Centerspace (NYSE:CSR) Q4 2023 Earnings Call Transcript
Centerspace (NYSE:CSR) Q4 2023 Earnings Call Transcript February 21, 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: Good morning, everyone, and welcome to the Centerspace Q4 2023 Earnings Call. My name is Harry, and I'll be coordinating your call for today. [Operator Instructions]. I would now like to turn the call over to Josh Klaetsch from Centerspace. Josh, please go ahead.
Josh Klaetsch: Centerspace's Form 10-Q for the year ended December 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.
Anne Olson: Thanks Josh and good morning everyone, and thank you for joining our call. With me this morning is Bhairav Patel, our Chief Financial Officer and Grant P. Campbell, who leads our investment and capital markets activities. Last night, we reported $4.78 of core FFO per diluted share for 2023, representing growth of 7.9% over 2022. These excellent results were driven by strong year-over-year same store NOI growth of 9%, together with significant outperformance of our projections on G&A items. During 2023, we faced macroeconomic uncertainty, softening multifamily fundamentals and a CEO transition. This was a lot of uncertainty. I'm so pleased with how our teams responded, our financial performance and the efficiencies that we have harvested on the G&A side of the business.
We feel well positioned as we head into 2024. It will be a difficult year given continued economic volatility and multifamily supply pressures, but we feel great about the relative position of our portfolio with attainable average rents and geographic exposures in the mid and Mountain West, which we think will translate into growth in 2024. At the midpoint, our 2024 projections include same store NOI growth of 2.5%, driving overall core FFO growth of 0.4% with guidance at $4.80 per diluted share for the full year. While Bhairav will provide more detail about our 2024 guidance, I want to share some recent results and trends that give us confidence that we will be able to achieve growth in 2024 even after the sale activity and repositioning that we undertook in 2023.
We ended the year with weighted average occupancy of 94.8%. During the fourth quarter, we realized an average decrease of 2.9% on same store new lease trade out and an average increase of 3.7% on same store renewals, resulting in a 0.4% blended rate increase. January provided optimism for 2024, as we are pleased to see market rents holding. With 5% of our leases expiring in January, we realized an average decrease of 1.9% on same store new lease trade outs and an average increase of 3.2% on same store renewals, resulting in a 0.1% blended rate increase. While Q4 and January showed negative new lease spreads, this is not uncommon historically and it is worth noting that the percentage change in January was 100 basis points stronger on average new lease rates than December.
We have prioritized physical occupancy over rent growth through much of Q4 and Q1 to date, and we'll continue to do so until we see renter demand rebound to a level sufficient to drive the necessary new lease volumes and put us in a position to implement more aggressive pricing on both new leases and renewal. Less so than some other parts of the U.S., we are seeing supply pressures in Denver and Minneapolis. However, to date both of those markets have shown resiliency and absorption. Particularly notable, CoStar cited Minneapolis as having the second strongest absorption in the nation in 2023 through the third quarter with it ranking in the top three nationally for both 2022 and 2023. At the same time, most of our secondary Midwest markets have minimal, if any new supply and range from 0% to 3% of existing stock under construction.
With the industry experiencing challenging operating fundamentals due to elevated supply and moderating, but continued expense pressures, there is a dearth of transaction activity. We focused on portfolio improvement in both operations and through disposition, and it was a busy year on that front. During 2023, we sold 13 communities for the aggregate price of $226.8 million. The communities sold were located in St. Cloud in Minneapolis, Minnesota, Omaha and Lincoln, Nebraska and Minot, North Dakota. The proceeds of the sales were used to acquire community in Fort Collins, Colorado and for the repayment of debt. Additionally, during the Q4, we were able to successfully close on a mezzanine loan that includes the purchase option, funding a new multifamily development of 244 homes in Inver Grove Heights, a demographically strong submarket of the Twin Cities.
To date, we have funded approximately 40% of our $15.1 million commitment. This community is scheduled for delivery in summer 2025. These transactions highlight our commitment to continued refinement of our portfolio, its age, quality and market exposure, as well as maintaining a strong balance sheet. Subsequent to year end, we entered into sale agreements for two communities in the Minneapolis market, comprising 205 homes for aggregate consideration of $18.9 million. Limited by size and age, these communities were not able to provide us with the NOI margin or growth we expect from our portfolio. The transaction should close in the next week and proceeds of these sales will be used to pay down our line of credit. Regarding share buybacks, since we reported our Q3 results, we have acquired approximately $9.5 million of our common stock at an average price of $53.
With continued lack of asset transaction volume and our demonstrated execution on 2023 sales of certain of our less efficient and lower growth assets at a weighted average cap rate of 6.5% based on prior 12-month NOI. We like buying our current portfolio at an implied cap rate of 7.6%. We do have some capacity remaining in our authorized buyback program, but we'll prioritize maintaining balance sheet flexibility while calibrating market factors affecting relative asset valuation. As I mentioned earlier, this may be a tough year for the multifamily sector, but we believe we will perform well on a relative basis given the work we have done on our portfolio composition and operating platform. Our board shares the belief that we will have strong results coupled with discipline on executing our strategy and has declared a $0.02 per common share increase in our next quarterly dividend raising it to $0.75 per common share.
Before I turn it over to Bhairav, I want to thank our team. 2023 was a great year because of our organizational commitment to better everyday, and I appreciate their hard work and dedication. Now I'll ask Bhairav to discuss our overall financial results and details of our 2024 outlook.
Bhairav Patel: Thanks, Anne, and good morning, everyone. Last night, we reported core FFO of $1.22 per diluted share for the fourth quarter of 2023, which was driven by another strong quarter of operating results with same store NOI increasing by 7.6% over the same quarter last year. Our operating results for the quarter were in line with our expectations, while core FFO exceeded expectations. The outperformance in core FFO during the quarter was driven by lower than projected G&A primarily due to lower IT related spend and higher interest income including approximately $150,000 in origination fee received upon the close of the mezzanine loan that Anne discussed in her remarks earlier. This capped off another strong year of earnings growth for the company with same store NOI growth of 9% for the year and core FFO of $4.78 per diluted share, an increase of almost 8% compared to the previous year.
Other notable activity during the quarter included an impairment charge of &5.2 million related to the two communities in Minneapolis that Anne mentioned we expect to sell next week and an additional charge of $1 million for pre judgment interest related to the litigation settlement earlier in the year. Both charges are excluded from core FFO. On the capital front, we are well positioned with a strong and flexible balance sheet. In the end of the year with $235 million of liquidity and leverage of 7.1 times net debt to EBIDTA which is half a turn lower than at the beginning of 2023 because of our capital repositioning activities during the year. In addition, we have a well laddered debt maturity schedule with no debt maturities until the middle of 2025, weighted average time to maturity of 6.3 years and weighted average cost of 3.54%.
This balance sheet strength allowed us to opportunistically repurchase shares, which we believe are currently trading significantly below the true value of our assets in the portfolio. During the quarter, we repurchased nearly 92,000 shares bringing our 2023 repurchases to 216,000 shares at an average price of $53.44 per share. After year end, we repurchased an additional 88,000 shares at $53.62 per share. Turning to guidance, we introduced our 2024 expectations in last night's press release. For 2024, we expect same store NOI growth of 1.5% to 3.5% with relatively healthy top line growth of 4% at the midpoint. The projected revenue growth is driven by an earn in of 1.7% at year end and projected blended lease growth of 2.5% at the midpoint.
It is further fueled by incremental revenue following the completion of our RUBS rollout and continued investment in our value-add program. We spent almost $30 million in 2023 and expect to invest an additional $25 million to $27 million on value-add initiatives in 2024. Although expense pressures have moderated, we still expect expense growth of 6.25% at the midpoint to exceed our revenue growth in 2024. The growth is primarily driven by on-site compensation as the labor market remains remarkably resilient and insurance expenses driven by premium increases of over 25% year over year. We expect core FFO of $4.68 to $4.92 per diluted share with a midpoint of $4.80 per diluted share, a slight increase year over year despite the impact of approximately $130 million of net dispositions during 2023.
Please note that although our guidance equates to core FFO of $1.20 per share per quarter, our core FFO during the first quarter is expected to be below that average and projected to increase in each subsequent quarter. This is primarily a result of sequential revenue growth from lease expirations during peak leasing season in Q2 and Q3. The guidance range incorporates all the buyback activity since the end of 2023 that I highlighted earlier and approximately $19 million of proceeds from the sale of two communities in Minneapolis. It also assumes that the mezzanine loan of $13.1 million will be fully funded by early Q3. No further investment or disposition activity is assumed in the guidance. Lastly, as noted in our press release, our Board of Trustees announced an increase of $0.02 per share in our quarterly common dividend to $0.
5 per share. The common dividend will be paid on April 8, 2024 to shareholders and unitholders of record at the close of business on March 28. To conclude, we are proud of the results we achieved in 2023, not just on the earnings growth front, but even more so in advancing our key strategic priorities of improving our balance sheet, portfolio quality and market positioning. This was only possible because of a considered effort, commitment and discipline across the organization and I would like to thank our entire team for their hard work and focus throughout the year. We look forward to building upon these results in 2024. And with that, I will turn the line back to the operator to open it up for questions.
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