D/B/A Centerspace

Good morning and welcome to the CenterSpace second quarter 2021 earnings conference call. All participants will be in 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 star then one on your telephone keypad. To withdraw your question, please press star then two. Please note, this event is being recorded. I would now like to turn the conference over to Mark Decker, Chief Executive Officer. Please go ahead.

Thanks. Good morning, everyone. CenterSpace's Form 10-Q for the quarter ending June 30, 2021, was filed with the SEC yesterday after the market closed. Additionally, our earnings release and supplemental disclosure package have been posted to our website at centerspacehomes.com. and filed on Form 8-K. During the course of today's call, it's important to note that our remarks will include our business outlook and other forward-looking statements that are based on management's current views and assumptions. As a result, we cannot guarantee that any forward-looking statement will materialize, and you are cautioned not to place undue reliance on these forward-looking statements. Please refer to our earnings release for reconciliations of any non-GAAP information which may be discussed on today's call. With me this morning is Ann Olson, our Chief Operating Officer, and John Kirchman, our Chief Financial Officer. We're fortunate today to be in the housing business, reporting these results that were unimaginable 12 months ago. I want to start by extending my thanks and appreciation to our community and support teams that have displayed incredible resilience, creativity, and thoughtfulness since 2020 began. In addition to being in a housing market that turned on a dime, Our teams have been hard at work as we make considerable investments in our business. Starting late last year with the renaming and more heavily this year as we move from our legacy property management system to a far more enabling and modernized system that will allow us to get to the last phase of our Rise by Five campaign. So in every respect, the company that's reporting today is measurably better than the one that reported a year ago or even in June. The second quarter exceeded our own expectations as the recovery outstripped our forecast, leading to better rent growth, same-store NOI, and core FFO. The trends are continuing into the third quarter, and we are significantly raising our outlook for the balance of the year, from the previous midpoint of $3.60 of core FFO to $3.86, a 7% increase. Careful readers will note that the bottom of our range is now $3.78, which was our 2020 core FFO. We now believe we can grow Core FFO per share for the year. If we can deliver, we will grow our same store NOI and Core FFO in each of 2020 and 21. Strong validation of the quality of our business. And of course, the rental growth that we've captured and the loss to lease that's embedded in our portfolio sets us up well for 2022. On the investment side, we're nearing our closing with KMS Management. This is the 19-asset, 2,700-unit portfolio we announced in June, which is planned to occur on September 1st. KMS allows us to efficiently scale our business and double our portfolio in the Twin Cities, in particular in the B, or attainable price point, where we have enjoyed a lot of success as we upgrade the customer experience through more efficient operations and disciplined capital allocation, which leads to a housing product that residents will pay more for. The fact is this is an exceptional opportunity for our shareholders and the KMS partners who will become shareholders through their OP stake. As capital continues to flow into the sector at a torrid pace, pushing pricing and lowering returns, we found ourselves close but no cigar on numerous asset purchases over the past 12 months in Nashville and elsewhere. That being said, assuming the close of KMS, we will have added over half a billion of apartment homes, 225 million in Denver, and $375 million in the Twin Cities over the past year. We'll also have grown our permanent equity base by 25%, all while continuing to improve operations, quality of earnings, and the all-important per share outcomes. And with that, I'd like Ann to please give us an update on the quarter from an office perspective.

Of course. Thank you, Mark, and good morning. The trends that we saw in Q1 accelerated in the second quarter, providing us with great operating results and strong tailwinds heading into Q3. Our same-store portfolio realized a 1.2% increase in NOI over the second quarter of 2020, driven by a 3.2% increase in revenue over the same period. Our year-to-date revenues are up 1.9% over the same period in 2020, driving a 1.7% increase in year-to-date NOI. Our revenue performance is all about our lease rates, as our weighted average occupancy in the second quarter was 94.9% and has stayed consistently between 94.4 and 95.3% for the past six quarters. Our revenue per unit, which is the result of occupied rent times occupancy, continues to climb. Q2 saw a rise to $11.75, which is $50 more than this time last year, and $77 more than this time in 2019, a 7% increase over two years. Effective move-in rents for the second quarter in our same-store portfolio were 10% higher than prior lease, and renewal rates increased 5.6% for a blended rate increase in Q2 of 7.5%. Our leaders have been in our secondary markets. Our other Mountain West portfolio consisting of Rapid City, South Dakota and Billings, Montana realized a 14% increase in revenues over Q2 2020 while also achieving a decrease in expenses for a 26% increase in NOI when comparing the second quarter with the same period last year. While our secondary markets have seen significant gains, there are some lingering negative effects of the pandemic in our portfolio, specifically across Minnesota, where the eviction moratorium is still in place with limited exceptions. While other markets and states have returned to pre-pandemic collections levels, Minnesota is an outlier. Our forecast does anticipate this improving as policymakers work through the phase-out of the moratorium and rental assistance programs gain traction in providing relief to residents with past due accounts. Overall, our portfolio collections were 98% in the second quarter. Our Minneapolis and Denver markets, while turning the corner on new and renewal lease rates, are lagging our secondary markets in the recovery as these areas are still experiencing supply pressures, and with respect to our urban assets, demand has been stunted by the slow return to office for downtown office workers. In the whole of our Denver portfolio, Q2 replacement rents increased 7.9% and renewal increases of 3.7%. Across the Minneapolis market, replacement rents increased 3.6% and renewals increased 5.1% in Q2. Our strong year-to-date results have set the stage for success in 2021. We are 46% through our lease expirations with great rental increases, and we renewed 52% of our residents in Q2. We have 41% of our portfolio rolling in Q3, so the trends here give us a lot of optimism. The strong Q2 trend continued in our same-store portfolio into July with 13% average increases in replacement rents and 6.5% average renewal increases for a blended increase of 8%. Our target markets of Minneapolis and Denver are accelerating, with the Denver portfolio realizing 14% new lease growth and renewal growth of 5.4% in July. In the Minneapolis portfolio, July replacement rents increased 7.7% and renewals increased 4.8%. Both Denver and Minneapolis returned to historic traffic levels and patterns in July. COVID has not slowed our progress on our Rise by Five initiatives. Year-to-date through June 30th, our gross margin is 74.9% and our NOI margin is 59.1%. One component of these results is our value-add renovations. Through our value-add program, we seek to enhance our customer experience through common area and unit renovations that drive strong lease-over-lease growth. In the second quarter, we delivered 217 renovated units, spending approximately $3 million and averaging $196 per unit premium, achieving an approximate ROI of 17%. As Mark mentioned, we're also underway on the implementation of our new property management software system. We're live with our pilot communities and expect to be fully rolled out by year-end. The non-recurring expense related to this implementation in Q2 was $448,000, and we're expecting $740,000 in additional non-recurring expense by year end to finish the transition. These investments set the stage for further efficiency enhancements across the portfolio. The market acceleration we have seen in traffic, new lease rates, and continuing high retention are creating a busy summer for our teams. They're working hard to keep our customer experience top of mind and leverage our commitment to making great homes and vibrant communities into positive results. I'm grateful every day for their efforts, and now I'll ask John to discuss our overall financial results.