Centerspace (NYSE:CSR) Q1 2024 Earnings Call Transcript April 30, 2024
Centerspace isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Welcome to the Centerspace Q1 2024 Earnings Call. My name is Carla, and I will be coordinating your call today. [Operator Instructions]. We will now hand you over to your host, Josh Klaetsch to begin. Josh, please go ahead.
Josh Klaetsch: Good morning. Centerspace's Form 10-Q for the quarter ended March 31, 2024 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 Centerspace's President and CEO, Anne Olson, for the company's prepared remarks.
Anne Olson: Good morning, everyone, and thank you for joining Centerspace's first quarter earnings call. With me this morning is Bhairav Patel, our Chief Financial Officer; and Grant Campbell, our Senior Vice President of Capital Markets. Before taking your questions, we will briefly cover our first quarter results and trends, our transaction activity and our outlook for the remainder of 2024. I'm happy to report core FFO per share of $1.23 for the first quarter, driven by stable fundamentals across our markets paired with disciplined expense management and a little help from a mild winter that reduced our utilities and associated expenses. While Bhairav will discuss our quarter results in detail, I would like to take a minute to discuss our current leasing trends.
In our same-store portfolio, market rent has increased year-over-year for the first quarter. And while a moderate amount of 2.5%, this is in line with our expectations and year-to-date, we are pleased to see that translate into positive lease over lease growth. For new leases, our trade-outs were flat for the quarter, and renewals priced debt increases averaging 3.4% for blended rate increases of 1.5%. The new lease trade-outs increased each month in the quarter. This bodes well for us as we begin the leasing season. Occupancy remains a focus, and today, we are slightly above 95%. Our marketing strategy aimed at the highest intent lease has led to converting more leases in this quarter than the same period last year. As we look at April, pricing is trending positively with indications of new lease trade-outs of approximately 3.5% and renewal increases of 3.3%.
We feel good about our resident retention rates, which are above 50%. Our results in Q1 and the trends we see give us confidence to bring up the low end of our guidance, raising our outlook for 2024 at the midpoint to reflect estimated annual core FFO growth year-over-year of 1%, with this growth coming in addition to the deleveraging and portfolio upgrades we achieved last year. Our confidence in this portfolio is bolstered by low bad debt of just 26 basis points in Q1 as well as continued stability in our regional economy. On the whole, our portfolio is not experiencing the high supply dynamics of Sunbelt in some coastal markets, and our supply profile remains relatively muted. Denver and Minneapolis are our markets with the highest levels of supply and we are seeing tapering of homes under construction and projected deliveries into next year.
A wide-angle view of several apartment communities in a major city skyline.
With respect to Minneapolis, our largest market concentration, it ranked eighth in the nation for most apartment absorption over the last 12 months, and according to Rent Cafe was the number one search market for the fourth month in a row. Turning to transaction activity. All is quiet on the acquisition front. We believe some recent larger transactions could help narrow the bid-ask spread on valuations and loosen up the market for acquisition activity. During the first quarter, we closed the previously disclosed sales of two communities in Minneapolis for gross proceeds of $19 million. These proceeds were used to pay down the line of credit debt that was associated with our Q4 2023 acquisition in Fort Collins. Completing our capitalization of that transaction, advancing our capital recycling initiatives and facilitating the purchase of $4.9 million worth of our common stock early in the quarter.
We are committed to growing our business, and while the overall economic environment has limited our access to capital, we do believe we can effectively recycle portions of our current portfolio for the right opportunities. We will be well-positioned when those opportunities arise. I'm extremely grateful for all our teams duty to deliver value to our shareholders. Our strong culture is evident in our recent diversity, equity and inclusion report, highlighting our advancement off and commitment to providing a great home for our team to achieve the best results. This report is available on our website. Now I'll turn it over to Bhairav to discuss our overall financial results and outlook for the remainder of 2024.
Bhairav Patel: Thanks, Anne, and good morning, everyone. We are pleased to report another quarter of strong earnings growth with core FFO of $1.23 per diluted share, driven by a 7.5% year-over-year increase in same-store NOI. Revenues from same-store communities increased 3.5% compared to the same period in 2023 with the increase attributable to 3.9% growth in average monthly revenue per occupied home, which was partially driven by higher RUBS income, as the rollout was fully implemented at the end of last year. The higher per home revenue was slightly offset by a 30 basis point year-over-year decrease in weighted average occupancy to 94.6%. However, occupancy has picked up nicely in April, as Anne noted in her remarks, and with market rents trending in line with expectations, we are well positioned as we enter leasing season.
Property operating expenses were down by 2.2% year-over-year. The decrease was driven by lower utilities costs and successful real estate tax appeals offset by increases in compensation, administrative and marketing costs and higher insurance premiums. While successful tax appeals are not uncommon, we recognize approximately $700,000 or $0.04 per diluted share from one such appeal spanning most full years. However, it did not materially impact our full-year projections as the anticipated refund was incorporated in our prior projections and corresponding guidance ranges we shared last quarter. Turning to guidance. We updated our 2024 expectations in last night's press release. For 2024, we now expect quarter of $4.74 to $4.92 per diluted share, an increase of $0.03 at the midpoint from prior expectations.
This number assumes same-store NOI growth of 2.5% to 4%, driven by same-store revenue growth of 3% to 4.5% and same-store total expense growth of 4% to 5.5%. A warmer than usual winter and favorable changes in natural gas pricing led to better-than-expected results in utilities during the first quarter helping us reduce year-over-year control expenses and in turn, decreased our expectations for controllable expense growth. On the non-controllable expense side, favorable results, particularly in real estate taxes related to both the previously mentioned rebate and other tax adjustments as well as lower non-reimbursable losses are leading us to decrease full-year expectations. Importantly, I'd like to highlight the relation between utility expenses and RUBS revenues, and remind everyone that the lower utilities costs drive lower expectations for RUBS revenues, which led to the decrease in the high end of our revenue guidance.
Moving on to other components of guidance. G&A and property management costs and interest expense are expected to be slightly higher than previously projected. Our guidance for capital expenditures, including value-add spend is unchanged from last quarter. On the capital front, our balance sheet remains flexible. We have a well-laddered debt maturity schedule that features a weighted average cost of 3.6% and weighted average time to maturity of six years and we had approximately $230 million of liquidity at quarter end via cash and line of credit capacity. Our capital repositioning activities last year drove leverage down half a turn over the course of the year, leading to Q1 net debt to EBITDA of 7.1x. As noted in our February call, this balance sheet strength allowed us to opportunistically buy back shares with centers-based repurchasing 88,000 shares at an average price of $53.62 during Q1.
We have already funded $8.8 million of the $15.1 million we committed to a development project in the Minneapolis area, with the remaining funding expected to occur over the next several months. This along with the sale of two assets in the Minneapolis metro area for roughly $19 million has been incorporated in our guidance. Our guidance assumes no additional investment activity for the rest of 2024. To conclude, we are proud of the results we achieved in the quarter, and I commend our center-based team on providing us with an excellent start to the year. We look forward to building upon these results in the rest of 2024. And with that, I will turn the line back to the operator for your questions.
