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spk08: 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.
spk05: 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.
spk01: 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.
spk10: Thank you, Ann. Last night, we reported Core FFO for the quarter ending June 30, 2021 of $0.98 per share, an increase of $0.07 or 7.7% from the second 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, for the six months into June 30, 2021, G&A expenses increased $1.1 million, or 16%, to $7.7 million from the same period of the prior year. The increase is primarily attributed to increases of $500,000 in long-term performance-based compensation and $500,000 in non-recurring technology implementation initiatives. The increase in long-term incentive compensation is driven by the timing of the performance grants from the prior year occurring in May of 2020 versus January 2021 for the current year, as well as the 2020 plan utilizing stock options for performance-based compensation, which reduced the accounting cost of the 2020 grants by approximately 30%. Property management expenses of $3.9 million increased 34% or $1 million compared to $2.9 million for the same period in the prior year. The increase comes from $200,000 of recurring technology costs related to newly implemented initiatives and $300,000 of compensation costs as a result of filling positions that had been left open since 2020, as well as higher healthcare costs in 2021. In addition, year-to-date property management expense includes non-recurring tech implementation costs of $400,000. Moving to capital expenditures, full-year same-store CapEx spend is expected to be $875 to $925 per unit. Our same-store CapEx forecast has been reduced from earlier guidance due to the impact of dispositions. During the second quarter, we fully utilized our ATM, issuing 731,000 common shares for net proceeds of $55 million. These proceeds were used to fund a portion of the Union Point acquisition and draws under our mezzanine lending program, as well as anticipated transaction costs, prepayment fees, and capital related to the KMS transaction. In the course of normal business, we will file for a new ATM later this month. In conjunction with our earnings release, we revised our financial outlook for 2021, which is presented in S16 of the supplemental. With strong quarterly results fueled by accelerated rent growth, we increased our full year core FFO per share midpoint by 7% to $3.86. We have also increased our full-year guidance on same-store revenues and NOI growth. Same-store expense growth has increased from prior guidance due to the impact of dispositions. The year has been positive, with strong year-to-date results, improving fundamentals, and an improved financial outlook for the rest of the year. I would like to thank our dedicated team for their work to make better every days for our residents And with that, I will turn it back over to the operator for questions.
spk08: We will now begin the question and answer session. To ask a question, you may press star, then 1 on your telephone keypad. If you are using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star, then 2. At this time, we will pause momentarily to assemble our roster. Our first question comes from John Kim with BMO Capital Markets. Please go ahead.
spk09: Thank you. Anne, in your prepared remarks, you mentioned, I think, 13% increase in new lease rates in July, and Denver really leading the charge. But I was wondering what other markets are either outperforming or underperforming that average for you.
spk01: Yeah, good morning, John. So that was just the Denver rates. which is, I'd say, right in the kind of main of what the average is for July overall. For our new lease rates, we continue to see pretty dramatic outperformance in the Billings market and Rapid City market. But overall, our new lease rates in July really came in right in line with Denver.
spk09: And how do you see occupancy trending in the third quarter? I think you mentioned 41% of your portfolio has leases expiring and you had, I think, flat occupancy in the second quarter. How do you see that changing over the next couple months?
spk01: Yeah. In line with our historical performance, we think that occupancy will dip a little bit as we push those new lease rates and try to optimize the revenue. 41% is a pretty big chunk of lease expirations in this quarter. But as I noted, we have been able to keep that occupancy within a really tight range with our low end being 94.3%, 94.4% over the last six quarters. So we're optimistic that occupancy is going to stay strong, and really our goal is to optimize the revenue and take advantage of those growing new lease rates.
spk09: Okay, and then my final question is, Mark, I think you mentioned you lost out on some acquisition opportunities in some of your markets. Given your cost of capital continues to improve, your stock price is up 21% over the last month. Does it provide more ability to execute or be more aggressive on acquisitions, and should we anticipate increased activity in the second half of the year?
spk05: Certainly, this recent run has improved the cost of capital, so that does make us a little more competitive. I mean, I would say we're very competitive, but where the world sort of ends for us is when it stops being accretive to the overall, so... These mathematics will help a little bit, for sure. And we'll be disciplined about that. Great, thank you. Thanks, John.
spk08: The next question is from Gaurav Mehta with National Securities. Please go ahead.
spk04: Thanks, good morning. I was hoping if you could provide some more color on your KMS acquisition, how that came about, and what did you like about that acquisition? and maybe provide some color on the pricing and evaluation of that acquisition?
spk05: Sure. Good morning, Gaurav. So that acquisition really came out of about two years of dialogue. So, I mean, we're always working dialogues like this. And as I joke to our board, we're more like professional golfers than baseball players, meaning we lose most of the time. And so, you know, this was a situation where we had really a contributor. They're not really a seller who was looking for a solution to provide liquidity and tax protection. So, I mean, he had several asks for him and his partners that we were able to meet. I would say it's more often the case that a seller just wants cash. They can understand cash and they can understand tax bills. So to have a dialogue like this kind of pull all the way through to a close, in my judgment, you have to have a very discerning seller who's really willing to have a two-way relative value discussion. So he's taking our equity. So as soon as we agree on what his price is, then we have to agree on what our price is. That happened in December, candidly, when we had a very different view of the world, as did the seller. And so we arrived at price based on a relative two-way discussion on what our overall company was worth, what we thought his was worth, what the tax protection was worth. So a lot of considerations to kind of get to the finish line. But it was also very important for him to have a good place for his team to land. This gentleman's been running this business for 40 years, so this is his life's work, and It was important to him to have a steward to carry that forward for the team who wanted to stick around. And we've spent a lot of time and energy making that happen. So really, it was about the people. It was about accommodating his partners. In some cases, they're third gen partners. They've been LPs for 40 years. So we're now talking to the original partner's grandchild. So I mean, a lot goes into it. in any transaction but there's a fair amount of complexity here and a lot of sophistication I'd say on the seller side because really the pitch is hey we're gonna we'll take it from here we'll run it from here you're going to participate in the upside there were a number of things that they I think see that we're doing that they agree will be helpful revenue management a number of the technology investments we've made and operating practices so I guess I'll stop there unless you have more questions about it. But long, long discussion. We always have these going. They usually don't work for a variety of reasons. But very pleased to be close to the finish line with this one. It's really a big win for us and for the KMS team and partners.
spk04: Great. No, that's very helpful, Kolor. Second question on your secondary and tertiary market. I was hoping, you know, if you could provide some color on what you're seeing in the transaction market there, maybe some handle on the cap rates that you're seeing in those markets.
spk05: Yeah, I mean, the issue with those markets is there's just not a ton of transactions. And when there are, they may not be relevant. So if, you know, a five flex in Bismarck sells, I wouldn't say that sets market. But we haven't seen much. I mean, what we have seen is quite aggressive. So, you know, as we often talk about, you know, if the government is your staple and they lend on a dollar of cash flow equally, no matter where, that's quite powerful. I mean, the most recent real data point we saw for a secondary market outside of anecdotal was our Rochester sale where we sold sub five on on our trailing 12.
spk04: Okay, thank you.
spk05: Sub five cap rate for reasonably old assets.
spk04: Okay, thank you.
spk08: Thanks, Rob. The next question is from Rob Stevenson with Jani. Please go ahead.
spk02: Yeah. Mark, I mean, what is – or Ann, what does the Minneapolis NOI exposure go to post-closing of the KMS transaction? And you plan on selling some assets in Minnesota and Minneapolis to reduce that?
spk05: It'll go – more on that, but it'll go to about 35% for the Twin Cities. And I think we'll be probably tipping right around 50 for Minnesota as a whole when you add St. Cloud and Rochester. Okay. And the answer to the question of will, I mean, listen, we'll always consider capital, you know, portfolio sales, but candidly, we really like the portfolio we have in the Twin Cities, and we think it represents a pretty strong opportunity to push cash flow growth. So I would say for the time being, you shouldn't expect to see us actively selling things in Minneapolis unless someone wanders into our office with some really undisciplined capital, in which case, you know, we've got to buy it now, price for everything.
spk02: Okay. And then the $40 million of rehabs on the KMS stuff implies something like $15,000 a unit. What is your typical kitchen and bath remodel running you these days, given current construction costs, trying to get a feel for how much beyond the sort of normal redevelopment scope these properties either need or warrant at this point?
spk05: Yeah, so that dollar, I would call those dollars not value-add dollars. So I would call that deferred capital or general property improvement. I think we believe that we will be able to get to the top of market for those specific types of homes. based on having really gotten everything to tip top, but the value-add would kind of be a gear past that, which we haven't really talked about. There is a lot of value-add pipeline, I think, embedded in that portfolio, but you should think of that $40 million as kind of keeping up with the Joneses' capital.
spk02: Is there a reason why you wouldn't do it at the same time, that you'd come back and do that stuff later on versus just knocking it out now? especially given the capital position you have? Unless you do another big acquisition?
spk05: Yeah, short answer is we may. I mean, we've given ourselves three years to put that capital out. So, I mean, there's nothing critical, fire, life, safety. I mean, these properties are well run. They've been run by a private owner who probably refis every seven years, and that's kind of when they've gotten capital. So there is some opportunity, I think, just to bring capitals up to now. But... Ann, do you want to talk about that a little more?
spk01: Yeah. So the way we're going to approach the value add and the spend, which I'd say typically we're looking at $10,000 to $12,000 a unit on a full unit renovation here in Minneapolis. But the way we'll approach that is we really want to take over operations, get their communities onto our platform, and then really see where the rents are. And then we would start kind of looking to underwrite. But if we take their in-place rents today, and try to underwrite value-add, we may not be considering the true value of what the market rent is for those once it's on our platform and we've kind of exhausted all the other revenue opportunities. And that does take some time to get us through the lease roll. And during that time, we'll be looking at those value-add renovations. And as Mark indicated, because we have a few years to deploy that $40 million, some of it may happen concurrently. But the things that will happen in the first year will be, you know, really just setting the stage for the potential of value-add in the future.
spk05: Yeah, Rob, I mean, just to expand briefly, you know, we really look at this as like IRT circa 2016. And that's the real opportunity is just to kind of bring everything forward. So in that sense, it feels very familiar to us. And being able to buy something that makes sense you know, on day one and not have to push a bunch of initiatives that may or may not be the best thing, you know, given a little bit of time in the saddle, feels really good to us.
spk02: Is there anything quirky here, given some of the age of the communities in terms of the expenses, either in terms of heat being included or the inability to sub-meter for water, et cetera, or use rubs, et cetera, in the locations that they're in?
spk01: No.
spk02: Okay. And then last one for me, Ann, when was the depth of new leasing for you last year? In other words, max concessions, lowest effective rent. So curious as to what your year-over-year comps are easiest this year, what months are easiest this year, and then when they start to get more difficult for you.
spk01: Yeah, I think that, you know, we don't have that exactly in front of us, but July really was probably our toughest month last year. With respect to concessions, we were holding our renewals flat. We had very, very low traffic and saw some pretty big declines in some of our new lease rates. So I think it was July. It got a little bit better in August. We started pushing renewals and seeing some stabilization in the rents come September.
spk02: Okay. Thanks, guys. Appreciate it. Thanks, Rob.
spk08: The next question is from Daniel Santos with Piper Sandler. Please go ahead.
spk07: Hey, good morning. Thanks for taking my question. So my first one, maybe, Ann, this is for you. It's about the Delta variant, which is on everyone's mind. Obviously, you guys probably aren't as affected as, say, office. But are you seeing any impact on the ground relative to your properties or the market economies? And I guess if you zoom out a bit, are the local sort of state governments reacting differently? They were sort of in the last year, they were the slowest to respond. So I'm just curious to see if that's still the same this year.
spk01: Yeah, you know, we just actually provided our team with an update this morning on the Delta variant, so good timing. We haven't seen any response from any of our state or local governments, you know, beyond just kind of reiterating what the new CDC guidance is about wearing masks in public places where there is high transmission rates. We don't operate any place that right now has high transmission rates or high number of cases on the Delta variant, so we're watching that closely. One thing we're sure of after last year is that we're prepared to be very nimble. I mean, we could put back in place any of the protocols or procedures needed at any of our assets. But to date, we're still operating in the areas where the governments aren't responding yet, and we haven't seen high transmission rates.
spk07: Okay, that's helpful. And then I guess, More specifically, you mentioned the remaining eviction moratoriums and how they haven't been lifted yet in Minnesota. Is your sense that when they are lifted, the few tenants that are sort of behind in rent going to try to catch up and stay in the portfolio? I sort of ask because if you think about coastal markets, it's a lot harder to catch up on a few months of this rent if your rent is $3,000 or $4,000 versus the $1,400s in your average portfolio.
spk01: Yeah, I think that we're going to have a little bit of a mixture as it rolls up. So we are starting to see some traction with the rent help programs here in Minnesota. The best outcome for us is that the residents who are behind are able to get assistance and stay and then continue to pay going forward to the extent that their income has stabilized and they can't afford it. And I think that will be the case for some, and it's probably 50-50 and the other 50% we'll probably, once we're able to evict, you know, move on and find other housing that's suitable to their income and or, you know, if they pocket the rent that they didn't pay for a year and take it and do something else. But, you know, we've been encouraged and we're optimistic about the rent help programs here, both in Minnesota and in some of our other markets where you know, they have launched kind of ways for people to stay in, that's the best solution for us as an operator is to actually collect the rent and help the residents stay in place if, in fact, they're able to make the rent payments going forward.
spk07: Okay, that's helpful. One last one for me, if I can. You know, when you think about potential acquisitions going forward, is your sense that you're going to target maybe B or B-assets that you'll kind of improve to a B+, Or are you seeing opportunities to maybe buy, we'll call them sort of aging A product that just might pencil better for the second owner?
spk05: Yes. I mean, Daniel, the answer honestly is, you know, we're looking for the best relative return for the asset that we believe has, you know, durable pricing power in a sub-market. And I mean, there's more than one of those in sub-markets. But, you know, where we've found ourselves I mean, it's been interesting because there's been just so much compression, and B has really been working, and funds that are oriented towards value-add have a lot of dollars and also a lot more knobs they can turn in their Excel models. Where we've historically found, in our judgment, the best relative value is with a pre-stabilized deal or a newly – so UnionPoint would be a good example, newly stabilized deal – We're typically missing the value add by 4% to 8% is where our underwriting, because again, our bias is to get into the asset, live in it for a little bit, and then come up with a good business plan from there. The winning bidder is not doing that. They're going to come up with their business plan in advance, and they're going to go right away. And I'm not faulting them. That's just That's just not how, that's a risk we've been unwilling to take so far. I don't see our risk appetite changing a lot there.
spk07: Okay, thank you. That's it for me.
spk08: Thanks, Daniel. The next question is from Buckhorn with Raymond James. Please go ahead.
spk06: Hey, good morning. I appreciate the discussion. I'm curious just on the thoughts around Nashville at this point, just given the capital surging into that market area and the compression we've seen in cap rates. Is anything penciling is potentially feasible in that market near term? And do you start to shift your focus into other geographies or other types of price points that might be cash flow accretive?
spk05: Yeah, I would say, I mean, on the bright side, there's been more product actually available in Nashville over the last three to four months. It was really slow. in the beginning of the year for a couple of reasons, a lot around tax, understanding what the taxes were going to be going forward. But listen, we've been close on a bunch of things. And frankly, we have some shareholders who say, well, don't. And some shareholders who say, push forward. Listen, it was a strategic decision. We don't generally change strategy based on a few months of data. But we are, and it's also the case that, you know, yields across the markets are, it's not like Nashville is really hot and everywhere else is awesome and we're just avoiding great deals in other markets. It is the case that there is an enormous amount of capital chasing multi and pricing has really come in. So the last deal that I really liked in mini, or I should say we really liked in mini, sold at a sub four cap rate. similar kind of 10-year IRRs to what we're seeing in Nashville. So the going-in cap rate is one piece of data, and I would say the market is generally pretty efficient at pricing growth in those markets. And we consider that when we're looking at assets and markets and sub-markets. Great, thanks. In short, we'd love to do something in Nashville, and if we can find something that meets our returns, we'll do it.
spk06: Okay. But speaking of kind of long-term growth, certainly the back-to-office shift seems to have slowed a little bit recently, but also a lot of survey work seems to indicate a lot of workers enjoy remote working, and there's certainly been a huge population shift into remote These secondary markets, you're seeing that, I think, obviously in Billings at the moment and a few other places. Does that shift in that secular, you know, change in how people want to live give you some pause around maybe reallocating capital to your secondary markets or, you know, finding assets in a Billings, as an example, to kind of change your portfolio mix?
spk05: Yeah, I mean, listen, if something comes up in one of our secondary markets, we generally look at it. So you should know that we're looking at anything that kind of comes up where we're active. You know, the thing that we love about Billings and Rapid City and I'll say the whole Mountain West portfolio, which is now about 30% of our NOI, is that like the Southeast, they're catching a lot of migration. And obviously, Rapid City and Billings are much smaller metros. So, you know, a little bit of in-migration goes a long way. Well, what we haven't seen with the same amount of robustness as Denver is housing pricing move and, you know, new job creation. And that's really what is the long-term driver in our judgment of being in a great multifamily market or apartment market. So, you know, we have to balance all those things together. Thanks, guys. Thanks, Buck.
spk08: Again, if you have a question, please press star then 1. The next question is from Amanda Schweitzer with Baird. Please go ahead.
spk00: Thanks. Good morning, guys. I had a few questions on some of the moving pieces within your guidance. Kind of to start, can you provide an update on what you're assuming for the KMS acquisition and guidance in terms of both pricing and timing? I assume that cap rate assumption has increased today, just given the broader fundamental strength you've seen.
spk05: Yeah, I mean, the cap rate that we've generally talked about for KMS is plus or minus a five, kind of going in and five after capitals. I mean, candidly, the NOI we underwrote and agreed to was in February. They are ahead of their budgets. Their budgets and our underwriting aren't the same thing. But I would say one of the things we believed was embedded in that portfolio was a reasonable loss to lease. That's grown. I mean, we haven't gotten that scientific about it. We're really focused on integrating their team. We'll be picking up about 130 team members. as part of that, and so our focus really has been on getting that team, or getting ourselves prepared to onboard that team. We have a pretty significant integration of Yardi that has to go right alongside that, which is a lot of complexity that they don't let me in those meetings, because they're very detailed, but there's a lot of work going on with that. I mean, what we know is It's no worse than we expected. It's probably better, and frankly, for now, that's all we need to know.
spk00: Got it. So in terms of timing assumed in your guidance for that deal, though, is it fair to assume midway through the third quarter or what's embedded in guidance?
spk05: September 1. September 1 is our scheduled close date. I mean, at this point, you know, there's a lot going to that. We're on track for that date.
spk00: That's helpful. And then what blended lease rates are you assuming in the second half of the year in guidance? And where are your renewal rates going out today?
spk05: Yes.
spk01: Our renewal rates today in July were 5.1. Sorry. So that's where our renewals are going out today. And then, John, on the forecast side for guidance, What are we assuming there? A little bit less than that, I think.
spk10: Well, Amanda, the way we forecast our rents is we actually use our rent roll and the loss to lease that's embedded in that rent roll. That's 8%, I think, Ann, right? Correct me if I'm wrong. Right, the loss to lease currently. 8% in July. So what we would have done, or the way we forecast it is we load those market rents in by every unit. And then the rent growth goals we're using into the future vary by region, but they're not substantial. The real driver of the forecast is that loss to lease. So it's the 10% to 13% new lease rates that we've been getting over the last few months.
spk00: Okay, that's helpful. And on that renewal rate increase that you were talking about, was that renewal rates effective in July? I guess I was asking where rate increases are going out today for a future period.
spk01: Those are the rates that were effective in July. So with respect to renewals, those would have been priced 60 to 90 days in advance of that, but that is what went effective on the July expiration.
spk00: And then last one on guidance. What was the impact of those Rochester dispositions on your same store NOI growth range? I heard your commentary, John, on the expense growth impact.
spk10: Yeah. The way I would look at the Rochester guidance, we actually present in our guidance the amount of the sold NOI, the 1.2 million represented basically four and a half months of 2021 NOIs that we had in our books before we sold it. Extrapolating that out, that would be a fair representation of what came out of the NOI. We don't know exactly what came out of the NOI at the point of time because that's not how we measure it. the forecast has been updated. But that would be a reasonable assumption to use. Is that helpful, Amanda?
spk00: That's helpful. I can extrapolate from the $1.2 million. And then final question for me, just first in cloud during the quarter, you did see a larger occupancy decline in that market. Was that in response to you strategically pushing rates, or were there other dynamics at play in the market that impacted occupancy?
spk01: Yeah, it's a little bit of value-add work going on in the St. Cloud market as well. So we have a little bit of value-add vacancy there as we kick off some value-add projects. And then, you know, really it is the pushing of the rates in that market. And that is a trend we typically see here coming into the third quarter. Thanks for the time. Yeah, thank you.
spk05: Thanks, Amanda.
spk08: The next question is from Barry Oxford with Collier's. Please go ahead.
spk03: Great, thanks. Hey, Mark. When you think not necessarily about your portfolio, but when you think about the markets in relation to the moratorium and that burning off, do vacancy rates have to kind of creep up or not necessarily because you think the rent help programs will come in to that? But if vacancy rates are going to be climbing in the future because of this, How are you guys figuring that out into your software system as far as rental increases maybe two, three months from now?
spk01: Yeah, I think we've been watching that really pretty closely. And one of the ways that we've figured that in is the individuals who, for example, haven't paid for 18 months, they're on month-to-month leases. And we have, you know, we feel really good about our percentage of month-to-month leases as compared to the whole. So, you know, that is one way we're kind of managing it and monitoring it. We do not, you know, our collections rates have been strong, and while we do have, you know, at each site a few people that we would like to move along if the eviction moratorium were to burn off, you know, I don't think it's anything dramatic enough to really impact our overall rates. But it is yet to be seen how much the rent help will give us assistance and help those people stay in place. But at this point, all of those residents are on month-to-month leases, and we're watching that number closely as a percentage of the whole and making sure that we're managing that. Everyone on a month-to-month lease could leave at the end of the month, and so we factor that in when we look at exposure.
spk05: Yeah, I mean, and I just make, as a macro comment, Barry, I mean... Yes, yes, thanks. We're not overhoused. So, I mean, I think it's hard to imagine vacancy materially moving down, especially, you know, at our price point, which, you know, we're plus or minus $1,300. I mean, the most amount of supply is $400 to $600 north of that in most markets.
spk03: Okay, so you wouldn't foresee... something that would cause you to kind of back off of your rent assumptions? No. Okay. Great. Thanks, Mark. Thanks, Barry.
spk08: Yep. This concludes our question and answer session. I would like to turn the conference back over to Mark Decker for any closing remarks.
spk05: Thanks, Gary, and thanks, everybody, for your time and interest in CenterSpace, and we look forward to talking to you next quarter.
spk08: The conference is now concluded. Thank you for attending today's presentation. You may now disconnect.
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