Good morning, and thank you for attending today's Centerspace Q1 2022 earnings call. My name is Jason. I'll be the moderator for today's call. All lines will be muted during the presentation portion of the call with an opportunity for questions and answers at the end. If you'd like to ask a question, please press star one on your telephone keypad. I would now like to pass the conference over to Emily Miller. Please proceed.
Good morning, everyone. Centerspace's Form 10-Q for the quarter ended March 31, 2022 was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package has 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 Form 10-K filed for the year ended December 31, 2021 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.
With me this morning is Mark Decker, our Chief Executive Officer, and Bhairav Patel, our Chief Financial Officer. Mark, I will now turn it over to you.
Thank you, Emily, and good morning, everyone. Quick note, I'm going to cover Anne Olson's operating commentary this morning since she's a little under the weather. It was around this time a year ago that the housing business really took off and our portfolio with it. For the Q1 , we achieved NOI growth of 7.8% and core FFO growth of over 3% despite some headwinds from the combination of a colder-than-average winter combined with a dramatic spike in energy prices. Even so, we remain on track, and we are reiterating our guidance for the full year. As we look forward, the health of our business and our customer are outstanding. We have a loss to lease of over 9%, strong employment, and relatively balanced supply. Our residents are earning more wages, and our homes remain affordable with rent-to-income ratios in the low to mid-20s.
This is an excellent backdrop to continue our retooling of operations. After converting all of our systems in late 2021, we are still training and optimizing in 2022. These investments will yield easier-to-access and more actionable data, better compatibility with some of the new PropTech offerings, efficiency and scalability. Turning to capital markets, it's been a volatile few months. We've seen our debt costs nearly double from high 2s for 10-year money to high 4s. Fortunately, we've been aggressively refinancing over the past few years, so we sit today with low maturities through 2025 and an outstanding ladder beyond that. The meaningful movement in debt costs has not changed the desirability of high-quality apartment assets. Asset pricing has not moved at this point. There are a lot of cash buyers who remain confident in light of strong underlying fundamentals in housing.
We believe we may see better opportunities given our balance sheet strength through the rest of the year. In the meantime, we will continue to be opportunistic and maintain our focus on the balance between the quality of the portfolio and quality of earnings. Despite the competitiveness of the investment markets, Centerspace has had our most active 12 months and enjoys more capacity than ever. Our debt to EBITDA on a forward-looking basis is now in the mid-sixes, and we are demonstrating our enhanced ability to compete on value versus price. Our Q1 OP unit purchase of the Min Three assets and the Noko development financing round-trip acquisition are perfect examples of our ability to get higher returns in an ultra-competitive market.
To date, over 43% or $580 million of the investments we've made since 2017 included intelligent structuring that drove value to us and the seller in a manner that was superior to cash. Turning to operations, we continue to see strong revenue growth. During the Q1, our same-store new lease rates were up 6.9% over the prior leases, and same-store renewals achieved increases of 9.6%. On a blended basis, this is Q1 rental rate growth of 7.9%. Increases have continued in April, with new leases increasing 12.3% and renewals increasing 8.8% for a blended rate increase of 11%. Our same-store weighted average occupancy was 93.9% on March 31 and continues to climb as we head into prime leasing season.
As we progress with the integration of our non-same-store portfolio consisting of 23 communities, we're pleased with the rental rate growth we're seeing. With respect to our KMS portfolio, new lease and rental rates have meaningfully outpaced our same-store portfolio in the Minneapolis market, where we grew at 8% for KMS versus 4.9% on a blended basis. This is proving out our investment thesis that there was a significant opportunity in this portfolio. All of this good revenue and wage news comes at a cost, and we are also monitoring expense growth, which was 9.6% higher in the Q1 than the same period last year. Increased utility costs are driving the majority of this increase, but we are also seeing inflationary pressures on wages and materials.
We realized utility expense increase of over 25% versus the same period last year due to both higher rates and increased usage as our Midwest markets experienced more severe weather than 2021. Our increased expense outlook for the remainder of 2022 is primarily a reflection of these increased costs offset by better-than-expected revenue projections as we realize strong rental rate across the portfolio.
Of course, all of these great results would not be possible without an incredible team and incredible teamwork, and I'm so grateful to work with our 450 dedicated associates. Thank you all for what you do towards better every day. Now I'll turn it over to Bhairav to discuss our financial results.
Thank you, Mark. Today, I will cover our Q1 results for 2022 and touch on our outlook for the full year. Last night, we reported core FFO for the Q1 ending March 31, 2022 of $0.98 per diluted share, an increase of $0.03 or 3.2% from the same period last year. The increase in year-over-year core FFO is primarily attributable to strong same-store results and the accretive acquisition of 22 properties since the beginning of 2021, offset in part by higher G&A and property management expenses from the investment we made in our operating platform to service a growing portfolio.
Total G&A was $4.5 million for the current quarter, an increase of 15.2% compared to the $3.9 million in the same period last year, which was primarily attributable to an increase of $473,000 in compensation expenses and $273,000 in professional and consulting fees, offset by a decrease of $377,000 in technology-related expenses, mainly driven by the relatively larger investment in the early stages of the Yardi implementation last year. Property management expense, which includes property management overhead and property management fees, increased to $2.3 million in the three months ended March 31, 2022, compared to $1.8 million in the same period last year. The increase is primarily due to $265,000 in compensation expenses.
Turning to capital expenditures, which is presented on page S-13 of our supplemental, same-store CapEx was $1.6 million for the quarter ended March 31, 2022. That translates to $145 per unit, and we expect this to ramp up over the next couple of quarters as we typically schedule most of the projects during Q2 and Q3 when the weather is warmer and more conducive. Looking at our balance sheet, as of March 31, 2022, we had $223.3 million of total liquidity, including $210 million available on our lines of credit. Our balance sheet remains strong. At the beginning of April, we paid off $22.3 million in mortgages. With those payoffs, we now have just 5% of our total debt maturing over the next three years.
As of the end of the Q1 , the weighted average maturity of our debt was 7.1 years, and the weighted average interest rate was approximately 3.2%. In the Q1 of this year, we grew our portfolio by purchasing four additional properties for a total consideration of $114.5 million. One of the properties acquired was previously financed by us through our preferred financing program with $43.4 million of construction and mezzanine loans. Additionally, during the quarter, we issued 321,000 shares at an average price of $98.89 per share, net of commissions for total consideration of $31.7 million. Now, I will discuss our 2022 financial outlook, which is presented on page S-14 of the supplemental.
We are maintaining our Core FFO guidance for 2022 of $4.45 per share at the midpoint of the range and our same-store NOI projected growth of 8%-10%. Please note that our Q1 results are typically impacted by seasonality, and the impact was particularly strong during the Q1 of this year from an expense standpoint. As Mark mentioned, our utilities cost increased by almost 25% due to a combination of higher per unit costs and higher usage due to a harsher winter. Additionally, we experienced more snowfall than usual in our markets, which drove up our snow removal costs by another 25% year-over-year. We do expect that to abate as we enter the warmer months.
While we do expect expense growth to be higher than previously anticipated and increases by 6.5% at the midpoint, we continue to see strong revenue growth, as Mark highlighted in his remarks, and expect that to offset the impact of expense increases. Accordingly, we have updated our expectations for revenue growth by raising the midpoint for year-over-year same-store revenue growth by 1% to 8% at the midpoint. That keeps us on course to achieve a core FFO growth we included in the initial guidance range we provided at the beginning of the year. As a result, our guidance range for core FFO remains unchanged and at the midpoint of $4.45 per share equates to an increase of 11.5% over last year. To conclude, I wanted to commend the entire Centerspace team for another strong quarter.
We are off to a great start to the year, driven by strong rental growth and expect to sustain the momentum as we enter peak leasing season. With that, I will turn it over to the operator to open it up for questions.
Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If for any reason you'd like to remove that question, please press star followed by two. Again, to ask a question, press star one. As a reminder, if you're using a speakerphone, please remember to pick up your handset before asking your question. We will pause here briefly as questions are registered. Our first question comes from Brad Heffern with RBC Capital Markets. Please proceed.
Bradley, if you asking a question? We can't hear you. Operator, sounds like he may not be in this line or something.
Hello, Brad?
Can you hear me?
There we are.
Yes.
Can you hear me now?
Yes.
Okay. Sorry. I was asking on the April leasing spread. It seems like there was a pretty significant inflection higher. Can you talk about what was driving that? Is that just seasonality? Is there something else going on?
Yeah. I think we don't have any specific certainty around it. I think it's just certainty. You know, the winter is particularly slow here, and it really starts to pick up kinda once you get to March in terms of traffic and demand to move. As you heard in our prepared comments, it was a pretty tough winter. We're pretty excited about what we're seeing there. That's some of our best new and renewal and blended lease rates we've seen since 2021.
Yeah. Okay. Got it. It seems like, you know, you're generally outperforming the underlying growth across your markets. Is that partially a KMS benefit, or what could be driving that?
Besides just management excellence, Brad? No, I'm kidding. I think it's a combination of things. I mean, in some of our markets, we are the most I'll say disciplined and focused operator. That cuts both ways. I mean, in some markets, we kind of wish everyone else were on revenue management, 'cause that might help move market rates. In Minneapolis specifically, I think it is KMS, where that portfolio really was under-optimized on the revenue side. Outside of that, I would say it's a combination of probably us being a little bit more focused. I mean, we're one of the only companies in our markets who has to tell everyone what we're doing every 90 days. I'm sure that helps us keep on our toes a little bit.
Yeah. Okay. Thank you.
Thanks, Brad.
Thank you for your question. Our next question comes from Buck Horne with Raymond James. Please proceed.
Hey. Good morning, guys. I was curious about the occupancy trends you've seen from month to month. I note, you know, last call, you guys highlighted that, at least through the first part of March, you know, weighted average occupancy was trending at, like, 94.4%, and it ended up the quarter at 93.9%. Kind of wondering what transpired in March in terms of occupancy trends, and has that stabilized through April?
Yeah, it has stabilized through April. I mean, we definitely took a bit of a dip in the Q4 , driven in part by the eviction moratorium being lifted. I would say since then, you know, slow traffic months to get back to occupancy in theQ1 . We are rising now. We've got great traffic, so I would expect that to continue to climb up from 94%.
Okay. All right. Appreciate that. I was wondering if you could drill down a little bit further, just in terms of what happened sequentially between. It looks like Minneapolis and North Dakota both took a sequential step downs, at least at the same-store level in terms of their monthly rental rates. Just wondering, you know, is that just a function of a severe winter, or is that just? Is there any signs of market weakness in Minneapolis or North Dakota?
I would say North Dakota, for all intents and purposes, didn't have COVID. You know, North Dakota is kind of going along like it was. Typically in that Q4 , we see negative trade outs and a weak Q1 . Minneapolis, I think is a little bit more just driven by the eviction moratorium. You know, as we had more vacancy, we needed to lower price to fill backfill.
Okay. All right. Thank you, guys. Appreciate it.
Thanks, Buck.
Thank you for your question. Our next question comes from Connor Mitchell with Piper Sandler. Please proceed.
Good morning. Thank you for taking my questions. Two questions. First, it seems like there's been a decent amount of seasonal seasonality between quarter-to -quarter. Without giving quarterly FFO guidance, what's a good way for us to think about modeling the seasonality of the portfolio?
Yeah, Bhairav.
Yeah. Oh, sorry. Connor, this is Bhairav. Yeah, I mean, from a seasonality standpoint, you know, utilities costs were up 25%. They make up about 35% of our, you know, Q1 expenses on the controllable side. Going forward, we would expect expense growth to moderate on a year-over-year basis as the impact of, you know, some of the expenses that have hit us harder in the Q1 due to seasonality just kind of becomes a lower proportion of our overall expense structure.
I mean, interesting fact. Usage was up about 10%. The price of the underlying commodity was up over 70%. Pretty surprising. I think your question. You know, we probably don't plan to give quarterly guidance. I guess, you know, we'll make a better effort to just check where people's models are and try to offer feedback. You can see our Q1 is typically our worst, our Q4 is typically our best, and the second and third usually are pretty consistently better than the first and not as good as the fourth.
Okay. That's helpful. Thank you. My second question, could you also just drill down a little bit on what guidance assumes for interest rates and then also energy costs for the balance of the year?
Yes. For interest rates, I mean, just a portion of our debt is floating. You know, our spot weighted average interest rate is 3.3%. It probably goes up a little bit because LIBOR, we are expecting LIBOR to go up. Other than that, because most of it is fixed, it kinda stays there. Our LIBOR assumption is, I believe it's 2.5%.
That is priced on the curve.
Yeah. We're just kind of pricing it on the curve.
For energy.
For energy, you know, as I said, you know, the impact that we felt for utilities cost was because the price per unit went up in Q1 versus the prior year. Then the price you know kind of stabilized in the last year. Overall, going forward, from an expense standpoint, we don't really expect that to drive much of the expense increase. Most of the expense increase is gonna come from items such as compensation, which overall we're expecting you know to be up about 5% year-over-year for the rest of the year.
That's helpful. Thank you. That's it for me.
Thanks.
Thank you for your question. Our next question comes from Rob Stevenson with Janney. Please proceed.
Good morning, guys. The energy stuff is all natural gas. You don't have oil heating, do you?
That's correct. It's all natural gas.
Okay. Have you guys thought about hedging? I know when, you know, Home Properties used to have this issue in the past, they wound up doing some hedging on that. Is that something that you guys are looking into or makes sense or given the magnitude not?
Well, I'd say worth considering and under consideration, the probably more likely tack we'd take is to just RUBS those expenses, so pass those through to the user, which isn't happening in every instance, obviously, and an area where we can focus. The challenge gets to be, you know, when you're pushing rent 10% to also push RUBS, I mean, you know, it's like squeezing a balloon. It's. You can only squeeze so much. You know, we're going to thoughtfully approach how to lessen our exposure and put that exposure on the end user. But we've got to balance that with our desire to push revenue.
Was this exposure in the new KMS portfolio? Was this in the legacy portfolio or mix? How should we be thinking about that?
Yeah, it was in both. You know, not one particularly in one versus the other.
Okay. As of today, what percentage of the portfolio is either unable to be sub-metered or where you're prevented from doing RUBS, where you're gonna continue to have exposure to utility costs no matter what?
That's a great question. I don't have the answer to that, neither does Rob off the top of his head and Mike. We'll have to circle back on that one.
Okay.
I mean, most of it.
And then-
will be at least proportionally dealt with.
Okay. I just didn't know whether or not through municipalities that didn't allow that, et cetera.
Yeah, I don't.
What month last-
I don't think so. Again, that's a better one for Anne. Sorry.
Okay. What month last year did you guys have the biggest jump in terms of rental rates? Trying to figure out when the comp, the year-over-year comps get toughest for you as we go throughout the year.
Yeah. Our best quarter, I don't have that by month. I do have it by quarter. Our best quarter was the Q3, where new was 10.8% and renewal was 7.2% and blended was 9%. I guess I'd say the Q3 is going to begin our toughest comparison. I mean, relative to the coastal names, we did have positive NOI growth in the Q1 of 2021, so tougher comparison for us than some of those names. Some of the southeast names likewise had growth. We don't have that fact pattern there. You know, April at a blended 11% is among our best months.
Okay. I'm sorry if I missed it, but did you guys talk about what happened in St. Cloud from a revenue perspective? Was that, you know, something abnormal 'cause the occupancy went up quarter-over-quarter, but the revenue went down 9%?
Yeah, are you talking sequential? I think that's a rent help.
Yeah, 'cause the rental rate goes up, the occupancy goes up, but the revenue per occupied home goes down, and it was just a little weird.
Yeah, I think that's the, you know, in the Q4 , we had a lot of Minnesota Rent Help, so essentially our bad debt, not bad debt, but the, you know, the state-funded portion of folks, rent who were behind came in a pretty large way in the Q4, and that was definitely affected the St. Cloud numbers. I think that's what we're looking at there. Is that right, Rob?
Yeah, on a sequential basis, that's exactly right. We collected more revenue in that market than we booked. It was a result of timing.
From a bad debt standpoint.
Okay. 'Cause that was helpful, 'cause it was just weird to sort of see, you know, occupancy and rental rate up, but revenue down. Normally those things go in concert. Last one for me, what does your acquisition pipeline look like today? You know, from a standpoint of are you guys still, you know, looking to add assets in Minneapolis after the continued move? Is that still a market where you're comfortable increasing the exposure? You know, it's obviously your biggest market.
Yeah, good question. You know, Rob, we really are most opportunistic in Minneapolis because it is our greatest concentration. It's also, you know, I think one of the feedback we get from investors frequently is we would love to see you be in more markets. We're mindful of that. It's also where we have some of the deepest roots. I'd say Minneapolis and Denver are definitely our best two hunting grounds, if you will. We would continue to invest in Minneapolis. You might see us change, you know, maybe we hold the count, unit count or home count steady, but do some swap outs.
We would be interested and will continue to fund development that we really like the way the Noko and Ironwood deals have worked out, which were both started as financing deals. Yes, we'll still be active there. Obviously, we bought what we call the Min Three portfolio and Noko, which, I mean, those are good examples where, you know, if we were looking at unlevered year one yields in Nashville, Denver, Minneapolis, you know, Noko on the year one yield was north of 4%. A like property in Denver might be mid-3s, and Nashville might be 3%. Our year five and our year 10 would be likewise spread out.
It's pretty hard to look at those and say, "Well, we should allocate capital to the one with the least amount of yield." It's a bit of a trap because obviously the more we do that, the more we get criticized for the concentration. Short answer, yes, we're still looking in Minneapolis. We'd probably be more aggressive on asset rotation there. The market continues to be pretty robust. I mean, just this morning I got a you know alert from a broker, 1986 or 1985 product. Greystar bought it. $1,600 rents, underground parking and in-unit washer dryer. Looks a lot like Park Place, which is a like asset. Sold for a 3.5 on trailing, 4.2 on the brokers going in number, which we would probably discount.
You know, $276,000 a door. You know, there's still lots of good demand for property out there. You know, that's a benefit if you're recycling. It's a challenge if you're gonna recycle into something new.
Okay. Thanks, guys. Appreciate the time.
Thanks.
Thank you for your question. There are no further questions waiting at this time, so I'll pass the conference back over to Mark for any final remarks.
Super. Thanks. Well, we appreciate everyone's continued interest in Centerspace. We hope to see you at Nareit in June, and Happy Mother's Day to all the mothers out there. Thank you.
That concludes the Centerspace Q1 2022 earnings call. Thank you for your participation. You may now disconnect your lines.