Good morning, and welcome to the IRET Third Quarter 2020 Earnings Call. All participants will be in listen only mode. After today's presentation, there will be an opportunity to ask to questions. Please note this event is being recorded. I would now like to turn the conference over to President and CEO of IRET, Mark Decker.
Please go ahead.
Good morning, everyone. IRET filed its Form 10 Q for the Q3 yesterday after the market closed. Additionally, our earnings release and the supplemental disclosure package have been posted to our website at iretapartments.com and filed on Form 8 ks. It's important to note that today's remarks will include our business outlook and other forward looking statements that are based on management's current views and assumptions on our results in 2020, including views and assumptions related to the potential impact of the COVID-nineteen pandemic. Our quarterly report and other SEC filings list certain factors, including those related to the pandemic, that could cause our actual results to be materially different than our current estimates.
Please refer to our earnings release for reconciliations of any non GAAP information, which may be discussed on today's call. Joining me this morning is Ann Olson, our Chief Operating Officer and John Kirchmann, our CFO. I'd like to start by welcoming our team who's on the line and thank them for the incredible efforts undertaken to make every day better for our customers. 2020 has been a wild ride, but our team has done a fantastic job of providing a strong and consistent experience for our residents, And we're certainly fortunate to be focused in our geography and on our customer base who are seeking a great home at a reasonable price point. Our business continues to prove resilient as we maintain occupancy and push rental rates when possible.
Our primary investment markets, The Twin Cities and Denver are experiencing more volatility than the remainder of our portfolio. We expect that our thesis of Minneapolis Providing stable growth and Denver providing more dramatic growth will play out as the recovery progresses, with renters still seeking Growing urban markets containing strong employment and amenities. Early indications show Minneapolis standing pat, while Denver is Our five assets in the core of the Twin Cities and Denver, comprising roughly 14% of our NOI over the next year, are hampering the overall performance of those portfolios. For example, our Minneapolis suburban portfolio has a weighted average occupancy that is 270 basis points higher and new achieved lease rates in the suburbs increased 3.1% versus a decrease of 16.8% in the quarter. The impact of the economic downturn on Our Twin Cities and Denver markets are balanced by the strong performance of our secondary markets, where we are achieving strong revenue gains across Montana, Nebraska and the Dakotas.
Our market and product diversification, both by suburban, urban and price point keeps us well positioned during the economic crisis And will help us as we continue through recovery. Transactionally, we had an active quarter. We sold 4 of our least efficient assets in Grand Forks And acquired a 465 home community in Denver. With this purchase, we now have scale to achieve operating efficiencies there. What's been surprising so far in the early days of this recession is the combination of deteriorating fundamentals and strong liquidity for multifamily product everywhere.
Over the last several cycles when there was a recession, the secondary and tertiary markets suffered disproportionate troughs in liquidity. In fact, the opposite has occurred today as some of the largest and most liquid markets face greater economic and regulatory uncertainty, a reversal of the when we consider the high CapEx associated with these older assets, the true economics are even better. As we monitor the investment opportunities in Minneapolis, Denver and Nashville, It's notable that overall transaction activity has significantly decreased since the inception of the pandemic. Across the U. S, multifamily transaction volume was down 8% in the 2nd quarter and 50% in the 3rd quarter compared to the same periods in 2019.
We feel great about our ability to invest in Denver, transaction volume was down 43% in the 3rd quarter as the dearth of opportunities has heightened competition and pricing continues to trend upwards from pre COVID expectations. We've also somewhat altered our position on Ready Liquidity, Deploying the cash we had on hand last quarter into the Denver acquisition, but maintaining a keen eye on our commitments over the next 24 months and 2020 required a significant rewrite to our plans and we are prepared to meet the continued challenges ahead. However, our game plan hasn't changed. We remain focused on increasing our exposure to strong markets, Improving our per share metrics and extending our financial flexibility and liquidity. And with that, I'd like to have Ann please take us through the operating update.
Thank you, Mark, and good morning. As the pandemic continues, its effect on our results, while not dramatic, are compounding. 72% of our portfolio leases have been priced since April 1. And during the 6 month period ending September 30, New leases priced 60 basis points lower than the prior year comparable period, while renewals increased 2%. Despite leasing activity being dampened by the economic downturn, during the Q3, we were able to stabilize rents and increase occupancy, resulting in revenue growth of 1.1 percent over Q3 2019.
Our efforts to optimize revenues were led by 90 basis Higher occupancy in the Q3 compared to Q3 2019 and our same store weighted average occupancy for the quarter was 94.4%. One metric we track is revenue per unit, which incorporates rents and occupancy, and our revenue per unit increased from $10.88 per unit as of September 30, 2019 to 11.04 per unit as of September 30 this year. While the 2nd quarter saw significant drop in traffic due to COVID shutdowns, our 3rd quarter traffic was up 26% year over year and our strong occupancy enables us to hold our new rents flat and achieve 60 basis points of increase on renewals in Q3. Notably, we saw an increase in renewal rents in September of 1.4% and our preliminary October results Indicate that stronger renewal rents may continue as we achieved a 2.1% increase for the month. As with our peer companies, Our results are a story of markets.
As Mark mentioned, the impact of the pandemic and social unrest has hit our denser urban markets harder than the rest of the portfolio. During the Q3, we saw new lease rates in Minneapolis and Denver decrease 7.2% and 8.9% respectively compared to Q3 2019. This was offset by significant gains in billings, Omaha, St. Cloud and across our North Dakota markets, markets with less regulation related to COVID precautions and until recently lower COVID infection rates. In the Q3, we realized strong collections with 98.8 of expected residential revenue collected and just 24 rent deferment requests across our portfolio.
Year to date, we have deferred a total of $251,000 in rent With only $59,000 of those amounts remaining to be repaid. We did see a slight uptick in deferral requests in October with 15 requests For an aggregate rent deferral of $21,000 or 14 basis points of expected residential revenue. Collections in October remained strong at 98.5%. Year to date through September 30, our revenues have increased 2.1% and net operating income has increased 1% over 2019. Well, this has been a challenging year for our Rise by 5 efforts.
We remain optimistic about the opportunity to increase margin across our portfolio. Challenges include flat revenue growth due to the impact of the pandemic, wage pressure, health insurance costs and of course the significant increases our industry has experienced in As we've been monitoring expenses directly related to changes in operations due to COVID protocols, we believe there will be opportunities to manage these more closely As our new reality stabilizes into 2021. Despite lagging second quarter traffic and economic We continued with value add common area and unit renovations within 9 communities in our portfolio this quarter. During the quarter, we completed 195 unit renovations and we're achieving our underwritten premiums with an average return of 18% upon leasing. Our unit renovation focus remains on our Minnesota and Nebraska portfolios with 66% of the renovated units located in Minneapolis and Rochester And the remaining units located in our Omaha market.
I mentioned the compounding effects of the pandemic at the top of comments and would be remiss if I didn't note the effect on our team members. Our team continues to show remarkable resilience and commitment to our customer experience. Well, during the Q2, we focused almost entirely on the safety of our residents and team by coming together to do the right thing. This galvanized our team and we have been to sustain that through the Q3. I'm grateful every day for our team's dedication to our mission.
And now I'll ask John to discuss our overall financial results.
Thank you, Ryan. Last night, we reported core FFO for the quarter ending September 30, 2020 of $0.94 per share, A decrease of $0.05 or 5.1 percent from the Q3 of 2019. The decrease in core FFO in the 3rd Q4 of 2019 and the Q2 of 2020, offset by reductions in G and A and interest expense. Year to date, core FFO is unchanged from the prior year at $2.76 per share. Turning to our general and administrative expenses.
For the 9 months ended September 30, 2020, G and A decreased by 10% or $1,100,000 to $9,700,000 compared to the same period of the prior year. The decrease is attributable to decreases in compensation related to open positions, consulting fees And travel and conference costs directly impacted by COVID-nineteen. Interest expense of $20,600,000 decreased by 11% or $2,600,000 for the 9 months ended September 30 compared to the same period of the prior year, primarily due to the replacement of maturing debt with lower rate term debt and lower average balances on our lines of credit. Year to date property management expense of $4,300,000 decreased $200,000 or 4.6 percent compared to the same period of the prior year. Casualty loss was $91,000 for the 3 months ended September 30, 2020, compared to $178,000 for the same period of the prior year.
The current quarter's loss includes $695,000 related to hail damage incurred during the quarter on our Rapid City portfolio, offset by a $532,000 reduction in the prior quarter loss related to our Omaha portfolio. For the 9 months ended September 30, 2020, casualty loss was $1,300,000 compared to 900 and $11,000 for the same period of 2019. Approximately $2,000,000 in capital expenditures Are expected to be spent over the next 12 months to replace the impacted assets from these two events with $750,000 expected within the next quarter. Turning to capital expenditures, Which are highlighted on Page S-sixteen of our supplemental, same store CapEx for the 9 months ended September 30, 2020, was $7,200,000 A 60% increase from $4,500,000 for the same period of the prior year. The increase in CapEx Was related to a delayed start of projects in 2019 due to adverse weather.
Full year same store CapEx It's expected to fall in the range of $900 to $9.25 per door, which has increased from our prior outlook due to an additional $750,000 for a full roof replacement as a result of the aforementioned hail damage. In Q3, value add spend was $4,200,000 as compared to 1,900,000 dollars in Q3 2019. For the 9 months ended September 30, 2020, value add spend was $10,400,000 compared to $3,000,000 for Same period in 2019. During the quarter, we issued 145,000 common shares through our ATM program At an average net price of $70.55 per share for total proceeds of $10,200,000 Year to date, we have issued 819,000 common shares at an average net price of $70.23 per share For total proceeds of $57,500,000 the proceeds from these shares were used to help fund the Park House acquisition. Looking at our balance sheet, our total liquidity as of September 30 was $132,000,000 including $115,000,000 available under our unsecured line of credit and $17,000,000 in cash.
As of September 30, 2020, we had apartment communities representing approximately 10% of pro form a NOI that are not pledged under the unencumbered asset pool. This unpledged asset pool has a total value of $223,000,000 which allows for an additional $134,000,000 of liquidity under the terms of our line of credit. Looking to the remainder of 2020 2021, as of September 30, we have $35,000,000 of debt maturities And $27,000,000 remaining to fund under our construction and mezzanine loans for the development of a multifamily community in Minneapolis. We believe our current liquidity is sufficient to cover our foreseeable capital needs, while allowing us to pursue opportunities in our target markets of Minneapolis, Denver and Nashville. Further information on our liquidity can be found at Page S11 of our supplemental.
As we look ahead to 2021, we continue to evaluate the impacts the current pandemic and economic crisis will have on our business into next This includes continued pressure on the top line as the impact of the remaining 28% of our leases signed pre COVID are renewed or replaced with post COVID leasing activity as well as the potential headwinds Expected with expenses, including having our common facilities open throughout all of 2021, Higher self insured healthcare costs as a result of delayed medical procedures during the pandemic, increased costs Associated with PPE materials and other measures adopted to keep our community safe increased insurance costs As a result of continued catastrophic losses suffered by the insurance industry and the potential for higher real estate taxes as State and local governments seek to close budget shortfalls caused by the COVID related shutdowns. As we continue to navigate the pandemic, we remain encouraged by our Q3 results, which reflect the work of our dedicated team members who every day live our mission of providing great homes. With that, I will turn it over to the operator for your questions.
We will now begin the question and answer session. Our first question today comes from Daniel Santos with Piper Sandler.
Hey, good morning. Thanks for taking my questions. My first one is more of a big picture question. Clearly, the team has done a great job of pivoting the portfolio to focus on Key Midwest markets and I think the case for owning some, we'll say, less brochure markets like billings where revenues were up over 7% is pretty clear. But as you said, your long term strategy is to expand in larger markets like Minneapolis and Denver, which are seeing better But similar pressures as some of the coastal cities.
So I was wondering if you could give us some more color on how you're thinking about expanding in those markets Versus maintaining your exposure to smaller markets, which are clearly bright spots in the portfolio?
Yes, that's a great question, Daniel. Thanks. Listen, I think our driving Focus continues to kind of be around not kind of, continues to be around markets that have real depth and real observable job and income growth. I That is ultimately the long term secret ingredient to good apartment cash flow growth. So I think we have Absolutely, I think been positively surprised with the positives surrounding the smaller markets where we have diversity and I'll Confess, probably more open minded to having some slice of diversity in markets like that in the future than we might have otherwise been.
But another way to get that is just to make sure you identify really good submarkets in some of those larger markets where you have Some good supply type constraints and things like that. So, I don't think it changes our overall view, although we're certainly happy we have The diversity we do.
Got it. That's helpful. So my next question, whether it's Rent collections, renewal spreads, occupancy, your portfolio has been relatively stable throughout what I'm assuming most people would say has been a pretty disruptive year. What would you say the biggest drivers of that stability? Is it affordability?
Is it the portfolio mix? Is it your urban to suburban ratio?
Yes, I think in my view, it is the mix of both markets and by Suburban and urban, so when we have talked a lot and I know you've been in some of these investor meetings where we've talked about how Minneapolis sort of feels to us like The most fully developed version of our investment thesis around urban and suburban and A and B, And it has really performed well, but obviously our portfolio is definitely being lifted by those secondary and tertiary markets. I don't know. Anne, did you
Yes. I think one of the big drivers which we commented on and is pretty clear is compared to our public peers, The less regulation around COVID precautions and the more open economies have really benefited us throughout the Midwest.
Yes, that's a great point.
Got it. That's it for me. Congrats on the quarter.
Thanks.
Our next question comes from Gaurav Mehta with National Securities.
Yes, thanks. Good morning. I think you talked about Declining in new and renewal events for your urban markets at like, I think, 7.2% 8.5%. I was hoping if you could maybe touch upon how the trends were on a month to month basis. Did you See the trends worsen or did you see this stabilize in some of your urban markets where you're seeing weakness?
Yes. Good morning, Rob.
Yes. Good morning. Good question. We do watch the month to month trends really closely. And Particularly on the renewal side, I think across the portfolio, we're seeing a stronger trend in renewals.
We were at 1.4% In September, our preliminary October numbers showed 2% up on renewals. When we look at the urban markets, the hit has been kind of A little bit more consistent where we're down in those markets pretty consistently. So we're not seeing much of a trend yet Besides that, we are down more in those markets than in the suburban markets. But nothing that yet shows that we're on our way back up out of The out of negative new lease growth in Denver or Minneapolis.
Yes. I mean, as a portfolio, we feel like we are stabilizing right now, but with some markets improving, but
Yes, we're definitely seeing the improvement, the trend improvement on both new lease rents and particularly on renewals, in the suburban markets. But those urban markets, We don't yet have a trend line to say if we think it's going to start picking back up or not.
Okay. Can you remind us what's the portfolio mix between Suburban and Urban and AMB in your total portfolio?
Yes. We really have 5 assets that are urban that comprise about 14% of our NOI, If you look on a go forward basis. So 3 in the Twin Cities and 2 in Denver.
Okay. I think, Mark, in your prepared remarks, you talked about transaction volume being down for the multifamily sector. Maybe talk about who are the buyers and sellers that are still transacting in the market? What kind of profile they have? And is it any different than people that were transacting
Yes, I think for the I mean, obviously multi is a big market and There are lots of participants and most of them live outside of the public markets and I think we're seeing that reflected in the transaction volume. If anything, there's probably been a marginal add to the investor pool in light of what's happening in other sectors. So if you ran Maybe you ran an opportunity fund in January, you probably had the ability to do multifamily in your fund, but you didn't actively do it Because you were looking at other sectors and you might be considering multi more than you were otherwise. We're definitely seeing that. But in terms of Who do we find in the bidding room, so to speak?
I mean, it's the same groups we saw before. I just say There's varying levels of conviction. So I think there are still some groups who don't want to be the 1st person at their investment committee to talk about anything. We actually took the opposite approach and really were active this summer trying to shake some things loose. We found in most instances, we chase things into other people's arms.
But it's I would say it's the same group plus a few extras, the buyers.
Okay. Thank you. That's all I have.
Thanks, Gaurav.
Our next question comes from Rob Stevenson with Janney.
Good morning, guys. Mark, how are you guys thinking about dispositions over the next few months, especially if there's a push for 1031 assets Ahead of year end and how much of your dispositions over the last few years have been to 1031 buyers?
Yes. The answer is we would be we'll always be opportunistic. I mean everything in the portfolio has a buy it now Price, and so if we can find someone those prices aren't all they don't all require exuberance to get there. But in general, we're always trying to call from the bottom, so and add to the top. So in terms of what have we sold to 1031 buyers?
I mean, 2 assets, right? Yes. So a couple of years ago, we sold 2 Small assets worth about $6,000,000 to a buyer in Rochester. The balance, which is over 200 some 1000000 of multi 250 probably, it's all been to non-ten thirty one buyers.
Okay. So it's not a big impact to you guys at
this point?
Yes. Buyers may have used 1031, but it wasn't part of their strategy or pricing. But larger institutions or private equity funds that would be using 1031. We lost
a couple this summer to 1031 buyers where We were down to a small pool of buyers and found ourselves just bidding against someone who wouldn't stop raising their price and Found out after it closed, hey, that person was not going to stop in the realm of reasonableness. So Good for you for stopping, I guess.
Okay.
And how are you guys thinking about redevelopment spending and how the recent returns been trending over the last few months? Do you put that on hold given that you may not be able to get returns in the near term that you want? Do you do it now anyway on vacancy while you can in anticipation The 2021 will be able to jump those rates up. How are you guys thinking about that today and where have the returns been?
Yes. I mean, we have enough active projects that we can throttle up and down a little bit. I mean, obviously, we're restrained by turnover. But our plan is to continue To make those investments provided they continue to hit the returns. I mean Anne?
Yes. I think we've been we were very careful, particularly At the beginning of COVID to say, do we need to stop and redo the market research to see if the premiums would hold up, Because obviously every time we make an investment there's a risk and whether or not it's going to lease for what we wanted it. And what we found particularly in some of our Markets where there are supply constraints is and our occupancy is high is that there's still a lot of demand for products and that there's a lot of demand for renovated product. So, we've continued kind of on the same plan. I think we'll hit the spend that we estimated to hit this year for value add and Feel really good about some of the opportunities.
When you look at our portfolio, for example, I noted we have some renovations going in Rochester. That is a fairly large rental market compared to the size of the overall market And not a lot of new supply. So while they have gotten some new supply, we have a really good opportunity to kind of draft behind that And we're not seeing a ton of new buildings going up that would compete with the renovated products. So we do still have some good pockets of opportunity that we want to chase down. We're being very careful and with the comp side to make sure that it will compete in the market and that we think that we can get the rent premiums that would justify the spend.
Okay. And then Anne, how successful have you guys been in terms of pushing your lease expirations into the second and third I mean, what percentage of your leases do you guys now have rolling in the Q4 and then the Q1 where things may be a little bit more challenging?
Yes. So since the beginning of in the second and third quarter, 72% of our leases roll. So we feel pretty good about that. Now that in this instance that means that 72% of our leases have priced during COVID and we only have 28% in the 3rd or in the 4th and first quarter. So, I think our exposure is good.
We are constantly tweaking it to match what we see in traffic That'll take a little bit more time. Obviously, the traffic pattern this year was off pretty significantly given very little traffic in Q2 and higher traffic In Q3 and we're seeing higher we saw higher traffic in October than last October as well. So that exploration profile may Want to move? We're never going to be done trying to identify exactly where it should be as the market moves, but we feel pretty confident about the amount of leases In the second and third quarter and the opportunity that that will bring next year, as we head into the summer months and with hopefully a better recovery on the economic side.
Okay. And then last one for me. Any markets where you've been seeing incremental deterioration in September October market condition wise?
I don't think so. I mean, I think the theme the most prevalent theme in our portfolio for certain is just the core versus suburban In the Twin Cities and Denver, I think we probably when COVID first came about, I suggested that we just roll everyone flat. In hindsight, we probably didn't need to do that. So we probably stifled some economic revenue growth there, but that's kind of That's over now and we're getting rental increases where we can and really focused on staying full and keeping pricing power for when things a little better.
Okay. Thanks guys. Appreciate it.
Thanks Rob.
Our next Question comes from John Kim with BMO Capital Markets.
Thanks. Good morning. You guys mentioned social unrest in your core urban markets, and I think you quoted a 17% decline in new leases in Minneapolis in the urban core. How much of this do you think is due to safety concerns and people looking to flee the cities with the discussion of defunding the police
I think It's really mostly about COVID. I mean, the just vacancy of the city just exacerbates The issue, the safety issue, which obviously Minneapolis has been in the headlines more than we'd want to be on all of those items, but I think it's really the kind of the second derivative. The first thing is COVID And when people get back into the office, I think things will definitely improve. To me now, You're living at our place in the North Loop called Freight Yard and you've got a killer apartment and you can walk to the river and you used to be able to walk to 100 restaurants Bars and now you can walk to 20 restaurants and bars and someone just stole your bike. So your marginal input there is not positive because You can't go to any of the sports things you went to or any of that stuff.
So I would say it's obviously a big issue for the cities In general and in North America and it's certainly an issue here, but I would say if everyone were back if Target and The other large corporate users in the city said, hey, we're coming back to the office tomorrow because we have a therapeutic or whatever we have that makes us all feel safer in the office. I think a lot of that would turn pretty quickly.
Okay. There's been discussion of Compressed cap rates in many markets, including Denver, can you comment on the cap rate on the Park House Act which is assets that you purchased? And what your leasing strategy is because I think it's a relatively new building?
Yes. So we bought that on our math at going in roughly 4 to 4.25 cap. So we've historically given 25 basis points ranges. Obviously, that In our judgment, we'll hopefully be a trough year number. So our 1st 12 months of cash flow will hopefully be The lowest and certainly they've been affected by COVID.
So we underwrote really no rent growth in year 1 and modest rent growth in year 2 3. So trying to be conservative. But for sure, I mean, looking at Nashville, we are seeing things trade in the mid-3s. So we haven't gotten anything to pencil there. So yes, I'd say that cap rates are definitely have come in.
I would certainly suggest that everyone should be mindful that it's on trough cash flows. It's not clear to me and it isn't the case for us that we've Lowered our long term return expectations. So I guess if you're looking to buy something and sell it in 2 3 years, it's a hard time to buy something right now. If you have kind of a 5 to 10 year timeline in your mind, then I think You can make sense of it. And in fact, you probably some of these markets look more appealing to you than they might have before.
And it's also the case that with some of the regulatory risk In California and New York and elsewhere that those are markets that take a lot of investment dollars. And as you De emphasize, the marginal dollar leaves that market and goes into a market like Nashville or Denver or Mini, which together those markets In a high year, we'd have $10,000,000,000 of volume out of $180,000,000,000 of total volume. When you push that marginal dollar out, It obviously helps compress returns and rates are another big factor there. So I've read a bunch The same things, in fact, some of them maybe you wrote, but a lot of the commentary I would agree with cap rates have definitely come in.
Are you a buyer in Nashville if pricing remains in the 3s? Or are you willing to Pivot to another expansion market.
I mean, we're a buyer as long as it's accretive And we are a long term believer in the asset. And I guess you could possibly count in some modest dilution if you feel really strong about the out But in general, we don't have a lot of happy agreement in our boardroom when we come with those kinds of ideas. So We're focused on per share cash flow growth and how we do that. So I mean one of the things that we've really liked about having Nashville in our world, As I've talked about before, it opened our opportunity set up 50% because we were previously really mostly hunting in the Twin Cities in Denver and now it's Denver and Nashville. So it gives us some better perspective.
But if that market continued to Long term, just not be open to us. I guess we'd have to consider. I don't believe that that'll happen, but we'll have to see.
Final question for me is, I think you provided an October update as far as renewals up 2.1% and the collection But I was wondering if you could also provide an update on occupancy as well as the new lease rate growth?
Yes. Our new leases in October, these are preliminary numbers because we're just a couple of days at the end of the month and things are still getting entered. Our weighted average occupancy today is 92.8% and our new lease rates in October look like they were about 90 four point 9 percent.
Yes.
Sorry. I'm sorry about that. And our new lease rates were down 1.1%. So we still are seeing a little bit of a decrease. That's only on about 200 leases for October.
So it's not a huge volume. As we talked about earlier, our expiration Profile is much lower in these winter months.
Just to make sure,
yes, 94.9. Yes, 94.9, sorry.
And that's weighted average for October or at month end?
That's for October. That's weighted average, same store.
Got it. Okay. Thank you.
Thanks, John.
Our next question comes from Amanda Switzer with Baird. Thanks. Good morning. Just following up on the transaction market, have you guys started to see any price discovery in the urban cores of your target markets? And then has your thinking changed at all in terms of where you want to be within those target markets apart from some of the comments you made earlier about avoiding
Yes. Good morning, Amanda. Yes, so I mean, I can give you a story of recent activity. There was an asset in downtown St. Paul that was for sale that roughly it was nice rehab of an old building.
It was rumored to be for sale last summer. We really liked it. I think the price talk last summer was, call it, $60,000,000 It has come to market. I don't know if it's been put under agreement, but I believe the price talk was around $45,000,000 which Would have been something like 200 a door, so well below replacement cost. The asset has some interesting unique physical aspects It's a converted office building.
So there's some there's a lot of commercial a lot more commercial space than you might like. But the point is, People's perspective on downtown St. Paul has changed a lot from a great market with some nice little Pockets of great activity going on and lots of things to do to now Ecolab's out of the office and they're going to be and some The other major employers are as well. And so what we're seeing in our own property is folks who took an apartment, maybe they worked 4 or 5 days a week and lived at our apartment and then Had a cabin in Wisconsin as their primary residence are just living there. So when some of those employers come back, we expect they'll be Living with us again and until then they're not.
So when I look at the when we looked at that asset And we priced it in that $45,000,000 range. It's pricing at mid 6 High seven kind of unlevered IRR with pretty reasonable assumptions, but you're really betting on Downtown St. Paul, which Just doesn't feel great right now because there's just not a lot of activity in the city. So again, we're having a hard time convincing ourselves to buy into the theme we're already seeing and the things we own in the downtown area where people are Less excited about living there because there's just less people pay a premium to live downtown if all the things you pay a premium for aren't available, The premium doesn't make a lot of sense. So I mean that's one small for instance where I can tell you we looked at it pre COVID and post.
I think directionally that owner and most owners are in a spot where they don't need to sell. Mean that owner doesn't need to sell. If they do, they've gone from hitting a home run to a double. I mean they did a really good job Turning that property and but they're only going to sell if they have a good thing to put the money into because they could probably hold out And do better later. That may be too much detail, Amanda.
No, that's a helpful anecdote. And then can you just stack rank as you think about the balance sheet stack rank, how you think about sources of acquisition capital today between levering up, selling additional assets or issuing equity via the ATM.
Yes. We would stack rank Levering up the lowest and be sort of dispassionate between sales or ATM or capital raises. Again, focusing on doing our best to maintain or extend our per share kind of earnings power. So we're not uncomfortable where we are with leverage today. I'd say we're comfortable.
One of the key Things we're focused on is maintaining access to the private placement market, which we certainly have access to that today if we wanted. So that That's a big governor in our mind.
Yes. Amanda, I would just add, I think the Park House is A good model for the type of acquisition that we like to do, we raised close to $60,000,000 on the ATM, Shed some pretty inefficient assets for excellent pricing for about $40,000,000 and then we're able to transact On a $145,000,000 asset in a great submarket.
That makes sense. Thanks for the time.
Thanks, Amanda.
Our next question comes from Jim Sullivan with BTIG.
Yes, thanks. Just first question for Anne. You talked a little bit about the value program earlier and given what's happening with cap rates in the markets Tightening and tough to sometimes get across the finish line on properties you might like. Just curious what the scope is for Expanding that, say over the next 6 to 8 quarters, I think you used The word that you were careful about the underwriting and you had pretty ambitious ROI targets you've hit it on what you've done so far. So what kind of scope is there for you to increase that, given maybe the lack of attractively priced acquisitions?
Yes, that's a great question and I think one we're thinking a lot about. We are actively looking at and underwriting more value add projects within our portfolio. It's an important part of our budget process each year that we talk with our community and regional managers about where they see opportunities, What they're hearing, where how much more rent they think that they could get, they're the ones who are interacting every day with the prospects And hearing, well, I didn't like your kitchen or I want to go to a nicer building with a better clubhouse or what those amenities are. We can do all the research on the market comps and all the underwriting, but we also use the time during our budget season To really touch base and hear what our community leaders think could be beneficial for their communities. And the value add process for us goes everything from Renovating units to looking at amenities to how we can create efficiencies by investing in infrastructure or technology Within the communities to make them better.
So I think our plan is to consistently do $10,000,000 to $15,000,000 of investment a year And we feel like we have a pipeline forward to do that. So it is going to expand over time because that amount will compound. These projects Take 2 or 3 years. So if we outlay $10,000,000 to $15,000,000 of investment in year 1 and $10,000,000 to $15,000,000 in year 2, in year Over time, we're building on that because it takes 2 to 3 years in most instances to Spend that money. So I think we do have a pretty good opportunity.
And one thing that we're going to be really cognizant about, especially given the trend right now is In our markets that might be smaller, we often see little or no supply. And so what is the opportunity in those markets to really Push rents or move to the top of the market in rent. So markets that we have not quite gotten to look at yet, but where we see Really strong growth over time, including markets like Billings or Rapid City. Our North Dakota portfolio has been really well situated after some of the dispositions we've done there. So there could be some opportunities there to refresh and stay at the top of the markets in those areas where we see very little supply.
Yes. I'm just going to circle back and add to I said earlier because I mentioned mid-3s in Nashville and I've already gotten several notes about it. So I should qualify that is for the nicest, Newest stuff in Nashville. That's not a market wide cap rate. That's it.
You want new product that's just come off lease up and things like that. So Sorry, Jim, just to tack on that general thought.
No problem. I appreciate that. I guess the other part of the value add question though, Given the compression in cap rates and what we'll call secondary markets is that achieving that yield on cap Expand, combined with the cap rate compression, only expands presumably the value creation opportunity that you're perceiving In doing this.
That's right. And, yes, I think we and we're thinking about that closely. One of the questions that we ask for every value add project is with respect to the risk return profile is where are the cap rates, where do we believe our NAV is, What would if we just sold that opportunity to a value add buyer who will underwrite The returns on the value add and kind of pay you for that, we always do that analysis too, to think about what is the value we're going
Yes. And The real challenge I think is you can't spend NAV and you can spend earnings per share or people can measure it. So I think one of the natural questions that I Feel like your dancing around is why aren't you selling more stuff? And the answer is, we certainly consider it. We will consider it.
The Grand Forks sale really was opportunistic and not something that we had planned when we got to the beginning of the year. We were really surprised to see The level of interest in those assets when we launched in June in kind of the new world. So it's definitely on our mind Constantly and something we talk about in the investment committee along with these value add deals all the time.
Thanks for that. And then a question for John on costs. You made a number of cautionary comments about areas where There, we are concerned about potential cost increases. Most of those items that you mentioned, John, I think I'm right, Really fall into the category of non controllable, we particularly when we talk about real estate taxes and insurance. And I just wonder if you can give us Some kind of ballpark guesstimate in terms of the increases that you might be Facing in 'twenty one in percentage terms versus what you've had to face already this year?
Sure. And good morning, Jim. I would say they fall into 2 buckets. The first bucket are really items that There were savings in this year because of COVID, right, closing common area facilities, Our self insured health care costs, people not being able to get in their physicians. So those are going to be returning to normal levels in the future.
So that would be the first bucket. Then as you mentioned, the non controllable bucket. We have had some initial discussions on insurance premiums And are getting feedback that we should expect things in 10% to 20% range for increases. And We are out with brokers now getting bids and locking that down, and we will definitely have that Lockdown by the time we come on this call next quarter. But indicative pricing, despite pretty big increases last year, if you recall, We had a premium increase in of 25% to 30% last year.
It's less coverage. I mean the quality is more or less.
That's right. With higher aggregates and more Deductibles, so it was a little surprising to us that initial pricing. And once again, I don't have final pricing to share, But that's what we're hearing from our brokers. On real estate taxes, we have not seen any increases yet and that may be Longer term, but it so happens most of our markets will send out their valuations Really in the next 4 to 6 weeks. So once again, we'll have a much better feel of What those increases are when we come on the call next quarter, but it's something we're concerned about, but We have no visibility yet as to what those increases are.
Yes. I mean, I think on the bright side there, Jim, A lot of our portfolio has been, I'll say, marked to the state of the art because almost half of our portfolio has been purchased In the last few years, so if you have owned an asset for a long time, you're going to get market Increases if you just transacted on it, it's really hard to argue that it's not worth what you just paid for it. So we feel like we have relatively up to date taxes, which Not a positive because it means we're sort of getting taxed at the full level. On the other hand, it should lessen our exposure To sort of surprise us like we had last year in Rochester, where that is the case where we had had those on those assets for a while. And then on the insurance front, I guess the good news for us is that everyone is affected by that.
Habitational insurance is just an area where the underwriters Did a poor job making money in most of the mid teens and they've really been trying to claw that back while also Looking at women's from a bunch of other really large losses kind of across the globe. So, if you have a piece of real estate where someone is sleeping And living for an entire 24 hour period as we do and hotels do and senior housing and so forth, Your insurance is going up because there's just been poor experience there from the insurance community.
Sure. I appreciate that detail. And then Just a final question from me. When you talk about the acquisition opportunities, I'm just curious, even though you may hesitate to commit capital to some of the urban markets, but I just wonder whether you're seeing any signs of The stress with developers who are struggling to achieve their lease up objectives in this market and potentially Those assets might be coming on the market or are available and what might be pretty attractive pricing if looked at from a long term perspective?
Yes, I do think, that is I think the areas of most opportunity are In the downtown markets and deals that are in lease up for certain are an area where I mean, we've seen several large Merchants who have large equity partners in multiple deals in multiple markets lower their exposure. And if that asset Was par if par was February 1, you might be able to buy that asset in the 93 to 97 territory today. And you're obviously taking more risk on the lease up. Another area where we've seen A similar theme is something that did get leased up, but its last 7 months of lease up have been the last 7 months. So they filled the asset, but they probably did it or We did it at rents that were lower than they expected.
So the cash flow stream that's in place that you're buying maybe there may be some Better opportunity for that to grow relatively quickly, once we get to firmer ground in terms of the recovery. And I mean, listen, we would absolutely pursue either of those types of scenarios and we're underwriting those things every day. We do believe in urban centers long term. It's just a question of how much risk are you getting paid for the risk? It's not Clear that you are at this point.
I think it's much clearer in the asset in the area or the example you just described of new asset In a market you understand, that feels a little bit better.
Okay, great. Thanks, guys.
Thanks, Jim.
Our next question comes from Buck Horne with Raymond James.
Hey, thanks. Good morning. You addressed many of my questions, especially insurance costs. I did have one point I was maybe I'm a little slow on picking up the clarification here, but just on the casualty loss in the quarter, just Help me understand, so that the 90, I guess, the 91,000 or so that flows through the income statement, but there's an add back In the core FFO for $545,000 just what was the difference between those two figures again?
Sure. So the $90,000 is really comprised of we had a little over $600,000 or maybe $700,000 almost $700,000 loss this year or this quarter. We also had a reversal, Change in the estimate from a prior quarter loss. So that's what shrinks that number in the current quarter and Why the net is $90,000 as far as the add back to core FFO, of that The loss the incident we had this quarter that we had a loss, some of that was a portion of that loss was the write off of An existing asset, so we have to do a complete roof replacement. So we write that asset off And that's a non cash transaction and we add that back to our core FFO.
Okay.
And then as we spin that yes, and then as we spin the replacement cost, you'll see that go through our
Buck, you need to know that somewhere Mike Dance and Jeff Kyra are smiling because we had a lot of discussion on that.
Good. Just wanted to clarify and make sure I understood all the moving parts. I appreciate that.
And the other cost Piece of
the equation for me was just the SG and A run rate. You guys have made a lot of progress controlling those expenses. Obviously, some of that related This post pandemic world we're in, I'm just curious, of the costs you kind of outlined that were Potentially going to come back to you next year. Is that going to affect the SG and A run rate where you're at now? Or how sustainable is this current SG
Yes, Buck. So as I mentioned in my comments, some of those are due to open positions. We do intend to fill those open positions as part of COVID and part of some cost constraints And just the difficulty in interviewing and evaluating the positions, we've held those open, but A lot of our team members have been pulling double weight, and so the plan would be That we would rehire those. Also, to a less extent in 2021, travel, conference, all those type of costs We'll return, but we don't think we'll go back to pre COVID levels in 2021 in those areas. So we're still going to get some savings there.
I mean, G and A has been a focus of ours from day 1. While the pandemic and some decisions we've made have contributed reducing those costs, As we don't see those returning to pre COVID levels In 2021, once you apply inflation factors, if that makes sense at all. Like if you took Our 2019 costs applied inflation factors to 2021. We do anticipate keeping some of those savings.
This concludes our question and answer session. And I would like to turn the call back over to Mark Decker for any closing remarks.
Thanks, Eileen. And thanks, everyone, for your time and interest in IRET. We wish everybody a safe and healthy holiday. And if you haven't already, get out and vote. Thanks so
much. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.