D/B/A Centerspace

Good day and welcome to the CenterSpace fourth quarter earnings conference call. All participants will be in a listen-only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press the star then one. Please note that this event is being recorded. I would now like to turn the conference over to Mark Decker, Chief Executive Officer. Please go ahead, sir.

Thank you, Operator. And good morning, everyone. As you may know, we are now doing business as CenterSpace and trading on the New York Stock Exchange as CSR. The Form 10-K for the full year 2020 was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted on our website at centerspacehomes.com and filed yesterday on Form 8-K. Before we begin our remarks this morning, I need to remind you that during the call, we will discuss our business outlook and we'll be making certain forward-looking statements about future events based on current expectations and assumptions. These statements are subject to risks and uncertainties discussed in our release in Form 10-K and in other recent filings with the SEC. With respect to non-GAAP measures we use on this call, including pro forma measures, please refer to our earnings supplement for reconciliation to GAAP. The reasons management uses these non-GAAP measures and the assumptions used with respect to any pro forma measures and their inherent limitations. Any forward-looking statements made on today's call represent management's current opinions and the company assumes no obligation to update or supplement these statements that become untrue due to subsequent events. I'm Mark Decker, CenterSpace's CEO, and with me this morning is Ann Olson, our Chief Operating Officer, and John Kirchman, our Chief Financial Officer. I'll start with a quick explanation about the name change. Lots of people have asked, and the rationale was simple. We changed our business. We were a business that for 50 years was called Investors Real Estate Trust, or IRET, or IRET, or IREIT, and we built a heritage that we're proud of. However, in addition to having a name few could agree on, that business was one of a diversified landlord that owned apartments, among many other things. Today, we are CenterSpace, and we are taking the 50 years of proud heritage with us, but we are now a customer and team-centric housing company. In fact, we've been CenterSpace for a few years, and so the name change was a good opportunity to close the chapter on our transition and rally around our mission with a name we felt passionate about. And as I've joked to anyone who'll listen, no one needs any coaching on how to say or spell CenterSpace. Simplicity is powerful, and on balance, we're confident confident this helps us attract talent, which is so important. We have this name approved and ready in May, but held back in light of COVID, social unrest, and all the other pain and difficulty of 2020. As the year came to a close, however, it felt great to end with a real positive. I know it resonated with our team, and they more than earned something fun after a banner year. We kept our customers and team safe, went above and beyond to be flexible and proactive, and delivered stellar financial results. I couldn't be more honored to be a part of this team. I'm especially excited that there are nearly 100 team members that are new owners of our business following last week's inaugural leadership conference, and I'm sure a few are on this call. Congrats to those fellow owners and partners. I know that people are eager to talk about the future, as I am, but I'd like to take a minute to recall some of last year's highlights. because 2020 was a year where our company demonstrated real resilience and continued improvement. In 2020, CenterSpace was added to the S&P small cap 600. We grew our same-store NOI 1.8%, which is among the best of the public apartment companies, and we grew our year-over-year core FFO per share by 1.6%. We exited some of our oldest and most inefficient assets at excellent prices and added high-quality assets in Minneapolis and Denver, growing our expected exposure to these focus markets for 2021 to over 40% of our net operating income. We also completed $14 million of value add, exceeding our 2020 budget while hitting our underwriting targets. And lastly, while it closed in early January, the work was done in 2020 to allow us to add another asset, Union Point, in Longmont, Colorado, bringing us to five assets in Denver. We believe Denver remains well positioned to benefit from shifts in how we all live and work now and in the future. In connection with UnionPoint, we priced nine and a half year money at 2.7%, a spread of 170 basis points over the 10 year, and among the best executions for a direct private placement across the real estate spectrum, which is a strong endorsement of the progress we continue to make as a corporate credit. All of this occurred against the backdrop of COVID. with a lean team that made sacrifices all year long to make great homes for our residents and investors' capital, which takes us to the present. In 2021, we forecast lower revenue growth as the pandemic chills our pricing power through the fall and we return to normal expense levels. In this time of transition for the economy from lockdown to a return to some normalcy, we are going to invest and position our company for the future. Most importantly, we're embarking this year on work that will enable us to revamp our operating systems as we build on our capabilities to codify, build accountability, and consistently deliver a great customer experience as efficiently as possible. We believe the investments we make now will bear fruit as we continue to grow and as fundamentals improve, which we expect to occur this fall and beyond. We may prove conservative in our view of revenues. I hope that's the case but it's out of our control. And, of course, the upside scenario is always the easiest one to figure out. The downside case is the one we need to prepare for. We are setting the table for the years ahead, and we're confident that our operations, balance sheet, and capital allocation discipline will position us well, and the investments will be worth it. We've talked a lot over the years about our North Star being the growth of distributable cash flow. And while the guidance that John's going to speak to in a moment produces lower year-over-year core FFOs, It amounts to roughly flat distributable cash flow per share and positions us for growth in 22 and beyond, which we believe is the most important thing. Lastly, I'd like to offer some brief thoughts on the opportunities and our outlook for the investment market. As you see, we expect modest acquisitions funded with capital recycled from dispositions and our ATM. We'd certainly like to be more active if possible, and as always, our motivations are improving our portfolio's quality and as measured by geography, margins, and growth profile. The rest of the story is that we need to make investments that are accretive to cash flow per share and neutral or better to our balance sheet metrics. Pricing continues to favor sellers as capital seeks increasing exposure to sheds and beds. We always have a robust pipeline of opportunities, and we find that today Nashville is the most aggressively priced, with Minneapolis and Denver just behind and in relative parity to one another. This pricing is driven by a combination of factors, most notably market size and liquidity, growth assumptions, and in all cases, less product for sale in larger coastal markets, which puts more marginal dollars in our markets. The cost of debt capital also continues to accommodate long-term investors' bullishness, and apartments nationally remain at historic wides to the tenure. I'm happy to discuss more of that in Q&A, but for now, I'd like to turn things over to our Chief Operating Officer, Ann Olson.

Thank you, Mark, and good morning. Like most people, our team was happy to put 2020 behind us and is cautiously looking forward to the opportunities 2021 will bring. 2020 was a year that was disrupted by working from home, quarantine, regulations, closures, cautious reopenings, cleaning and more cleaning, and a myriad of operational changes from virtual leasing to facilitating rental assistance for our residents financially impacted by the pandemic. In spite of that, we were able to perform well by focusing on the basics of the business, holding occupancy steady to optimize our revenue, closely monitoring our expenses, and focusing on collections. In the fourth quarter, our weighted average occupancy increased 60 basis points over the third quarter 2020 and 1% over fourth quarter 2019. Our weighted average occupancy in 2020 of 98% was a driver of our 2.1% revenue increase for 2020 over 2019, and together with particularly strong revenue performance in our billings in Rapid City markets, as well as in Omaha and across North Dakota. As we saw developing over the course of the year, the headline of our portfolio performance was our smaller markets. We saw significant year-over-year NOI gains in these markets, while our larger markets like Minneapolis and Denver, which faced more regulation, longer eviction moratoriums, and were impacted by higher unemployment rates, were able to maintain strong occupancy but saw rental rates decline. In the fourth quarter, we realized a blended decrease of 70 basis points on new and renewal leases. Just 16% of our leases expired in the fourth quarter, which highlights the large opportunity we have for the 2021 leasing season. In 2020, we increased our disclosure as we closely monitored collections and bad debt. For the fourth quarter, we realized strong collections with 98.6% of expected residential revenue collected. January collections maintained that trend with 98.7% expected rental revenue collected. Our fourth quarter bad debt was 1.4% of revenue compared to 30 basis points in the same period in 2019. In 2020, we deferred a total of $301,000 of rental revenue and currently $56,000 of that deferred amount remains outstanding. Less than 4% of our portfolio sought assistance through our rent deferment program in 2020, And as eviction moratoriums burn off across our portfolio, we expect to see our bad debt returning to historical norms by the end of 2021. Despite the negative impact the pandemic had on our revenues, we were able to hold our same-store NOI margin to a decline of just 20 basis points in 2020 compared to 2019. While our NOI margin was significantly impacted by our non-controllable expenses, particularly taxes and insurance, our growth margin increased year-over-year by 1.4% to 73.9%. As we look ahead to 2021, we are expecting wage pressure, higher health care, and increasing insurance costs to negatively affect our expenses. Coupled with continued uncertainty about revenue growth, our outlook reflects the challenges we face. But there are bright spots. Momentum in our value-add, strong occupancy, increasing traffic levels year-over-year, and the balance we have in our portfolio across small and large markets and across product types. We will do what we can to continue our Rise by Five efforts that have been characterized by revenue optimization, expense control, and strategic disposition and acquisition activity. In the fourth quarter, one of our initiatives drove a one-time increase in our revenue of $450,000 as we shortened our RUBS billing cycle in connection with a conversion to a new RUBS provider. Our value-add common area and unit renovations programs also had a strong fourth quarter. With 81 units renovated and significant progress on common area renovations, we are seeing the increased revenue contribute to our positive results in Minneapolis and Omaha. Particularly in Minneapolis, the renovation projects at two of our suburban assets were able to offset the declining rates we saw in our urban portfolio. Looking ahead to 2021, we are expecting to renovate approximately 725 units across our portfolio. We're going to leverage what we learned in 2020 as we seek to maintain and expand the efficiencies that we found. We're going to live our mantra of better every day by striving for constant improvement and through the little things we do each day that enhance the lives of our residents and fellow team members. Our new normal is going to be better every day, and while our economic forecast contains a lot of uncertainty, we have demonstrated that we will control what we can for the best possible outcome given the circumstances we face. I'm continually inspired by and grateful for our teams across our regions and in our support offices. And now I'll ask John to discuss our overall financial results.