Hello, everyone, and welcome to the CenterSpace Q4 2024 Earnings call. My name is Ezra, and I will be your coordinator today. If you would like to ask a question, please press star followed by one on your telephone keypad. I will now hand you over to Josh Klaetsch from CenterSpace to begin. Josh, please go ahead. Good morning.

CenterSpace's Form 10-K for the year ended December 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 sanitizehomes.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 filing under the section titled Risk Factors and in 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.

Good morning, everyone, and thank you for joining CenterSpace's fourth-quarter call. With me this morning are Bhairav Patel, our Chief Financial Officer, and Grant Campbell, SVP of Investments and Capital Markets. Before taking your questions, we will briefly cover our 2024 results and discuss our outlook for 2025. 2024 was a year of positive platform execution that produced opportunities for strong advancement of our company's financial and market position. Our teams did the work to drive stable revenue growth, strong occupancy, and were diligent on expense control while facing the headwinds of supply and market uncertainty. During the year, we delivered $4.88 of core FFO per share, driven by sector-leading same-store NOI growth. We were able to expand our portfolio in Denver, where we purchased the Lydian, continue to simplify our balance sheet with the redemption of our Series B preferred shares while also improving our leverage profile and float via issuance on the ATM. The strong fundamentals of our community were proven, giving us positive blended leasing spreads in every quarter while also ending the year with one of our highest Q4 occupancies. We did all this while advancing our mantra of better every day. Our team members set a company record, volunteering over 2,700 hours in the communities we serve. We increased our aggregate online review scores by 3.5% over the past year, had a 16% increase in five-star reviews online, and showed improvement in every key metric of our resident satisfaction survey, including a 5.3% increase in overall satisfaction, which contributed to our outstanding same-store resident retention rate of 56.6% for the year. We also brought home six industry awards for individual and company performance and were named the Minneapolis Star Tribune Great Workplace for the fifth consecutive year. I'm incredibly grateful to our wonderful team for…

Thanks, Anne, and good morning, everyone. Within the investment landscape, we expect apartment demand and economic growth to remain resilient in 2025. When coupled with the downward trend of new supply additions this year, it bodes well for continued strengthening of underlying fundamentals. In our two largest markets of Minneapolis and Denver, we are past peak deliveries, so recent supply impacts will affect the cadence of absorption and forecasted rent growth this year. In Minneapolis, delivery peaked earlier when compared to Denver, where high watermark deliveries were concentrated in the second half of 2024. Given this, we expect to see relative fundamentals improvement sooner in Minneapolis, with Denver positioning itself for more defined tailwinds in 2025. In both Minneapolis and Denver, next twelve-month deliveries are forecasted at 1.4% and 2.5% of existing apartment stock respectively, further highlighting the tapering supply profile. Transaction volumes in our markets improved in 2024, though remain below 2021 and 2022 levels. There is a lot of capital looking for multifamily investments right now. However, real-time transaction velocity is muted, driven by continued interest rate volatility and the bid-ask spread. For instance, recent Mountain West core asset sales that priced at mid to high 4% cap rates inform asset owners' perspectives and, coupled with their belief in improving fundamentals over the coming twelve to eighteen months, lead to a general lack of real-time transaction velocity. On the capital allocation front, we will remain focused this year on enhancing our differentiated Mountain West and Midwest geography. We continue evaluating a variety of new investment possibilities to grow the company and advance our strategic plan while being mindful of our cost of capital. This could include potential operating partnership unit transactions, acquisitions where we can obtain attractive financing, and mezzanine lending pursuits. All areas where we have recently…

Thank you very much. We will now open the floor for the Q&A session. Please ensure your device is unmuted locally. If you change your mind or your question has already been answered, please press star followed by two. Our first question comes from Brad Heffern with RBC Capital. Brad, your line is now open. Please go ahead.

Hey. Good morning, everybody. Just starting with your top two markets, at least in the market data that we see, Minneapolis has been improving in recent months, Denver seems to be weakening, if anything. Does that align with what you're seeing in your portfolio? And can you just sort of compare and contrast the fundamental market drivers there?

Yeah. Good morning, Brad, and thanks for the question. It does align with what we're seeing. You know, supply pressure has eased in Minneapolis earlier than Denver. Both markets have had very strong absorption. So while our new lease rates have been, you know, less there than in our other markets where we didn't see supply, they are turning the corner. And I would also point out that we've been able to hold occupancy in those markets and even drive occupancy up a little bit. So, you know, our projects are all stabilized and most aren't competing with the brand new projects coming online, but there is the downstream ripple. You know, I think what you indicated does align well. A little bit softer in Denver than Minneapolis, but both have good prospects for 2025 and 2026 given the supply pipeline diminishing.

Okay. Got it. And then maybe just for the rest of the markets that are harder for us to track, can you just give your expectations for 2025 performance of those and maybe any that stand out one way or the other?

Morning, Brad. Yes. With the rest of the markets, 2025 looks a lot more like 2024 where we don't really see a lot of supply coming online in our smaller markets. So we expect, you know, blended spreads over there to be pretty healthy as we wait for especially Denver to kind of turn the corner as Anne said. And Minneapolis, as you said, is kind of on its way back to normalization.

Okay. Thank you.

Our next question comes from John Kim with BMO. John, your line is now open. Please go ahead.

Thank you. On the guidance this year, you mentioned, Bhairav, 2.4% blended. Can you just break that down between new and renewal? And, also, when you look at it versus 2024, it doesn't seem to be that much improvement, and I'm wondering if you can comment on that.

Good morning, John. Yes. In terms of the blended spreads of 2.4%, we expect renewals to lead new lease spreads as we expect to kind of digest supply in some of the larger markets especially. So we would say at this point, we look at renewals at about 3% with new leases at around, you know, high 1% to 2% range. In terms of, you know, comparison versus 2024, you know, I think the small markets are gonna be roughly in line with 2024. So but the renewal pricing over there and as well as the new lease pricing in 2024 was kind of healthy. So we're just kind of tempering expectations over there for 2025. But we'll see as leasing season kind of comes in. What the initial trends look like. So for now, we're forecasting pretty normalized growth that we saw at the pre-pandemic.

I was just wondering because you're starting out at a higher occupancy point than you were last year. You mentioned that retention rates are higher as well. So the ability to push renewals, it seems like would have been more prevalent this year than last year. But I'm just wondering how much conservatism is baked in in this guidance.

Yeah. John, there is some conservatism, I'd say, with respect to renewal rates, that high retention rate. You know, that's really a high watermark, and we're really trying to weigh out, you know, if you go back, you know, three, four years, those retention rates were really hanging around 50%. So I'd say, you know, if in fact we do achieve very high retention again in 2025, there is some room, you know, for betterment and particularly to push on the renewal rate. But, you know, a lot remains to be seen there, particularly with will the single-family housing market rebound, where are interest rates going, how long will, you know, the average age and of our resident is increasing. The average tenure is increasing. So, you know, we think that trend will continue. We don't know where it will taper off. So our assumptions in the guidance for retention aren't quite to where we hit in 2024.

Okay. And then my next question is on acquisition and disposition activity you expect this year. Like Grant mentioned, cap rates in the mid to high 4% range in Mountain West. Is that prevalent in markets that you're looking at today, and what's your appetite to acquire with initial negative leverage?

Yeah. Good morning, John. So as you alluded to and as mentioned, there are trades for well-located core assets pricing in that, you know, kind of mid to high 4 range. We do want to grow. We want to advance our strategic plan. We continue to evaluate a whole host of opportunities that could achieve that. However, we are very mindful of our cost of capital. So we want to be in positions where, you know, we have a defined path to positive leverage, I'll say, that could come in a number of different respects. It could be acquisitions where we could obtain some attractive financing, could be OP unit transactions where there's a little bit more structural creativity that can be employed. Generally speaking, not going through, you know, three rounds of bidding on a marketed process to buy a mid 4 cap deal that doesn't include some of those other things that I would do.

And do you expect to be net acquirers this year?

We hope so. I mean, you know, we really do appreciate that scale is something that we need for the company, and that comes from external growth. So but, you know, we are committed to continuing to enhance the portfolio overall. If acquisition opportunities come to us that require capital recycling, you know, we've shown that we've been able to do that keeping it AFFO positive, you know, on the cash flow line. So we will continue to employ that, but we would like to be net acquirers.

Okay. Thank you.

Our next question comes from Rob Stevenson. Rob, your line is now open. Please go ahead.

Good morning, guys. Bhairav, what is the key factor or factors that drive the same-store expense guidance towards the 2% end versus the 4% end in the guidance range?

Morning, Rob. With respect to expenses, there's a couple of initiatives, you know, that we are hoping benefit us on a year-over-year basis. One of them being the centralization effort that we expect will benefit us to the tune of about half a million dollars, which is keeping the expenses lower. The other component is insurance costs. As I mentioned in my prepared remarks, we had a really favorable renewal after a couple of years of, you know, almost 20% growth. So we saved $900,000 on premiums alone. So those are the two components that really keep expenses on the low end.

Okay. That's helpful. And then the same-store recurring CapEx per home guidance is up about 11% at the midpoint of your 2025 guidance. Is this increase just inflationary, or is the scope of the 2025 projects meaningfully greater than the 2024 ones to drive that big of an increase?

Yeah. So, you know, with respect to the year-over-year increase, that's really being driven by the timing of projects. What we reported for 2024 is below what the midpoint was for our guidance for 2024. So we pushed some projects into 2025. So the year-over-year increase is really driven by timing, not really a scope of projects on an annual basis. But just when we were able to kind of wrap up some of those projects, it was in the first quarter of this year.

Okay. And then last one for me. Anne, how different is the retention rate by markets, especially, you know, Minneapolis and Denver, I guess, your more institutional markets, versus some of the smaller markets? And, you know, how is that impacting, you know, the when you look at it, the mark market in terms of rental rate growth expectations for 2025 here?

Yeah. We've seen a lot more stability in higher retention in the smaller markets or the tertiary markets. And that you can see that in those rates where we're able to push renewal higher and get some pricing power on new leasing and also just their occupancy. In Denver and Minneapolis, where there has been more supply, there's more choice. I'd say, you know, our high supply communities or, you know, high supply pressure communities in Denver do have some of our lowest retention rates, sometimes in the forties. And then, you know, that's offset by markets like Billings and Rapid City, where we have, you know, several communities where we have very, very high retention rates. But yeah. In the market where there has been more supply, we just we do see lower retention rates, and that is being offset by higher retention in the smaller market.

Okay. And then I guess the last one for me is in terms of non-rent revenue, the fees and all the other sort of associated stuff, how fast is that growing on an annual basis for you guys versus sort of the core rental rate? And is that sort of a positive boost or a drag to overall rent revenue growth?

So yeah. With respect to 2025, it's gonna grow in our expectation in line with the rest of the rental revenue items. For the last couple of years, as you may have noted, we rolled out the reps program. So there was some noise just due to the rollout of the reps program. So going forward, we are looking at it on a normalized basis, and it is growing in line with other rental revenue.

Okay. That's very helpful. Thanks, guys. Appreciate the time this morning.

Next question comes from Rich Anderson with Wedbush. Rich, your line is now open. Please go ahead.

Okay. Thanks, and good morning. So the path to get to a more optimal sort of balance in your portfolio, I know we've talked about, you know, maybe eighteen to twenty-four months to sort of get to a seventy-five, twenty-five-ish type split between institutional and secondary. Correct me if I'm wrong on that. Is it fair to say that it appears that's gonna be extended significantly more further out than, you know, eighteen to twenty-four months just because of how the markets are behaving and, you know, what should our expectations be about, you know, the path the timeline path to get to something that is more in line with what you're thinking long term?

Yeah. Thanks, Rich, for joining us, and appreciate the question. I think you're hitting the nail on the head. We need transaction volume and opportunities. You know, we need sellers in order to be a buyer. And while we have the desire, and I believe we have the platform to execute quickly on opportunities, particularly creative opportunities that will advance our portfolio strategy, you know, the lack of transaction volume over the past couple of years has been an issue. Now that being said, we've been we have been adding. You know, we added in Fort Collins, we've added in Denver. And we've also changed that mix a little bit by trimming some of those smaller markets. So we disposed in North Dakota. We've trimmed Minneapolis just slightly. So, you know, we're gonna continue to work on that portfolio strategy. But, you know, the timeline may be a little bit longer, but as I indicated in our remarks, our goal is to be nimble and ready, and we feel like particularly in 2024, we proved that the platform is ready to take advantage when those opportunities come, and we're gonna continue mining them wherever we can.

Okay. And on the topic of sort of trading, you know, perhaps older or newer. Are you willing and if you think about the CapEx load that might be involved in an older asset versus a newer asset, are you willing to allow for some FFO dilution in this process? If at the AFFO line, it's more of a wash? Is that a reasonable way to think about how this could happen in the short term?

It is. And we have used that exact map to make sure that we aren't diluting the actual, you know, cash flow of the company. So, you know, we have acquired projects that recycle capital where we think it's, you know, net neutral to the cash flow line, but maybe slightly dilutive on earnings. We're doing that with real conviction that the growth profile of what we're acquiring is, you know, significantly stronger than what we're disposing of. So not only is the CapEx, you know, lower if those newer assets, but also the growth profile of the rents is higher.

Is there any that you really can't form a number at this point?

Yeah. I mean, I think it would be difficult to speculate, but, you know, I mean, the pipeline probably has generally, I would say, half a billion of things that are interesting to us that we're working on in some form to get past initial kind of an initial underwriting. But, you know, that's significantly down from what it used to be. And Grant, you maybe want to comment on what you feel like the pipeline and the opportunity for the pipeline as the year goes on?

Yeah. I think, you know, a general thawing of the transaction market as the year progresses seems academically reasonable. What is needed there for that to occur is stabilization in interest rates and reduced volatility. Which then begs the question, what is the definition of stabilization? Is that sixty days? Is that six months? And, you know, everyone, including asset owners and potential sellers, have a view there. They're also informed by, you know, eighty-five percent of the market could be over here saying value should be x, but for every mid to high 4% cap rate trade that posts, again, for instance in Denver, that does inform asset owner's perspective on pricing. So the bid-ask spread is real. Reduction in interest rate volatility is needed. And unless you're a forced seller right now, or you're coming to the end of perhaps the closed-end fund, there isn't a lot of motivation broadly speaking for groups to transact where the bulk of the market wants to be from a pricing perspective.

Okay. Great. Thanks very much.

Thank you. Just as a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. Our next question comes from Michael Gorman with BPIG. Michael, your line is now open. Please go ahead.

Yeah. Thanks. Good morning. Maybe just sticking with the acquisition environment for a moment. Can you maybe share what are your thoughts on what could bring that bid-ask spread together? Right? I understand some stability in the interest rates, but that wouldn't necessarily collapse the spread. We're on the tail end of a supply shock moving towards stronger fundamentals. I'm just wondering what you think is in the pipe for a catalyst to bring them together, and do you think the market is gonna trend towards the ask or towards where the bid is right now as the market strengthens and maybe more institutional capital comes back into the apartment space?

Yeah. Not to sound like a broken record, but, you know, people want to know what the inputs are, quote-unquote, and if the broader market settles on interest rates are generally going to be within this band, it allows people to make yes, no decisions versus somewhat being paralyzed or uncertain on, you know, no activity, i.e., we'll wait to see where the landscape is in thirty, sixty to ninety days. So I do think it's heavily driven around that interest rate volatility. There is a lot of capital seeking multifamily right now. That capital will continue to be aggressive. I think, you know, market dependent, if you're talking about some of our other Midwest markets, that buyer profile generally is a levered buyer, they certainly want neutral to positive leverage. So that is gonna move more so the way of the bid, I would say. And in some of these larger institutional markets, it's gonna be a hybrid of, you know, capital continuing to find ways to get aggressive to meet the ask. It's also gonna be sellers saying we feel like volatility has subsided. This is the pricing landscape. We can make a sale decision with conviction and know we're selling at a market price.

Michael, one other thing to consider about the inputs going in is, and you mentioned coming to the end of the supply, you know, kind of a large supply wave, is if people really start to get constructive about where they think rents are gonna go given a lack of new starts, that is also an input that could move the pricing towards the ask. You know, if people really started underwriting aggressive rent growth again, that's another input that I think in 2025 could change the dynamic. I think most owners and operators, we feel like the fundamentals are really good for some stability in growth, particularly across our portfolio. Hopefully, you can see that in our guidance. But I think if, you know, if we start seeing rents really rising in some of those markets where supply has passed peak, some of the buyers could use that as a reason to get aggressive.

That's helpful. Thanks. And then maybe, Anne, just in terms of the pipeline that you talked about being smaller than historically typical, when you think about looking at the opportunity set in front of you, have the reasons changed for opportunities falling out of that pipeline, i.e., is pricing driving more of those opportunities out of the pipeline? Or are you maybe able to find more of those unique opportunities starting to come to market?

I'd say first, we're really focused on the unique opportunities. So when I talk about the pipeline, I'm talking about kind of a traditional pipeline of when we're gonna buy a community or maybe two communities. We're really focused on looking at things that might be more strategic, those OP unit deals, maybe portfolio deals. Because the reason everything is falling out of the pipeline is pricing. I mean, it's, you know, we used to have a lot of, you know, there'd be twenty-five things in the market in Denver, and we'd chase the five that we like the best. We felt like we could be a little bit picky. There was something for everyone. You know, everyone could be a buyer in, you know, 2021, 2022 market. And now, you know, there's only one winner, usually. Maybe one winner a month, because trades are so low. So the reason things are coming out of the pipeline really is pricing and uncertainty around what the inputs might be. And so our focus really is on building a larger strategic pipeline of larger scale portfolios, you know, potential large OP unit deals, and we have been able to both in scale and on a one-off basis. So, you know, we're spending quite a bit of time there.

Great. Thank you.

Our next question comes from Mason Guell with Baird. Mason, your line is now open. Please go ahead.

Hey, good morning, everyone. Just going back to the rate curve assumption for 2025, I guess, how do you expect this to trend throughout the year? Is the second half expected to be better than the first? Should it stay relatively steady throughout the year?

And was that with respect to, I'm sorry, Mason. The beginning of your question cut out a little bit. With respect to the renewal rate or leasing rate assumptions?

Yeah. Renewal, renew, and I guess, just blended. I guess, how that's hoped to trend up here.

Okay. Great. Yeah. Morning, Mason. Yeah. We would say that to lead the year as we go through the first half, the renewals will lead new leasing spreads, and we believe in the second half, we gain some price power, especially in the larger markets where we can see them balance off for the second half of the year. But at least in the initial part of the year as we enter leasing season, we expect that renewals will lead to new lease spreads, especially in the first half of the leasing season.

Great. And then could you give any updates on the current lending loan? I guess, what assumptions do you have for this to be paid off?

Yeah. Morning, Mason. That project remains on budget and on track both from a financial perspective and a timeline perspective. First phases of that construction have been turned over to the developer. That will continue to happen here as we move through the next one to two quarters. We'd expect that community to stabilize midyear 2026. Along the way, we'll continue our dialogue with the development partner, and if everything goes according to plan, we would execute a potential purchase of that community in the middle of 2026.

Great. Thanks for the time, everyone.

Thanks, Mason. Thank you very much. We currently have no more questions. I will hand back over to Anne for any closing remarks.

Well, thank you all for joining us today. We are coming to you live from Denver, where we're at our leadership conference. And so I'd be remiss if I didn't indicate how grateful we are for all the hard work of our team. We're gonna spend the next few days getting everyone prepared to execute on our expectations for 2025, and look forward to talking to you all next quarter.

Thank you very much, Anne. And thank you to all the speakers on today's line. That concludes today's conference call. You may now disconnect your lines.