Centerspace (CSR) 2017 Q4 法說會逐字稿

Good morning, and welcome to the IRET Fourth Quarter 2017 Earnings Conference Call. (Operator Instructions) Please note, this event is being recorded.

I would now like to turn the conference over to Stephen Swett. Please go ahead.

Thank you and good morning. IRET's Form 10-K was filed with the Securities and Exchange Commission yesterday after the close. Additionally, our earnings release and supplemental disclosure package have been posted on our website at www.iret.com and filed yesterday on Form 8-K.

Before we begin our remarks this morning, I want to remind you that during the call, we will be making forward-looking statements about future events based on current expectations and assumptions. These statements are subject to risks and uncertainties due to factors discussed in yesterday's Form 10-K, during this conference call, and in the Risk Factors section of our annual report and other filings with the SEC. Actual results may differ materially, and we do not undertake any duty to update any forward-looking statements. Please note that our conference call today will contain references to financial measures, such as funds from operations, or FFO; and net operating income, or NOI, that are non-GAAP measures. Reconciliations of non-GAAP financial measures are contained in yesterday's press release, and definitions of such non-GAAP financial measures can be found in our most recent supplemental operating and financial data, both of which are available in the Investor Relations section of our website at www.iret.com.

With me today from management are Mark Decker Jr., President and Chief Executive Officer; and John Kirchmann, Executive Vice President and Chief Financial Officer. Also joining us is Andrew Martin, Executive Vice President of Operations; and Anne Olson, Executive Vice President and General Counsel who will be available for your questions.

I will now turn the call over to Mark.

Thank you, Steve, and good morning, everyone. Welcome to our Fiscal Fourth Quarter and Full Year 2017 Earnings Call. I'll begin with a summary of fiscal 2017 and provide an overview of our recent activity. John will then provide more detail on our financial results, balance sheet and liquidity, and then we'll open up the call for questions.

The last 12 months have been an exciting and transformative time for IRET. Just 1 year ago, we announced our strategic intention to transition our portfolio and become a focus multifamily REIT. Throughout the year, we took meaningful steps to dispose health care and other noncore properties, strengthen our balance sheet and deepen our management bench. As we stand today, we are well on our way to achieving our goals, becoming solely focused on apartments with a high-quality portfolio, superior operating platform and a flexible balance sheet that supports our future growth initiatives. Our overarching goals remained broad and ambitious: Increase the focus, quality, flexibility and efficiency of all facets of the IRET organization. Our North Dakota markets, in particular, continue to receive much of our attention due to the ongoing performance weakness. We believe our efforts over the last fiscal year to stem the declines and turn the corner are beginning to bear fruit. We implemented revenue management software across our portfolio, which has helped us quickly find bottom on rents in this markets. We took over on-site management from our JV partner in Williston, and occupancies are improving. Combining these efforts with some emergent tailwinds, absorption of existing deliveries, limited new supply and a small pickup in drilling activity should provide better results over the coming quarters. Williston have less than 2% of fiscal year 2017 same-store NOI is not the story, and there is no shortage of opportunities ahead of us to improve. I'm proud of what our team has accomplished on all fronts.

During fiscal 2017, we completed the sale of 32 of 34 senior housing properties for a total sales price of $239 million. We are happy with the pricing for these assets. And upon closing on the final 2 properties in the coming months, we will have fully exited senior housing, taking another meaningful step in simplifying our portfolio and improving our earnings quality. We also sold 1 medical office property for $21 million to the user, who exercised the purchase option in its lease and also paid a $3.2 million lease termination fee. Finally, we sold 5 additional noncore properties for $27 million, netting approximately $25 million in proceeds.

Proceeds from all of these sales were allocated in several ways. In the past 12 months, we paid down $200 million of debt, redeemed our Series A preferred stock, and funded open-market stock purchases and operating partnership redemptions, reducing our fully diluted share count by 1.4% since last quarter and a portion was used to fund the purchase of Oxbo, which I'll discuss more in a moment. As a result, we strengthened our capital position and have a balance sheet with enhanced financial flexibility that provides us with additional capacity to fund our growth.

We continue to look for attractive investment opportunities, targeting high-quality properties in markets with strong and stable economic and demographic fundamentals where we can build a meaningful presence over time. To that end, in May, we acquired Oxbo, a 191-unit apartment community in St. Paul, Minnesota for $62 million. Oxbo opened in March and includes sophisticated interiors, a fitness center, indoor parking and a rooftop pool and terrace. The property is located in close proximity to entertainment, restaurants, employment centers and local landmarks. This is a good example of the profile of multifamily investments we are targeting and the tactics we are employing to deliver value. In this case, we purchased the asset just after occupancy began and believe we achieved a modest pricing discount to take the lease of risk. We continue to review potential opportunities in the Minneapolis area, where we have a substantial presence already as well as other large markets with similar characteristics that are contiguous to our geography.

Finally, as you saw with recent announcements, we put in place a new leadership team with deep experience in multifamily operations and investment. Jeff Caira, our new Chairman, brings decades of public market experience and along with the rest of the board, provides fantastic vision and support from me, as I assume the CEO role after Tim's retirement.

John Kirchmann, who will speak shortly, joined Andy and I on the senior team on April 30. And effective today, as you may have seen in this morning's press release, is our new Chief Financial Officer. John most recently served as Vice President of Operations Support at Essex Property Trust and was formally Corporate Controller and Corporate Treasurer there.

Anne Olson, our new General Counsel and Corporate Secretary was most recently in private practice where she focused on real estate development and investment, representing numerous sophisticated owners, investors and developers.

Finally, earlier this month, we announced that Susan Picotte, joined us as new Vice President of Asset Management. Sue joins from Greystar and brings deep real estate management and advisory experience to IRET, and we are pleased to have her on the team.

This transformation of our leadership team allows us an opportunity that few companies have: to look with fresh eyes at all aspects of our business, to be unburdened by the past and to develop a strategy centered on making investments in market that have strong multifamily fundamentals and developing an efficient operating platform to provide a best-in-class experience for our residents and drive real value for our investors. Our team is now all together in Minneapolis and energized and focused on the opportunity to differentiate this company from the diversified REIT we have historically been. We want to provide a great home for our residents, our employees and our investors and now is the time to do so.

On behalf of the board, I want to thank Tim Mihalick, Ted Holmes, Diane Bryantt and Mike Bosh for their many efforts and contributions over many years, and we wish them the very best. I also want to thank Jeff Miller for his many years as Chairman and his continued wisdom as a fellow trustee. A transformation like this would not be possible without strong leadership from Tim and Jeff, and I'm honored that they chose me to lead IRET. Thank you.

And now I'd like to turn the call over to John Kirchmann.

Thank you, Mark. In my comments today, I'd like to review our 2017 results, our balance sheet and liquidity. Beginning with our financial results, yesterday, we reported revenue of $54 million for the quarter ending April 30, 2017, an increase of 12% from $49 million for the fiscal fourth quarter of 2016. Net income attributable to common shareholders totaled $28 million or $0.23 per share compared to $0.07 per share for the same period last year.

Funds from operation, or FFO, was $10 million or $0.07 per share compared to $0.14 per share for the same period last year. FFO for the fourth quarter of 2017 included a $3.2 million writeoff of development pursuit costs, a $2.9 million loss and debt extinguishment, $1.2 million in severance costs net of reduced share-based compensation and a $3.2 million lease termination fee. Excluding these items, FFO would have been $0.11 per share.

For the full fiscal year, total revenues increased 9.2% to $206 million from $188 million for fiscal 2016. Net income attributable to common shareholders totaled $31 million or $0.26 per share compared to $61 million or $0.49 per share for fiscal 2016. FFO for fiscal 2017 was $55 million or $0.40 per share compared to $104 million or $0.76 per share for the prior fiscal year. FFO for the fiscal year 2017 included a $3.2 million writeoff of development pursuit costs, a $4.9 million loss on debt extinguishment, $2.6 million in severance costs, $1.4 million in redemption cost for the Series A preferred shares and a $3.2 million lease termination fee. Excluding these items, FFO would have been $0.47 per share.

Moving to our multifamily same-store performance. Our fourth quarter results experienced increased revenue in average rental rates, which were offset by reduced occupancy and increased expenses in most markets. As Mark mentioned, we continue to feel the impact of the energy sector weakness in North Dakota. Same-store revenue increased by 0.5% year-over-year with average rental rates up 2.6%, offset by a 2.1% decrease in weighted average occupancy. I would note that while our average occupancy in the quarter was down, we have been achieving higher occupancy in the beginning of our current fiscal first quarter.

Property operating expenses increased 5.5% quarter-over-quarter driven by increases in payroll, utilities and insurance as well as software and system improvements. As a result of the revenue decline in North Dakota markets combined with broader expense increases, same-store multifamily NOI for the fiscal fourth quarter decreased 3.3%. While this was in line with the expectations we outlined in the last call, we are not satisfied with this decline and have our entire organization focused on finding avenues for revenue enhancement and expense containment.

With regards to our balance sheet, at April 30, 2017, we had total debt of approximately $789 million, including $42 million of construction financing secured by 2 apartment developments. During the quarter, we reduced outstanding debt by $150 million. And at quarter-end, we had $29 million of cash and cash equivalents and $149 million of availability on our line of credit for a total liquidity of $178 million.

Two final notes before we open the call for questions. First, to better align our reporting with our multifamily REIT peers, we reviewed and adjusted our capitalization policies, including raising our capitalization threshold from $250 to $500. While we estimate the total impact of these changes will reduce FFO by $2.6 million for fiscal year 2018, we believe that the quality of our earnings and their comparability to our peers are much improved.

And second, we are not providing guidance for the upcoming year. I previously mentioned that our fourth quarter FFO, adjusted for nonrecurring items, would have been $0.11 per share. Starting from that number and adjusting for dispositions and development deliveries during the fourth quarter, we believe that $0.09 per share is a reasonable quarterly FFO run rate given current market conditions and activities. Obviously, the timing of additional transactions, including potential acquisitions and dispositions will affect that run rate and is a major factor impacting our decision not to provide guidance at this time. We recognize the importance of providing robust disclosure, including guidance to the investment community, and we'll continue to evaluate providing guidance in the future.

With that, I will turn the call over to the operator for your questions.

(Operator Instructions) The first question comes from Rob Stevenson of Janney.

Mark, what are you guys thinking about in terms of timing at this point for the disposition of the medical office portfolio? I mean, I know that you guys were looking at the Duke numbers and the process and wanted to get that cleared out of the way. Is that something that sort of sooner rather than later? Or you're going to basically try to match that to when you have the ability to -- more closely or more immediately redeploy the proceeds into apartment acquisitions?

Rob, with respect to the medical office, all we'll say is our plan is to be more efficient in timing sales to match opportunity. We won't comment on the timing of the sale, if and when we do it.

Okay. Nothing -- there's nothing been added to assets held for disposition at this point?

No. I don't believe there's any change in held for sale. John?

That's right.

What are you guys thinking is the lease-up time period and the stabilized cap rate on Oxbo?

In our acquisition underwriting, we have that leasing up by next March and we are underwriting that to roughly a 5% stabilized cap rate, assuming full occupancy and full taxes, et cetera. Right now, we're on plan with our underwriting. And frankly, weren't trying to beat our underwriting. But right now, we're right on plan.

Okay. And then as of today, I mean other than the medical office portfolio, the 2 remaining senior housing assets, what's left in terms of sort of non-apartment assets left in the portfolio?

I'm going to ask -- Anne, go ahead.

On the non -- in the non-apartment portfolio, we have some industrial buildings and some small commercial buildings. We currently have a few that are under contract for sale, and the plan is to pursue disposition of those assets over the next fiscal year.

The next question comes from Jim Lykins of D. A. Davidson.

First of all, the higher occupancy costs or higher occupancy that you mentioned, was that Bakken specific? Or were you talking about overall trends for the whole portfolio?

On a year-over-year basis, I think we're about flat year-on-year. And then occupancy, that was specifically -- the comment was specifically referencing Williston and the Bakken, probably most notably at Renaissance Heights, which isn't part of the same-store portfolio. But we took over management of that in December, I guess formally in January, but we started in December, that transition plan and we've taken occupancy from about 50% into the mid-70s.

And could you -- sorry, go ahead.

No, go ahead.

I was just also going to ask about how rents are trending so far in this quarter as well and if you're having to make any concessions in the Bakken?

Oh, in the Bakken. Go ahead, Andy.

In the Bakken? We have -- there are some concessions, Williston specific, being offered in the market, but not as aggressively as previously. And rent rates in the market are holding right about $1,000 a unit.

Okay. And what about the redevelopment program? I think you guys may have put that on hold. Can you give us a sense where you are on that and how you're thinking about that over the next few quarters?

Yes, I'm glad you asked, Jim. We did place that on hold at the end of April. As you know, we spent about $17 million in fiscal year '17 and we're going to evaluate all the value-add. We brought in and really bifurcated the role of property operations and asset management when we brought in Sue just a few weeks ago. So we're going to be evaluating all the value-add. We're going to be very focused and targeted on a go-forward basis to make sure we hit our guidelines and generally speaking, an 8% to 10% plus return depending on the strength of the market and the strength of the asset.

Okay. And kind of along the same lines, if you could just give us a sense for also how you're thinking about development projects beyond the current 2 you've got right now. (inaudible) focused.

Yes, we would consider both of those near or fundamentally complete on a roll-forward basis. The way we're thinking about development, we are looking at deals that have development or are development. We're looking at those in a structured format where we feel we can gain alignment with a development partner and mitigate some of the risks that come with development. So at this time, we're not contemplating any on balance sheet self-developed asset. We can do something on balance sheet, but probably wouldn't do it with our own staff. We actually trained our development staff last summer. So at this time, we're not actively looking at development as the developer.

Okay. So you do have a pretty, I think, robust pipeline or potential acquisitions you're looking at right now, is that correct? Maybe you can give us some color on that.

Yes, we do have a large opportunity set in front of us. The market is very competitive. We've lost on a few things in the last few weeks, but the market is very thick in terms of the bidding pool for high-quality assets. The great majority of what we're focused on is not development. We are evaluating development and we really endeavor to cost our capital and look at it on an apples-to-apples basis. So we think about the cost of lease-up, the cost of carry, et cetera and usually buying something that's cash flow and scores better when you do that.

(Operator Instructions) The next question comes from Drew Babin of Robert W. Baird.

First question just thinking about kind of its management baseline expectations going into the next year. In a general sense, do you expect that same property revenue growth is going to stay positive as it was in the fourth quarter kind of within the range of outcomes that are at least being talked about internally?

Yes, we do. And yes, we do expect revenue growth to stay positive.

Okay. And then on the margin front, obviously, some of the programs have been put into control cost a little more recent. And so year-over-year margins are still under decline. Is there a quarter of this coming year where kind of all else equally you really start to see the impact quickly? Or will this be see kind of a gradual phase in some of the improvements kind of this gradual margin improvement over time?

Yes, I would expect it to be gradual, Drew. I mean, as you know, we did take some actions that were really focused on the corporate side in April. So we did do a small reduction in force. On the operations side, I mean we've been very careful not to break anything there, and Andy and his team have done a good job. So we're going to be continuing to look for more ways to do that better, but I don't think you'll see anything sudden that will be an evolution not a revolution.

Okay. And on the G&A front, obviously with the management turnover, lots of people have left, but a lot of the people are coming in. Is there any way to quantify kind of the net G&A impact we should expect on a run rate basis?

Sure, Drew. This is John. So we said in our April press release that we'd save $3.5 million to $4 million or $800,000 to $1 million each quarter. That was in anticipation of the additions that we were going to have or the people we were bringing in. So fourth quarter G&A adjusted for onetime items was $4.5 million. So you should expect at a normalized rate that G&A will be reduced to $3.5 million to $3.8 million per quarter. But we do still have about $400,000 of costs related to this transition that we're going to occur in the first quarter of fiscal year '18.

Okay, that's very helpful. And one last one, you're talking about kind of that $0.09 per quarter FFO growth run rate. Do you kind of assume the same FFO to AFFO relationship as it was in the fourth quarter? That would put AFFO at about $0.07 a quarter. It's just kind of right on top of the dividend payout. Is the policy changed to expense more property maintenance versus capitalizing? Should that spread between AFFO and FFO maybe tighten because of that change?

Yes, that's right, that's right. That change doesn't impact AFFO. It only impacts FFO. So all things -- all other things being equal, that would tighten.

Yes, I guess I would add, Drew, the $0.09 does -- so the $0.09, it sounds like you caught this, catches the accounting change. I'm not sure we are clear on that in our prepared, but some of you got that.

And this concludes our question-and-answer session. I would now like to turn the conference back over to management for any closing remarks.

We just like to thank everyone for their continued interest in the company, and have a happy 4th of July.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect your lines. Have a good day.