D/B/A Centerspace

and welcome to CenterSpace's first quarter 2021 earnings conference call. Today, all participants will be in a listen-only mode. Should you need assistance during today's call, please signal for a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. Please note that today's event is being recorded. I would now like to turn the conference over to Mr. Mark Decker, President and Chief Executive Officer. Please go ahead, sir.

Thank you, Chris, and good morning, everyone. Center Space's Form 10-Q for the quarter ended March 31, 2021, 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 will 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 and Form 10-Q and in other recent filings with the SEC. With respect to non-GAAP measures we used on this call, including pro forma measures, please refer to our earnings supplement for a reconciliation of 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. With me this morning is our Chief Operating Officer, Ann Olson, and our Chief Financial Officer, John Kirchman. We'll each provide some commentary and then open the call for Q&A. I'm excited to share our first quarter results for 2021, which reflect our business's strength and resilience, enabled by outstanding teamwork and discipline on the part of the CenterSpace team. I continue to marvel at and appreciate my colleagues, who are focused on taking care of our customers and each other. To all those from CenterSpace who are listening, many of whom are fellow owners of the business, thank you. It's also noteworthy to point out that on April 12th, CenterSpace paid its 200th consecutive quarterly dividend, 50 years of focusing on distributable cash flow. Here's to our investors and another 50 years of dividends. May they be paid quarterly and grow. As we discussed in our last call, it's been a humbling 18 months in the prediction and estimation business. And as most listeners here know, we raised our guidance significantly a few weeks ago by over 4% at the midpoint and notably taking the bottom end of our guidance above the previous midpoint. We did this to adjust for the recovery that's happily here sooner than we expected. We had based our guidance on two key assumptions. First, we wouldn't experience pricing power until the second half of the year after most of our leases were signed. And second, caution around our ability to maintain efficiencies that we gained in 2020 through our proactive innovations during COVID. Our goal with guidance is to be pragmatic and thoughtful, to transparently articulate our best estimate of a range of outcomes, but this period has been one of extreme uncertainty. Now back to the business. As John and Ann will discuss further, we had an outstanding first quarter, and that strength is carrying into Q2 as we see high traffic and demand buttressed by a white-hot housing market moving rents upwards. Our results are a testament to the capital allocation decisions we've made over the last few years and payoff on investments we've made and keep making in our people and technology. As we often say, it's about positioning the business with the best opportunity set and then capturing that opportunity with a great operating platform that sits atop a flexible balance sheet. In Q1, we demonstrated good progress. As disclosed in our press release, we are under contract and expect to close this month on the sale of six communities in Rochester for $60 million. Those proceeds, which will be all cash, will be applied to pay down our line of credit, closing out the funding of our January purchase of Union Point on a leverage neutral basis. This series of transactions exemplify what we love about our transformation. Sale of older, lower margin, lower growth assets, purchase new, higher margin, higher growth assets, finance with long-term unsecured debt. We've been doing this for four years. What's different and exciting is to see it get to the bottom line on a per share basis. This is the best quarter per share result we've produced as a team. We will maintain a significant presence in Rochester, and this sale does not reflect a lack of confidence in the market. Like other asset management decisions that result in dispositions, these sales allow us to optimize our portfolio in that market and overall. This has big positives for our team in terms of operating efficiently, and it helps us grow distributable cash flow. We look forward to reporting results in Rochester in the quarters to come, but we know this strategy has been effective in Bismarck, Grand Forks, and Minot, and you can see it in our same store results today, where we are growing NOI and operating margin well. Staying on the theme of transactions and the transaction market, we are reviewing opportunities primarily in the Twin Cities, Denver, and Nashville. We announced last June that Nashville was a focused market, and we don't own anything there yet. And now that market has gotten a lot of positive attention. Cap rates are low, and competition is high. Thematically, this is nothing new. These same comments could have been made about Denver before we got into that market, but of course, we didn't have the interruption of COVID in our early time there, and that is a factor. The reality is that multifamily is a great product and a great business. It's easily financeable and well supported by the federal government through Fannie and Freddie. For a variety of reasons that have been accelerated by the pandemic, markets like ours have seen an uptick in demand from the consumer side and an attendant uptick in interest from investors as marginal dollars flow from coastal markets. These are not secrets, but we know how to compete. We are focused, creative, and bring strong operating skills and an excellent cost of capital to any competitive situation. And we have been and will remain disciplined, never forgetting who we work for, our mission, and how we measure success. With that, Anne, can you please take us through the first quarter and your outlook on operations?

Thank you, Mark, and good morning. When we last talked in February, the weather was hovering around freezing across the Midwest, and the United States had less than 15% of the population vaccinated against COVID-19. As Mark mentioned, there was much uncertainty. As we sit today, the snow is gone, the sun is out, and we're approaching 50% vaccination rates. The optimism for our economy and for the resolution of the pandemic is palpable. And our confidence in our business has also improved as we have more clarity around leasing rates and expense projections, both of which were favorable for our first quarter of 2021. Occupancy across our portfolio is holding steady, and we realized 40 basis points of increased revenue compared to Q1 2020. Strong leasing trends coupled with a 90 basis point decrease in expenses resulted in a 1.4% increase in NOI for the first quarter compared to the same quarter 2020. Our average monthly revenue per occupied home increased 80 basis points in the first quarter over Q1 2020, and our overall revenue per unit increased from 1,119 in Q1 2020 to 1,133 for Q1 2021. Our renewal retention remains strong, And our first quarter collections were 99.1% of expected residential revenue, which compares to pre-pandemic Q1 2020 of 99.8%. We continue to see strong revenue performance in our secondary markets, where there were less COVID impacts to the economy and there continues to be very little, if any, supply. Revenues in Billings, Rapid City, Omaha, and across our North Dakota markets all increased between 3% and 6.5% over Q1 2020. If we bifurcated our portfolio into secondary markets, coupled with suburban assets in our core markets of Minneapolis and Denver, and compared them to our five urban assets that were harder hit by COVID impacts and where there continues to be supply pressures, we would see positive trends in both. Our five urban assets located in Minneapolis and Denver, which contribute approximately 14% of our overall NOI, showed improvement in lease over lease rates for the quarter. starting January at negative 7.9% and improving to negative 3.6% in March. Those assets also experienced flat renewal rates. In comparison, our secondary markets combined with suburban assets showed the potential of increased rates with an average lease-over-lease increase for Q1 of 2.6%, but marked showed lease-over-lease rate increases of 5.9%. Our non-urban portfolio realized first quarter renewal increases of 4.6%. In the first quarter, we achieved renewal increases of over 5% on average in St. Cloud, Rochester, Grand Forks, Bismarck, and Billings. This demonstrates the strength of our suburban portfolio and the balance that our secondary markets have brought to our results. Our preliminary April results show a continuation of this trend, with our same-store replacement rent changes continuing to increase over March and renewal rates remaining strong. This is great news as we're heading into our heavy leasing season with 32% of our portfolio leases expiring in the second quarter. Last quarter, we discussed our desire to leverage operating efficiencies and changes that were made during 2020 that helped us reduce costs. Our 2021 first quarter controllable expenses decreased 2% compared to first quarter 2020. We are capturing operating efficiencies from resident self-service and other measures put into place during 2020. Our Rise by Five initiatives for 2021 are well underway, as we expect to see continued benefits from the changeover of our RUBS provider and as we gain momentum on our technology implementations. During the first quarter, we deployed several new collaborative tools and enhancements to our service and knowledge centers. The costs associated with our technology implementations were $413,000 in the first quarter, and we expect to invest approximately 1.1 million in 2021 as we change over our base property management software systems to enhance efficiencies and reporting. We are right on track with our value-add renovation program through the first quarter, and we'll see a significant uptick in the number of homes renovated during the second and third quarters. We completed 90 homes at an average premium of 187 per month. We anticipate renovating approximately 725 homes in 2021, And between unit renovations and common area enhancements, anticipate our full-year investment to be between $15 and $20 million. With warming weather and positive financial results across our portfolio, we are looking forward to leveraging our success into the summer and having a little more fun than this time last year. Our business is about people, our residents, our team, and our investors. And I know our teams are looking forward to opportunities to connect as our nation reopens. Now I'll ask John to discuss our overall financial results.

Thank you, Anne. Last night, we reported core FFO for the quarter ending March 31st, 2021 of 95 cents per share, an increase of 5 cents or 5.6% from the first quarter of 2020. The increase is attributed primarily to higher NOI offset by increased interest expense and a higher share count. Looking at our general administrative expenses, Total G&A was $3.9 million for the quarter, a $500,000 or 14% increase for the same quarter in 2020. The increase in G&A is due to non-recurring technology implementation costs, as well as higher long-term incentive compensation costs. Property management expense of $1.8 million increased 14% or $210,000 from the first quarter of 2020. The increase comes from non-recurring tech implementation costs, as well as an increase in compensation as a result of filling open positions. Interest expense of $7.2 million increased 4.6% or $320,000 from the same period of the prior year. While our weighted average interest rates have declined over the year, the increase in expense is attributed to the expansion of our total capital base which includes higher levels of equity and debt. Moving to capital expenditures, as presented on page S13 of our supplemental, same-store CapEx was $1.5 million for the first quarter of 2021, which is in line with the first quarter of 2020. For the year, same-store CapEx spend is expected to be approximately $900 to $1,000 per unit. Q1 value-add spend of $2.6 million increased $600,000 from the first quarter of 2020 as we continue to ramp up our value-add activities. Turning to our balance sheet, as of March 31st, we had $79 million of total liquidity on our balance sheet, consisting of $68 million available under our line of credit and $11 million in cash and cash equivalents. During the first quarter, we were able to expand our capital base by issuing 164,000 common shares under our ATM program for net proceeds of approximately $12 million. As mentioned earlier, during the second quarter, we expect to close on the disposition of six assets in Rochester for proceeds of approximately $60 million. These proceeds, when received, will be used to reduce our outstanding line of credit balance and increase liquidity. In January, we amended and expanded our shelf agreement with Prudential to increase the aggregate amount available from $150 million to $225 million, and issued $50 million in unsecured senior notes due June 6, 2030, at a rate of 2.7%. Under the agreement, we have $50 million of remaining capacity. We believe that this financing demonstrates our ability to access all forms of capital and obtain investment-grade pricing levels. In April, we issued a release announcing our revised financial outlook for 2021, which is presented in S14 and S15 of the supplemental. With strong first quarter results, acceleration of rent growth, and lower-than-expected expense growth, We increased our full year core FFO per share midpoint by 4.2% to $3.60. We have started the year with strong Q1 results, improving fundamentals, and an improved financial outlook for the rest of the year. It has been a strong start to the year, and I would like to thank our dedicated team for their work to make better every day. With that, I will turn it back over to the operator for your questions.

We will now begin the question and answer session. To ask a question, you may press star then one on your touch tone phone. If you are using a speaker phone, please pick up your handset before pressing the keys. If at any time your question has been addressed and you would like to withdraw it, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question comes from Gaurav Mehta with National Securities. Please go ahead.

Thanks. Good morning. Morning, Gaurav. First question on transactions. I was hoping if you could provide more color on why you decided to sell those six assets in Rochester, how was the buyer pool for those assets, and maybe some comments on pricing and cap rates.

Sure. Thanks. We decided to sell them because we felt like we had opportunities to deploy the capital and better assets in better growth markets. The Rochester portfolio is, we have a great portfolio there. We have a large concentration in a very well located sub-market that is on the Mayo Clinic's bus line and has some pretty high rents. The assets we sold were either considerably older and had, in our judgment, a lot of CapEx in front of them. And then we also sold some townhome products. It was a little bit, it just was kind of off the beaten path and tough for our staff to really manage them efficiently. And the buyer pool was fantastic. We had several, I don't know how many CAs we signed, but we had three or four very strong competitors in the end as we got to kind of best and final. The assets sold for a sub-five cap, so we felt great about it. I think what we saw in terms of CapEx they saw as opportunity. I'm sure they'll be right, but we had, in our judgment, better things to do with the capital.

Okay. The second question on your same store revenue guidance for 2021. I was hoping we should provide more color on which markets are you seeing largest improvements? I know you talked about suburbs and secondary markets outperforming urban, but I guess in terms of rate of change, are you still seeing more better improvements in suburbs or are you seeing improvements in your urban portfolio as well?

Yeah, I'll ask Anne. I made the comment on an investor call a few weeks ago that Billings is the best apartment market in the world right now, which was half kidding. But Anne, maybe you could talk about that.

Yeah, I think we're seeing improvement in both the urban and suburban portfolio. We're seeing a lot of strength in our secondary markets, so markets like Billings and Rapid City, which in our supplemental are categorized as kind of the other markets. Omaha, Nebraska has been particularly strong. Across North Dakota, you know, those markets, the hallmark of those markets is really no supply. They have very little, if any, supply, and that's been a pattern for a couple of years. They also had much less economic impact from the COVID pandemic in those secondary markets. So we're seeing really strong results there. We are seeing really great improvement in our urban assets. So You know, downtown Minneapolis, downtown Denver, the lease rates are really improving and kind of rebounding. We feel like we're well past the bottom there. Concessions are starting to come in a little bit. So those were highly concession markets, and we're seeing that really taper off. So we have a lot of optimism across the entire portfolio.

Great. And maybe lastly, I think on the last call you talked about expectation of maybe 70 basis points declined in occupancy in 2021, and now you guys are looking to focus on rent growth. With the guidance change, are you still expecting to focus on rent in lieu of occupancy in 2021?

Yeah, I think our job, our goal when we look at revenue management is really to optimize the revenue overall. So with a large lease expiration kind of hurdle in front of us in Q2 and 3 and the lease rates, the lease over lease rates improving the way they have been, we really will push those lease rates to get the highest lease rate and give up some occupancy to do that. So we think we'll see a little bit of a dip as we see the rising lease rates, and that's pretty natural in our portfolio, particularly given the expiration curve.

Okay, thank you.

The next question is from Rob Stevenson with Jani.

Thank you. Good morning. What does this leave you guys in Rochester in terms of number of assets and number of units going forward?

Great question. I'm going to go off the top of my head and tell you something like 1,100, 1,200 units and properties. It's 1,200 and what, Emily? Yeah, 1,200 units.

Yeah, about six properties.

Something like five or six properties?

Yeah. That's right.

Okay. And, I mean, from your standpoint, is this a market that you'll continue to add to? Is this basically sort of, you know, you're happy to maintain what you have going, what you'll wind up having going forward, and maybe, you know, look to trim some of that at some point in the future? How do you think about Rochester strategically longer term?

Yeah, I mean, we have a fantastic team down there. We've got a great regional, it is a market that is anchored by one of the most innovative healthcare providers in the world. And I mean, that's not an exaggeration, the Mayo Clinic. So, you know, we like the market because it is a great market to rent. We have considerable value-add opportunities there in the portfolio that we have remaining. There have been some very strong product edition so the top of the world there in rents was just below two bucks two or three years ago today there's some very compelling new product that's very well located you know type one construction concrete high-rise where rents are into the mid twos there's even some studios that are in the three bucks a foot range so that's great news for us because that that lifts the market up and we can we can draft behind that so we like Rochester long-term You know, we'll always be, I guess, mercenary about our capital allocation, but we're committed to that market. We believe in it, and we're very happy to own the portfolio as we own it now. Okay. It's just much more efficient. I mean, what we've seen, Rod, just to expand, which you didn't ask me to, but I'm going to anyway, because I have a bet on who can make the call the longest. What we've seen is when we do these selective dispositions, You know, what our team tells us afterwards, I mean, when we tell them we're doing it, they're not happy. And then we do it, and they're like, God, you know, that was great because I was spending so much time on that older asset or whatever the case may be. And so it really helps us run things better.

Okay. And then, I mean, from the standpoint of the, you know, the trying to get into Nashville, I mean, how long do you guys sit here and look at acquisitions versus, trying to find some partner and do a development that even if it's somewhere between a normal development return and an acquisition that at least it starts getting you into that market. If you really want to be in that market longer term, I mean, how creative, you know, do you guys get, or is it just need to be for initial entry into Nashville just needs to be of a fully functioning asset at this point?

Oh, I'd say we're willing to be creative, uh, there or anywhere else but i mean you know uh it's got to be a developer we have confidence in it's got to be a location we really like i mean as we say to developers we're we're alignment freaks not control freaks so if we can find a good site and we can uh feel good about our counterparty um we're we're absolutely open-minded to that and listen i think the other uh fact is with uh between covet and some pretty significant tax The market really there has been pretty low volume, and we expect there to be more. Now, there's a lot of dollars there, so that may or may not help, but we expect to see more volume there in the back half of the year than we've seen for the last 12 months.

Okay. And so something along the lines of a Mez loan-to-own transaction wouldn't be off the table at this point?

No. If you've got any ideas, send them our way, Rob. We're happy to do that.

And then last one for me, John, when do you work on the 2022 debt expirations? And what are you thinking now? I mean, that's awfully low rate. Part of that, I guess, is the line. But I mean, is it that's not exactly five or six percent yielding debt there? What are you thinking the tradeoff winds up being when you do get that termed out and refinanced? Is it basically sort of flattish rate wise? Are you actually looking at an increase rate wise?

Yeah, so you are right, Rob, on that, that that's primarily the line that you're seeing. And, you know, we are in the market talking to banks, and really what we're seeing now are spreads on pricing that are pretty consistent with what we have now. So I would not expect that that facility to get refinanced at a significantly different rate than we have now.

And then what about the other sort of $80-some million, a lot of that which is swapped from a rates standpoint?

Yeah, so on those term loans, we have flexibility with those as far as the timing coming up. But, you know, we just price on the private placement market, which is a more attractive market than that bank debt that the term loans are on. You know, we just priced some in January, and we feel pretty good about the pricing today of where, you know, 10-year money is in the private placement market relative to that term debt. So we feel good about being able to get some upside and refinancing that. Now, rates are, you know, can do a lot between now and when we refinance.

Okay. Thanks, guys. Appreciate it.

Thanks. The next question comes from Daniel Santos with Piper Sandler.

Hey, good morning. Thanks for taking my question. So my first question is kind of going back to the staffing deficiencies, Anne, that you talked about earlier. Could you maybe walk us through some more specifics on what those moves to virtual services have been, and do you feel like you're sort of able to take advantage of these staffing efficiencies more than peers would because you're not necessarily an owner of a product and therefore don't have to offer such high touch service? Or maybe just offer some thoughts on that.

Yeah, great question. So a few of the things that we implemented in 2020, which I think industry-wide really were adopted, were a lot of virtual leasing, much more information on our website, fewer office hours, And therefore, more correspondence with residents via email, phone, or through self-service portals, more online payments. And those things really have evolved into 2021 in a way that's been great for our staff. So while our offices are now open, there is kind of less traffic there. And our prospective residents are able to get much further along in the process. than they had been previously with respect to leasing. So the time efficiency really comes from the people who come to tour in person, if they're interested in an in-person tour, are very interested in the property. So, you know, we have some secondary markets, as you know, across North Dakota. It might not have been uncommon in the past for someone to still look for an apartment by driving around and pulling up and asking to see apartments. We don't get as many of those opportunities. people coming anymore, and people who are coming usually now have an appointment, have done a lot of work online, have probably had their application in. And we did a lot of 3D videos. In fact, well before 2020, we had started uploading virtual floor plans that you could move around. So about halfway through last year, I think we were all the way done with what's called Matterport videos, which are where you can kind of manipulate the 3D version of floor plans online. So we were a little bit ahead there and really, you know, I think the move towards self-service, one of the things that we think about with respect to our resident experience is, you know, you can't just continue to do everything the way you had done before. And 2021 or 2020 really pushed us to think differently and to meet the resident where they are. And our residents are, you know, a younger generation and also, you know, had their own interruptions from the pandemic. and their own desires. And so, you know, we're really trying to find that space where the resident, where we can make it easiest on the resident and communicate with them in the way that they want to. That's much more mobile. It's much more Internet-based. And, you know, they don't want to see people as much as they used to in the past. So I think as we move forward, we're going to try to leverage those capabilities and efficiencies that we put in place there to, you know, the goal is to have overall either reductions in staffing, but really what we're seeing right now is just more efficient time so that we can spend more time on work orders, resident communication, enhancing the resident experience, and focus on our renewals, which help us drive the rates.

Yeah, I mean, Daniel, just to add to that, if you consider a market like Denver where you have every large institutional owner, every merchant builder, lots of new A's, It's very hard to differentiate yourself on a technology package. If you get to some of our smaller markets, we really are frequently the tip of the spear there because we're bringing in those practices, and that's been the case with revenue management, with rubs, with a bunch of these virtual leasing and things like that. It's not that the people in those markets aren't smart or hardworking or talented or But, you know, they may not have needed to do it and they may not have decided to make those investments in technology. So, I mean, it's really on the margin. But, I mean, this is a game that gets played on the margin. So, you know, we think that does help us a little bit, you know, be a little bit more tech friendly to those customers. And, you know, that's a benefit.

Got it. That is very helpful. My next question is, you know, on inflation, which seems to be on everyone's mind, both in terms of materials and labor. I mean, as a team, you don't do a ton of ground-up development, though it sounds like you might be more open to it in Nashville. But maybe talk a bit about, you know, how you see inflation playing out in your markets and how that might impact your strategy.

Yeah. I mean, we are definitely – listen, we aren't developers, but we talk to them a lot because we endeavor to potentially finance them. And we are absolutely hearing what I think you heard thematically on the – I listened to the same calls I suspect you did. I mean, for sure, there are some real – supply chain pressures. There's some real materials cost pressures that are affecting development. So, you know, we've got to watchful eye on that. I mean, that's one of the reasons we love the apartment business is, you know, we get a chance to reset our rents every year. That hasn't been fun for the last 12 months. It might become more fun over the next, you know, 24 to 48 months. And for sure, what we're seeing, I mean, I think One of the comments that we've heard a lot is that we have people who are moving out to buy homes. Well, if anyone knows anyone who's tried to buy a home recently, you better have your cash in a pretty rip in escalation clause because it's really vibrant out there. And so that's probably keeping people with us a little bit longer.

Perfect, thank you. And congrats on a great quarter. Thanks, Daniel.

The next question is from Amanda Switzer with Baird.

Thanks. Good morning, guys. Going back to capital allocation, your guidance now assumes lower expected accretion from investments in capital markets activity. Is that a comment or a reduction on changing cap rate assumptions for your potential buys and sells, or is there another variable in there?

Yeah, good morning, Amanda.

John will hit that. Sure. Good morning, Amanda. That's a reflection of the union point acquisition sliding into the different side of the ledger where we've actually executed on it. That NOI from union point, which would have been in that net accretion line, is now in our NOI forecast number. What you're seeing on the net accretion being negative is really the dilution from the Rochester disposition netting against the other activities we're guiding on. But that's really the driver as far as flipping that to a negative from a positive is union point coming out and Rochester being left there alone.

That's helpful. And then higher level untapped allocation. Can you talk more about how you're thinking about your cost of equity today? just relative to declining cap rates in your markets. Have you changed your hurdle price for equity issuances at all?

Yeah. Well, we appreciate that teaser in your note, Amanda. I mean, we think about it every day, and we think about it on a long-term and a short-term and a spot basis and a relative basis. And I guess, listen, we feel like we've done a lot of things to help engineer a favorable cost of capital. And I would say, you know, when we think about this and consider it kind of over the last couple years, our early years of this transformation were really defined by the need to fund things with our own assets, so funding purchases with asset sales. And I would say that episodically, we have had access to equity capital that we like, and very occasionally we've had access to equity that we love. So, you know, we're I guess I'll say my perspective is, which I think the team shares, is that the investment community is very focused on FFO and AFFO for share. And then there is a subgroup there that's very focused on NAV. And that group, frankly, is shrinking to some extent. I mean, that was one in, you know, it was 45% of the world 15 years ago, and I think it's 15% of the world today. But, you know, we've got to be mindful of both. You know, when we sell equity as we did last quarter at, what was it, 72.50 or in the low 70s, I mean, we do that because we think we can take a little bit of NAV dilution and grow our cash flow for sharing and eventually and long-term grow the business in a manner that meets both needs. So, you know, that's a long-winded answer, probably more detailed than you wanted, but You know, we're constantly walking the line between what is a great NAV play and what is a good earnings play. The two obviously live together over time. But, you know, if you want to buy something in Nashville at a three and three quarter cap rate, that could be a great real estate decision that looks terrible in your FFO for the next three to six quarters. And, you know, those are the tradeoffs we have to make. So we're we're just trying to stay very disciplined there. We have a lot of discipline, I think, at our own table, and I can tell you without any equivocation that we have that discipline at the board level. So, you know, it's a constant back and forth on, you know, what's the best thing? And, you know, over time, we've talked about sort of the three things we focus on, markets, metrics, leverage, and, you know, what are the priorities? I mean, today, as has been the case for, I would say, the last... you know, 12 to 18 months. It's really markets, metrics, and leverage. So people say, well, how do you feel about your leverage? We feel fine about it. I mean, we're really focused on trying to expand that market presence and do it in a way that helps where we can continue to grow our per share metrics, which is one of the reasons I'm so happy about this quarter because this is our best per share first quarter as a team.

Yeah. I'll just add there that, you know, the ATM is We view that as a very efficient way to get off small capital. The cost is very low on there, so if we're selling on the ATM a little below NAV, we're doing it very efficiently for a great cost as opposed to relative to an overnight going off at our NAV, but then having to take a much larger commission. as well as a discount to move it.

Yeah, that's an excellent thought, and that's right on. So the way we think about it is, you know, if the ATM is a point and a half of friction and no discount, you know, a fully marketed equity deal or forward with, you know, options and all that sort of stuff is going to be kind of somewhere in the 6% to 8% all-in cost range. So, you know, that's how we get our mind around it, Amanda. Are we on the direction that you're asking about, or?

Yeah, no, that makes perfect sense, and I appreciate all your thoughts, and you clearly have a lot that goes into it. Last one for me, just have you seen an increase in permits in some of those stronger secondary markets following that strength? Are there any regulatory constraints, either from a local municipality perspective, that's driving some of that lower supply?

Yeah, I think – We haven't seen anything that's particularly notable, Amanda. I mean, I think what is true nationally is true in these submarkets, which is permits haven't dropped a ton. We'll see what happens with materials costs and rents. But markets like Nashville have a lot of supply. Denver has a lot of supply. Minnie is coming off of a couple years of reasonably record supply. I mean, it's been the most since... I think 1986. But, you know, there's nothing dramatic in any of those markets that is new or different or not well understood.

And with respect to the secondary markets, you know, we haven't seen any increase in permitting there. And there isn't any, you know, there are no kind of physical barriers of entry where, you know, maybe Billings, which is bordered by a large river and some mountains has some physical barriers there. But we have seen a really big increase kind of across the country, which won't surprise anybody, of interested buyers. So we do get calls on those secondary market portfolios. And as Mark indicated, our Rochester portfolio had a very deep and strong bidding pool. So we haven't seen any increase in permits in those secondary markets as of yet. But with more people looking to buy there, it may lead to that.

Got it. Thanks. Appreciate all the time.

Again, if you do have a question, please press star then one on your touchtone phone. The next question comes from Buck Horn with Raymond James and Associates.

Hey, good morning, guys. Quick one. In terms of technology costs, just looking at the guidance here, it looks like you're expecting another $600,000 or $700,000 to be spent in terms of just kind of, I guess, one-time technology. How should we think about the quarterly distribution of those costs? Will it still be more front-end loaded, or how does that go forward, you know, the rest of the quarters of the year?

Yeah, I do think it's more front-end loaded. So we're really in the implementation right now, and I would say by the third quarter it will – or by the fourth quarter it will really be tapering off. So I would – My estimate is that we will have spent most of that money in the next couple quarters with very little left in the fourth.

Got it. That's helpful. Thank you. And second question, just given how competitive the market is in Nashville and some other places, I'm just wondering if you've thought about some other potential growth markets, just the emergence of new technology hubs in Mountain West areas like Boise or Salt Lake. Do those types of markets become more appealing or on your radar screen at this point?

Yeah, I mean, we like those markets. In Salt Lake in particular, I saw MAA went there in their earnings call, which I think is really smart. You know, for us to get critical mass there, it's four to six assets in our judgment. And, you know, you have to capture a lot of what comes for sale. So development would be ideal. To answer your bigger question, do we look at other markets? Yes, we consider other markets. I would say we're opportunistically interested in other markets. There is a list of 10 markets that start with Nashville and then have nine other names on them. And we're opportunistic with respect to those markets. But for now, we're going to stay focused in Nashville for all the reasons that led us there in the first place. And, you know, if something changes, you know, you'll be one of the first to know.

Great.

Thank you. Thanks, Buck.

At this time, we are showing no further questioners in the queue, and this concludes the question and answer session. I would now like to turn the conference back over to Mark Decker for any closing remarks.

Thanks, Chris. I think from our perspective, we're happy for everyone's interest, and we look forward to talking to you next quarter, and we'll be at NARIT taking meetings if anyone wants to talk to us there. Thanks very much, everybody.

The conference is now concluded. Thank you for attending today's presentation, and you may now