, our outlook for the remainder of 2023 and an update on our investment activities. We're pleased with our results on revenue and expenses and year-to-date, we've increased core FFO by 6.8% year-over-year. Starting with revenue in our same store portfolio we achieved a 5.7% year-over-year increase. This is slightly ahead of our expectations as we realize sequential revenue growth even as new lease rental rates have moderated. With respect to revenue trends in the third quarter we executed one-third of our lease expirations. And same store new lease trade outs we achieved 2.3% increases and 4.9% increases on renewals, resulting in a 3.9% blended lease trade out. Sequentially, market rent is declining as leasing slows into the fourth quarter. And we expect that trend to continue. In October our same store leasing trade outs look positive at a blended 0.8% which is a combination of new lease trade outs of negative 2.4% and renewable lease rental rates increasing 5.3%. This slowdown in leasing has been factored into our revenue guidance and with over 86% of our leases in the books for 2023 we’re focusing on occupancy to close out the year and maintain a strong position headed into 2024. This will capitalize on the stability of our portfolio fundamentals, with 23.8% rent household income levels, and a collection rate in the third quarter of 99.6%. With respect to expenses with a 6.1% year-over-year increase, the largest driver of increases continue to be real estate taxes and insurance. This quarter non-controllable expenses were up 11.3% year-over-year, driven by a 21.4% increase in…

Thanks, Anne and good morning, everyone. We are pleased to report another quarter of strong earnings with core FFO $1.20 per diluted share driven by a 5.4% year-over-year increase in same store NOI. On a sequential basis same store NOI decreased by 3.7% driving a sequential decline in core FFO as revenue was relatively flat while expenses grew due to higher spend in certain categories typical of the summer months when we have a huge chunk of our leases expiring. Our balance sheet remains in one of the strongest positions the company has experienced. We ended the quarter with no balance on our line of credit and a weighted average interest rate of 3.46%. We have a real laddered maturity schedule with a weighted average maturity of approximately seven years and minimal of debt coming due in the near term. Our net debt to EBITDA pro forma for our Lake Vista acquisition and Minot dispositions is approximately seven times. This metric includes the mortgage we assumed as part of the Lake Vista purchase as the coupon of 3.45% on the mortgage we assumed is significantly below the current market rate, it resulted in a fair market value discount of $3.9 million on the date of acquisition. This discount will be amortized over the remaining term of just under three years at a rate of $370,000 per quarter, and will increase our interest expense relative to the coupon payment. Consistent with our past practice we will make an adjustment for it in calculating our core FFO. Historically this adjustment has decreased our core FFO per share as we have been advertising above market debt. Now I will discuss our financial outlook for 2023. Based on our Q3 results, we are increasing the midpoint of our full year 2023 core FFO guidance…

Thank you. [Operator Instructions]. We will now take our first question from Brad Heffern from RBC Capital Markets. Brad your line is now open. Please go ahead.

Yeah, thanks. Hey, everybody. On the new lease number in October Bhairav it sounded like you said that that's a relatively normal number for October. Is that correct? And I guess just any color as to whether you're seeing, any additional pressure versus what you would normally see on lease rates?

Morning, Brad, this is Anne, thanks for your question. I think Brad did reiterate that is fairly normal. We have seen through the second half of the year in particular a real return to pre-COVID seasonality after a couple years of very steep run up. So, we aren't concerned about what we're seeing in October. It is pretty isolated to markets where we had very steep increases in the Mountain West. And or have more supply pressure on a relative basis than the rest of our markets. That would be Billings, Rapids City and the other Mountain West. A little bit in Denver. We're down in October about 0.9 in new leases. So, not real estate, and then we're about flat in Minneapolis.

Okay, got it. And then on supply, not something that you typically have to deal with. But that's obviously been the theme this quarter. So, what are the markets where you're seeing elevated supply? I think you just gave a couple. And then what are your expectations for supply in 2024?

Yeah, that's a great question. It certainly is a big theme. You know, one of the hallmarks of our portfolio is our markets are more insulated from supply, they're smaller. But that also means that they're more susceptible to supply. So, some place like Billings, which is a small market has very little supply, but it has impacted it slightly there. As their most supply affected markets are Denver and Minneapolis, we feel good about our position in those markets, our rents are still at a level below brand-new products. And to keep us a little bit inflated, but we are feeling pressure there. With respect to 2024. I think like most of the industry, we’re really expecting supply to moderate. And in fact, unlikely to see a lot of new products coming on or starting lease up in 2024. But we may have some products that's, you know, has taken longer to lease that falls in into 2024. We expect the effective supply to be much muted in 2024.

Okay, thank you.

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

Good morning. This is Robin Haneland I’m sitting in with John just to touch on to focus on occupancy for the remainder of the year. Which, what level of occupancy translates to the respective high and low end on the same store revenue? And could you also give us a sense of how occupancy split between your value add and stabilizing, so portfolio?

Yeah, Robin this is Bhairav. Yeah. So with respect to Q4, we expect occupancy to be in the mid-94 range. That is what we have kind of built into the guidance so I would say 94.5% to 94.8% is what we are kind of factoring into the guidance. And with respect to value add, it's about 25 basis points, which is attributable to value add from an occupancy perspective.

Got it? And do you consider Fort Collins a standalone market from Denver? And could we expect future investments in the market?

Yeah, Fort Collins is near Denver, but not but does have its own MSA and some of its own economic drivers, particularly with respect to Colorado State University. And Hewlett Packard has a large base there. So, a little less energy and gas concentration than the Denver market, the core of the Denver market. So, it does have its own demographics and available information a little bit less supply driven there. So, we do consider it a separate market. It is an extension for us of Denver from a regional and scale basis on an operations basis. It's within 30 minutes of some of our assets that are in the Denver MSA including our asset in Longmont. And I do -- we are going to look there to continue to scale out that Mountain West platform. So, when we see some transactions come back, we would like to see more in Fort Collins.

Okay, thank you.

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

Hey, yeah, good morning, everyone. I want to go back to that smart home technology roll that you've put into this year, how much of a lift testing for revenue was at this year? And would you expect a greater lift next year?

So, this year, we started this year, so the increase on the revenue side has been relatively minor. Simply because we're in the middle of the rollout. We think that that will continue into next year. There isn't a large component. I think the premiums on those are about $40 to $60 a unit. So, not a massive lift on the revenue side, but we really do expect a lot expense savings in particularly into next year from some of this. Our return, our calculated ROI that we're targeting on those is about 21.4%. So, great investment, it's a combination of cost savings for us and revenue.

Yeah, no, thanks for the return on that as well. Appreciate that. And then you did a lot of capital recycling off late. And just wondering when you look at the portfolio now see where pricing is, is there a chance to do more of that?

I think so we're really taking a keen eye to what in our portfolio is performing well, what markets and types of assets, we think have long term growth potential. And where we may do some trading out, the flip side of the coin on the dispositions is that there's a real dearth of acquisition opportunities, particularly in markets that we like, there's a lot of capital still waiting to be placed, even with high interest rates, and a lot of sellers who are holding. So, we do see the disposition side, we think we can still achieve really good pricing, given the amount of capital. With respect to the Minot sale we had four full portfolio, best and final offers, which we thought was a very strong bid pool for those assets in North Dakota. So, we're keeping a strong eye on it. And we'd like to be well positioned, really focusing on the balance sheet right now, so that we can take advantage of what opportunities come whether those be in the form of capital recycling, or new opportunities.

Great, thanks for the time.

Thank you, Wes. We now have a follow-up question from Brad Heffern from RBC Capital Markets.

Hey, everybody, I'm back. Just a couple of quick little things. Bhairav, can you give the last lease in the earning that you're expecting for 2024? Currently?

Sure. The last lease, as it stands as of today is about 2.8%. The earning is about a 0.5. Now this has kind of declined, as you know, it's a point in time number. So, this has declined over the summer months into today. And that's a similar trend that we expected last year into this time as well.

Okay, got it. And then on the expense picture for ‘24. I think you said no relief expected on insurance, not expecting you to give guidance. But would you expect relief overall on expenses next year? Or should we expect them to remain elevated?

Well, am I giving direction to you or to the people running my budgets here Brad? I think what we're going to see and what we're starting to see, as we have started to see some of the budgets come in for next year. I think we're going to see some relief on taxes, those are going to stay relatively flat, I think our portfolio was very fully valued. And with the higher interest rates, we have good reason to believe that those will stay relatively flat, insurance, no relief, other in other places over the past couple of years, we've had a lot of pressure on wages and onsite compensation. I think we could see that moderate some back to normal levels, 3% to 4% there rather than the double digits we've seen in the past couple years. And but repairs and maintenance and churn costs continue to be a struggle as vendors are difficult to find. And they are still feeling some inflationary pressure in those services, professional services category. So, I think, we're optimistic that we'll be able to hold revenue and grow NOI next year. That's really our core goal and focus right now is making sure that we can grow the NOI.

Okay, appreciate the thoughts.

Thank you, Brad. Our next question is from Buck Horne from Raymond James. Buck, your line is now open. Please go ahead.

Hey, thanks. Good morning. Just wondering if you could comment on any recent updates on leasing traffic trends, either physical traffic in the communities or online. How's that been trending through the end of October?

Yeah, sure. Just starting in June and July, we really saw kind of a slowdown in leasing traffic, we have been able to offset that slowdown, which through the third quarter was about 20% year-over-year less leasing traffic and that'd be a combination of online foot traffic, phone. And we've been able to offset that with higher retention, more people are staying in place that makes sense less people are looking and so they're staying where they are. And also with higher closing ratio. So, we've really been focused on making sure that our leasing techniques are effective that we're meeting the customer where they are and really getting those leases in the door. In to October, we're seeing that same slowdown, it feels seasonal. In a lot of our markets, people don't like to move in, though in the winter. And generally people are looking a little bit further out. So, people coming in today are looking for apartments for November, December. We're feeling a seasonal slowdown there. But nothing that's concerning to us from an occupancy standpoint, we feel like we're going to be able to meet our goals this year.

Got it. Very helpful, thanks for the color. And just following up on the personnel or just the cost you've seen in terms of just wage and an onsite cost. I'm just curious, if you're thinking about how, you may be competing against more lease up properties next year. Is there an issue with other developers or other properties potentially coming in and trying to poach some of your employees to get their properties leased up? If they're familiar with those markets? Or how do you manage that process and maintain good retention with your onsite staff?

Yeah, that's a great question. And you're highlighting an issue that I think is facing all operators across the country, which is, there's no pipeline of new leasing team and or maintenance professionals or anyone who works onsite for us. And so as new supply is delivered in the amount of units and communities out there, it does stretch the same staffing pool. So, we have been focused on retention in the way of professional development, additional training opportunities, and really trying to get some career pathing going for our onsite personnel. To make sure and culture is huge for us making sure that this is a great place to work. And then also on the replacement side, we're really focusing on talent acquisition, onboarding, and making sure that we can get the right candidates and give them the tools to be successful right out of the gate. Another huge thing for us, as you know, is trying to leverage the technology that we've invested in to make it, what is, can be a very simple business, easy to execute onsite. And I think the easier we couldn't make it for them to be successful in their jobs, the better chance we're going to have to keep them from going to that lease up down the street.

Got it. Alright. Thanks, guys. Good luck.

Thank you, Buck. Our next question comes from Michael Gorman from BTIG. Michael, your line is now open. Please go ahead.

Yeah, thanks, Anne. I was wondering if you could just talk about some of the new supply in some of your markets and the possibility that given the financing challenges that might turn into potential opportunities if the developers can't roll the financing, or maybe can't get the lease up done quickly enough. And then maybe if you're seeing that, and then what your appetite would be to take on lease up potential through acquisitions?

Yeah, I think there's two facets to what we're looking at from an opportunity perspective for investment to your question. One is existing developments that might have refinance risk and or a developer who wants to redeploy that capital because of timing or otherwise, we are interested in stepping in probably not at an early stage, at least up that we have before taking properties that are between 75 and 90, or just coming into stabilization, where you really have that first full year of lease expirations to work through. That would have been the case for us with Lyra, which we acquired in Denver in September of 2022, that had just finalized lease up had a developer that, for numerous reasons needed to get out of it. So, we are looking for those opportunities, we think that pipeline is going to grow. And then the other side is developers who are needing additional equity, we're really, out there looking for opportunities to place mezzanine financing, that might give us an opportunity to own the asset upon stabilization. So, we've taken a few of those, full circle in the past couple of years. And that's another place where we see opportunities in that development pipeline for us.

Okay, great. Thank you.

Thank you, Michael. We will now take a follow-up question from John Kim from BMO Capital Markets. John, your line is now open. Please go ahead.

Hi, Robin here again. We've heard reports on new tenant application fraud, is this anything you've seen in your market? And what is your bad debt today? And where do you see it going in the near term?

Yeah, we haven't seen very much fraud historically. We've had a little, when we did the new implementation with ERD, we really beefed [technical difficulty] processes. So, we have kind of a dual verification process and we haven't I've seen very much fraud there on the bad debt side. Bhairav can comment on that.

Yeah. So, for Q3, our bad debt was about 30 basis points to 40 basis points. That is consistent with pre-COVID trends. So, we have seen a return to normalization over there. We typically see that fluctuates between 25 basis points and 50 basis points, and we've been towards the lower end of that throughout the year. Got it.

Got it. Thank you.

Thank you, John. We have no further questions registered. So, with that, I'll hand back to your host, Anne Olson for final remarks.

Thank you. Thanks, everyone, for joining. And I'd like to thank our team for the tremendous work they have done. It's been a year of uncertainty and everyone here at Centerspace has continued to prioritize, what is really important to drive results. So, I'm grateful to be here and for all of you that joined us this morning. Have a great day.

This concludes today’s call. Thank you for your participation. You may now disconnect your lines.