Centerspace (CSR) 2020 Q3 法說會逐字稿

Good morning, and welcome to the IRET Third Quarter 2020 Earnings Call. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to President and CEO of IRET, Mark Decker. Please go ahead.

Good morning, everyone. IRET filed its Form 10-Q for the third quarter yesterday after the market closed. Additionally, our earnings release and the supplemental disclosure package have been posted to our website at iretapartments.com and filed on Form 8-K.

It's important to note that today's remarks will include our business outlook and other forward-looking statements that are based on management's current views and assumptions on our results in 2020, including views and assumptions related to the potential impact of the COVID-19 pandemic. Our quarterly report and other SEC filings list certain factors, including those related to the pandemic, that could cause our actual results to be materially different than our current estimates. Please refer to our earnings release for reconciliations of any non-GAAP information, which may be discussed on today's call. Joining me this morning is Anne Olson, our Chief Operating Officer; and John Kirchmann, our CFO.

I'd like to start by welcoming our team who's on the line and thank them for the incredible efforts undertaken to make every day better for our customers. 2020 has been a wild ride, but our team has done a fantastic job of providing a strong, consistent experience for our residents, and we're certainly fortunate to be focused in our geography and on our customer base who are seeking a great home at a reasonable price point.

Our business continues to prove resilient as we maintain occupancy and push rental rates when possible. Our primary investment markets, the Twin Cities and Denver, are experiencing more volatility than the remainder of our portfolio. We expect that our thesis of Minneapolis providing stable growth and Denver providing more dramatic growth will play out as the recovery progresses, with renters still seeking growing urban markets containing strong employment and amenities. Early indications show Minneapolis standing pat while Denver is seeing outsized in-migration from some of our largest U.S. cities. We've also witnessed firsthand the combined effects that COVID shutdowns and social unrest are having on the urban core.

Our 5 assets in the core of the Twin Cities and Denver, comprising roughly 14% of our NOI over the next year, are hampering the overall performance of those portfolios. For example, our Minneapolis suburban portfolio has a weighted average occupancy that is 270 basis points higher and new achieved lease rates in the suburbs increased 3.1% versus a decrease of 16.8% in the core.

The impact of the economic downturn on our Twin Cities and Denver markets are balanced by the strong performance of our secondary markets, where we are achieving strong revenue gains across Montana, Nebraska and the Dakotas. Our market and product diversification, both by suburban, urban and price point, keeps us well positioned during the economic crisis and will help us as we continue through recovery.

Transactionally, we had an active quarter. We sold 4 of our least efficient assets in Grand Forks and acquired a 465-home community in Denver. With this purchase, we now have scale to achieve operating efficiencies there.

What's been surprising so far in the early days of this recession is the combination of deteriorating fundamentals and strong liquidity for multifamily product everywhere. Over the last several cycles when there was a recession, the secondary and tertiary market suffered disproportionate troughs in liquidity. In fact, the opposite has occurred today as some of the largest and most liquid markets face greater economic and regulatory uncertainty, a reversal of the prevailing trends of the last 20 years. We were able to take advantage of this in the sale of our Grand Forks assets, where we are happy with the pricing achieved, a sub-5% cap rate on our trailing 12 months NOI. And when we consider the high CapEx associated with these older assets, the true economics are even better.

As we monitor the investment opportunities in Minneapolis, Denver and Nashville, it's notable that overall transaction activity has significantly decreased since the inception of the pandemic. Across the U.S., multifamily transaction volume was down 68% in the second quarter and 50% in the third quarter compared to the same periods in 2019. We feel great about our ability to invest in Denver, where transaction volume was down 43% in the third quarter as the dearth of opportunities has heightened competition and pricing continues to trend upwards from pre-COVID expectations.

We've also somewhat altered our position on ready liquidity, deploying the cash we had on hand last quarter into the Denver acquisition, but maintaining a keen eye on our commitments over the next 24 months and keeping capacity for difficult times and opportunities.

2020 required a significant rewrite to our plans, and we are prepared to meet the continued challenges ahead. However, our game plan hasn't changed. We remain focused on increasing our exposure to strong markets, improving our per share metrics and extending our financial flexibility and liquidity.

And with that, I'd like to have Anne please take us through the operating update.

Thank you, Mark, and good morning. As the pandemic continues, its effect on our results, while not dramatic, are compounding. 72% of our portfolio leases have been priced since April 1. And during the 6-month period ending September 30, new leases priced 60 basis points lower than the prior year comparable period, while renewals increased 2%. Despite leasing activity being dampened by the economic downturn, during the third quarter, we were able to stabilize rents and increase occupancy, resulting in revenue growth of 1.1% over third quarter 2019.

Our efforts to optimize revenues were led by 90 basis point higher occupancy in the third quarter compared to third quarter 2019, and our same-store weighted average occupancy for the quarter was 94.4%. One metric we track closely is revenue per unit, which incorporates rents and occupancy, and our revenue per unit increased from $1,088 per unit as of September 30, 2019, to $1,104 per unit as of September 30 this year.

While the second quarter saw a significant drop in traffic due to COVID shutdowns, our third quarter traffic was up 26% year-over-year, and our strong occupancy enabled us to hold our new rents flat and achieved 60 basis points of increase on renewals in Q3. Notably, we saw an increase in renewal rents in September of 1.4%, and our preliminary October results indicate that stronger renewal rents may continue as we achieved a 2.1% increase for the month.

As with our peer companies, our results are a story of markets. As Mark mentioned, the impact of the pandemic and social unrest has hit our denser urban markets harder than the rest of the portfolio. During the third quarter, we saw new lease rates in Minneapolis and Denver decrease 7.2% and 8.9%, respectively, compared to third quarter 2019. This was offset by significant gains in Billings, Omaha, St. Cloud and across our North Dakota markets, markets with less regulation related to COVID precautions and, until recently, lower COVID infection rates.

In the third quarter, we realized strong collections with 98.8% of expected residential revenue collected and just 24 rent deferment requests across our portfolio. Year-to-date, we have deferred a total of $251,000 in rents with only $59,000 of those amounts remaining to be repaid. We did see a slight uptick in deferral requests in October, with 15 requests for an aggregate rent deferral of $21,000 or 14 basis points of expected residential revenue. Collections in October remained strong at 98.5%.

Year-to-date through September 30, our revenues have increased 2.1% and net operating income has increased 1% over 2019. While this has been a challenging year for our rise by 5 efforts, we remain optimistic about the opportunity to increase margin across our portfolio. Challenges include flat revenue growth due to the impact of the pandemic, wage pressure, health insurance costs and, of course, the significant increases our industry has experienced in real estate taxes and insurance expense. In spite of these, our optimism remains due to opportunities in value add, revenue optimization and controllable expense management. As we've been monitoring expenses directly related to changes in operations due to COVID protocols, we believe there will be opportunities to manage these more closely as our new reality stabilizes into 2021.

Despite lagging second quarter traffic and economic uncertainty, we continued with value-add common area and unit renovations within 9 communities in our portfolio this quarter. During the quarter, we completed 195 unit renovations, and we're achieving our underwritten premiums with an average return of 18% upon leasing. Our unit renovation focus remains on our Minnesota and Nebraska portfolios, with 66% of the renovated units located in Minneapolis and Rochester and the remaining units located in our Omaha market.

I mentioned the compounding effects of the pandemic at the top of my comments and would be remiss if I didn't note the effect on our team members. Our team continues to show remarkable resilience and commitment to our customer experience. While during the second quarter we focused almost entirely on the safety of our residents and team by coming together to do the right thing, this galvanized our team, and we have been able to sustain that through the third quarter. I'm grateful every day for our team's dedication to our mission.

And now I'll ask John to discuss our overall financial results.

Thank you, Anne. Last night, we reported core FFO for the quarter ending September 30, 2020, of $0.94 per share, a decrease of $0.05 or 5.1% from the third quarter of 2019. The decrease in core FFO for the quarter can be attributed to lower NOI of $1.9 million, primarily due to the impact of dispositions in the third and fourth quarter of 2019 and the second quarter of 2020, offset by reductions in G&A and interest expense. Year-to-date, core FFO is unchanged from the prior year at $2.76 per share.

Turning to our general and administrative expenses for the 9 months ended September 30, 2020. G&A decreased by 10% or $1.1 million to $9.7 million compared to the same period of the prior year. The decrease is attributable to decreases in compensation related to open positions, consulting fees and travel and conference costs directly impacted by COVID-19. Interest expense of $20.6 million decreased by 11% or $2.6 million for the 9 months ended September 30 compared to the same period of the prior year, primarily due to replacement of maturing debt with lower rate term debt and lower average balances on our lines of credit.

Year-to-date property management expense of $4.3 million decreased $200,000 or 4.6% compared to the same period of the prior year. Casualty loss was $91,000 for the 3 months ended September 30, 2020, compared to $178,000 for the same period of the prior year. The current quarter's loss includes $695,000 related to hail damage incurred during the quarter on our Rapid City portfolio, offset by a $532,000 reduction in the prior quarter loss related to our Omaha portfolio. For the 9 months ended September 30, 2020, casualty loss was $1.3 million compared to $911,000 for the same period of 2019. Approximately $2 million in capital expenditures are expected to be spent over the next 12 months to replace the impacted assets from these 2 events, with $750,000 expected within the next quarter.

Turning to capital expenditures, which are highlighted on Page S-16 of our supplemental, same-store CapEx for the 9 months ended September 30, 2020, was $7.2 million, a 60% increase from $4.5 million for the same period of the prior year. The increase in CapEx was related to a delayed start of projects in 2019 due to adverse weather. Full year same-store CapEx is expected to fall in the range of $900 to $925 per door, which has increased from our prior outlook due to an additional $750,000 for a full roof replacement as a result of the aforementioned hail damage.

In Q3, value-add spend was $4.2 million as compared to $1.9 million in Q3 2019. For the 9 months ended September 30, 2020, value-add spend was $10.4 million compared to $3 million for the same period in 2019. During the quarter, we issued 145,000 common shares through our ATM program at an average net price of $70.55 per share, for total proceeds of $10.2 million. Year-to-date, we have issued 819,000 common shares at an average net price of $70.23 per share for total proceeds of $57.5 million. The proceeds from these shares were used to help fund the Parkhouse acquisition.

Looking at our balance sheet. Our total liquidity as of September 30 was $132 million, including $115 million available under our unsecured line of credit and $17 million in cash. As of September 30, 2020, we had apartment communities representing approximately 10% of pro forma NOI that are not pledged under the unencumbered asset pool. This unpledged asset pool has a total value of $223 million, which allows for an additional $134 million of liquidity under the terms of our line of credit.

Looking to the remainder of 2020 and 2021. As of September 30, we have $35 million of debt maturities and $27 million remaining to fund under our construction and mezzanine loans for the development of a multifamily community in Minneapolis. We believe our current liquidity is sufficient to cover our foreseeable capital needs while allowing us to pursue opportunities in our target markets of Minneapolis, Denver and Nashville. Further information on our liquidity can be found at Page S-11 of our supplemental.

As we look ahead to 2021, we continue to evaluate the impacts the current pandemic and economic crisis will have on our business into next year. This includes continued pressure on the top line as the impact of the remaining 28% of our leases signed pre-COVID are renewed or replaced with post-COVID leasing activity as well as the potential headwinds expected with expenses, including having our common facilities open throughout all of 2021, higher self-insured health care cost as a result of delayed medical procedures during the pandemic, increased costs associated with PPE materials and other measures adopted to keep our communities safe, increased insurance cost as a result of continued catastrophic losses suffered by the insurance industry and the potential for higher real estate taxes as state and local governments seek to close budget shortfalls caused by the COVID-related shutdowns. As we continue to navigate the pandemic, we remain encouraged by our Q3 results, which reflect the work of our dedicated team members who every day live our mission of providing great homes.

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

(Operator Instructions) Our first question today comes from Daniel Santos with Piper Sandler.

My first one is more of a big-picture question. Clearly, the team has done a great job of pivoting the portfolio to focus on key Midwest markets. And I think the case for owning some, we'll say, less brochure markets, like Billings, where revenues were up over 7%, is pretty clear. But as you said, your long-term strategy is to expand in larger markets like Minneapolis and Denver, which are seeing better but similar pressures as some of the coastal cities. So I was wondering if you could give us some more color on how you're thinking about expanding in those markets versus maintaining your exposure to smaller markets, which are clearly bright spots in the portfolio.

Yes, that's a great question, Daniel. Thanks. Listen, I think our driving focus continues to kind of be around -- or not kind of -- continues to be around markets that have real depth and real observable job and income growth. I mean, that is ultimately the long-term secret ingredient to good apartment cash flow growth. So I think we have absolutely, I think, been positively surprised with the positives surrounding the smaller markets, where we have diversity. And I'll confess, probably more open-minded to having some slice of diversity in markets like that in the future than we might have otherwise been.

But another way to get that is just to make sure you identify really good submarkets in some of those larger markets where you have some good supply-type constraints and things like that. So I don't think it changes our overall view, although we're certainly happy we have the diversity we do.

Got it. That's helpful. So my next question, whether it's rent collections, renewal spreads, occupancy, your portfolio has been relatively stable throughout what I'm assuming most people would say has been a pretty disruptive year. What would you say the biggest drivers of that stability? Is it affordability? Is it the portfolio mix? Is it your urban-suburban ratio?

Yes. I think -- in my view, it is the mix of both markets and by suburban and urban. So when -- we have talked a lot, and I know you've been in some of these investor meetings where we've talked about how Minneapolis sort of feels to us like the most fully developed version of our investment thesis around urban and suburban and A and B, and it has really performed well. But obviously, our portfolio is definitely being lifted by those secondary and tertiary markets. I don't know, Anne, do you want to add something?

Yes. I think one of the big drivers, which we commented on and is pretty clear, is compared to our public peers, the less regulation around COVID precautions and the more open economies have really benefited us throughout the Midwest.

Yes, that's a great point.

Our next question comes from Gaurav Mehta with National Securities.

I think you talked about decline in new and renewal rents for your urban markets at, like, I think, 7.2% and 8.5%. I was hoping if you could maybe touch upon how the trends were on a month-to-month basis. Did you see the trends worsen or did you see this stabilize in some of your urban markets where you're seeing weakness?

Anne, why don't you get that?

Yes. Good question. We do watch the month-to-month trends really closely. And particularly on the renewal side, I think across the portfolio, we're seeing a stronger trend in renewals. We were at 1.4% in September. Our preliminary October numbers showed 2% up on renewals. When we look at the urban markets, the hit has been kind of a little bit more consistent, where we're down in those markets pretty consistently. So we're not seeing much of a trend yet, besides that we are down more in those markets than in the suburban markets. But nothing that yet shows that we're on our way back up out of negative new lease growth in Denver and Minneapolis.

Yes. So I mean, as a portfolio, we feel like we are stabilizing right now, but with some markets improving, but...

Yes, we're definitely seeing the improvement, the trend improvement on both new lease rents and particularly on renewals in the suburban markets. But those urban markets, we don't yet have a trend line to say if we think it's going to start picking back up or not.

Okay. Can you remind us what's the portfolio mix between suburban and urban and A and B in your total portfolio?

Yes. The -- we really have 5 assets that are urban that comprise about 14% of our NOI if you look on a go-forward basis, 3 in the Twin Cities and 2 in Denver.

Okay. And I think, Mark, in your prepared remarks, you talked about transaction volume being down for the multifamily sector. Maybe talk about who are the buyers and sellers that are still transacting in the market. What kind of profile they have? And is it any different than people that were transacting pre-COVID in your markets?

Yes. I think for the -- I mean, obviously, multi is a big market, and there are lots of participants, and most of them live outside of public markets. And I think we're seeing that reflected in the transaction volume. So if anything, there's probably been a marginal add to the investor pool in light of what's happening in other sectors. So if you ran a -- maybe you ran an opportunity fund in January, you probably had the ability to do multifamily in your fund, but you didn't actively do it because you were looking at other sectors, and you might be considering multi more than you were otherwise. We're definitely seeing that.

But in terms of who do we find in the bidding room, so to speak, I mean it's the same groups we saw before. I'd just say there's varying levels of conviction. So I think there are still some groups who don't want to be the first person at their investment committee to talk about anything. We actually took the opposite approach and really were active this summer trying to shake some things loose. We found in most instances we chase things into other people's arms, but it's -- I would say it's the same group plus a few extras of buyers.

Our next question comes from Rob Stevenson with Janney.

Mark, how are you guys thinking about dispositions over the next few months, especially if there's a push for 1031 assets ahead of year-end? And how much of your dispositions over the last few years have been to 1031 buyers?

Yes. The answer is we would be -- we'll always be opportunistic. I mean, everything in the portfolio has a buy now price. And so if we can find someone -- those prices aren't all -- they don't all require exuberance to get there. But in general, we're always trying to cull from the bottom so -- and add to the top. So in terms of what have we sold to the 1031 buyers, I mean, 2 assets, right?

Yes.

I think it was -- so a couple of years ago, we sold 2 small assets worth about $6 million to a buyer in Rochester, the balance, which is over $200-some million of multi -- $250 million probably. It's all been to non-1031 buyers.

Okay. So it's not a big impact to you guys?

Yes. The buyers may have used 1031, but it wasn't part of their strategy or pricing. But larger institutions or private equity funds that would be using 1031.

We lost a couple of this summer to 1031 buyers, where we were down to a small pool of buyers and found ourselves just bidding against someone who wouldn't stop raising their price and found out after it closed, hey, that person was not going to stop in the realm of reasonableness. So good for you for stopping, I guess.

Okay. And how are you guys thinking about redevelopment spending? And how have the returns been trending over the last few months? Do you put that on hold given that you may not be able to get returns in the near term that you want? Do you do it now anyway on vacancy while you can in anticipation that 2021 will be able to jump those rates up? How are you guys thinking about that today? And where have the returns been?

Yes. I mean we have enough active projects that we can throttle up and down a little bit. I mean, obviously, we're restrained by turnover, but our plan is to continue to make those investments, provided they continue to hit the returns. I mean, Anne will add.

Yes. I think we've been -- we were very careful, particularly at the beginning of COVID, to say, do we need to stop and what -- and redo the market restart to see if the premiums would hold up. Because obviously, every time we make an investment, there's a risk and whether or not it's going to lease for what we wanted it. And what we found, particularly in some of our markets where there are supply constraints is -- and our occupancy is high, is that there's still a lot of demand for product and that there's a lot of demand for renovated product. So we've continued kind of on the same plan. I think we'll hit the spend that we estimated to hit this year for value-add and feel really good about some of the opportunities.

When you look at our portfolio, for example, I noted we have some renovations going in Rochester. That is a fairly large rental market compared to the size of the overall market and not a lot of new supply. So while they have gotten some new supply, we have a really good opportunity to kind of draft behind that. And we're not seeing a ton of new buildings going up that would compete with the renovated product. So we do still have some good pockets of opportunity that we want to chase down. We're being very helpful on -- with the comp side to make sure that it will compete in the market and that we think that we can get the rent premiums that would justify the spend.

Okay. And then, Anne, how successful have you guys been in terms of pushing your lease expirations into the second and third quarters? I mean, what percentage of your leases do you guys now have rolling in the fourth quarter and then the first quarter where things may be a little bit more challenging?

Yes. So since the beginning of -- in the second and third quarter, 72% of our leases roll. So we feel pretty good about that. Now that -- in this instance, that means that 72% of our leases have priced during COVID, and we only have 28% in the fourth and first quarter. So I think our exposure is good. We are constantly tweaking it to match what we see in traffic patterns. That will take a little bit more time. Obviously, the traffic pattern this year was off pretty significantly, given very little traffic in Q2 and higher traffic in Q3. And we're seeing higher -- we saw higher traffic in October than last October as well. So that expiration profile may want to move. We're never going to be done trying to identify exactly where it should be as the market moves, but we feel pretty confident about the amount of leases in the second and third quarter and the opportunity that, that will bring next year as we head into the summer months and with hopefully a better recovery on the economic side.

Okay. And then last one for me. Any markets where you've been seeing incremental deterioration in September and October market condition-wise?

I don't think so. I mean, I think the theme -- the most prevalent theme in our portfolio for certain is the -- just the core versus suburban in Twin Cities and Denver. I think we probably -- when COVID first came about, I suggested that we just roll everyone flat. In hindsight, we probably didn't need to do that. So we probably stifled some economic revenue growth there, but that's kind of -- that's over now, and we're getting rental increases where we can and really focused on staying full and keeping pricing power for when things get a little better.

Our next question comes from John Kim with BMO Capital Markets.

You guys mentioned social unrest in your core urban markets and I think you quoted a 17% decline in new leases in Minneapolis in the urban core. How much of this do you think is due to safety concerns and people looking to flee the cities with the discussion of defunding the place versus, I guess, new supply or other economic factors?

John, thanks. I think it's really mostly about COVID. I mean the -- just vacancy of the city just exacerbates the issue -- the safety issue, which, obviously, Minneapolis has been in the headlines more than we'd want to be on all of those items. But I think it's really the kind of the second derivative. The first thing is COVID. And when people get back into the office, I think things will definitely improve. To me, now you're living at our place in the North Loop called Freight Yard. And you've got a killer apartment and you can walk to the river, and you used to be able to walk to 100 restaurants and bars. And now you can walk to 20 restaurants and bars and someone just stole your bike. So your marginal input there is not positive because you can't go to any of the sports things you went to or any of that stuff. So I would say it's obviously a big issue for the cities in general and in North America and it's certainly an issue here. But I would say, if everyone were back -- if Target and the other large corporate users in the city said, hey, we're coming back to the office tomorrow because we have a therapeutic or whatever we have that makes us all feel safer in the office, I think a lot of that would turn pretty quickly.

Okay. There's been discussion of compressed cap rates in many markets, including Denver. Can you comment on the cap rate on the Parkhouse assets that you purchased? And what your leasing strategy is because I think it's a relatively new building?

Yes. So we bought that on our math at -- going in roughly 4 to 4.25 cap. So we've historically given 25 basis points ranges. Obviously, that, in our judgment, will hopefully be a trough year number. So our first 12 months of cash flow will hopefully be the lowest. And certainly, they've been affected by COVID. So we underwrote really no rent growth in year 1 and modest rent growth in year 2 and 3. So trying to be conservative. But for sure, I mean, looking at Nashville, we are seeing things trade in the mid-3s. So we haven't gotten anything to pencil there.

So yes, I'd say the cap rates are -- definitely have come in. I would certainly suggest that everyone should be mindful that it's on trough cash flows. It's not clear to me, and it isn't the case for us, that we've lowered our long-term return expectations. So I guess, if you're looking to buy something and sell it in 2 or 3 years, it's a hard time to buy something right now. If you have kind of a 5- to 10-year time line in your mind, then I think you can make sense of it. And in fact, you probably -- some of these markets look more appealing to you than they might have before.

And it's also the case that with some of the regulatory risk in California, New York and elsewhere that those are markets that take a lot of investment dollars. And as you deemphasize -- as the marginal dollar leaves that market and goes into a market like Nashville or Denver or Minnie, which, together those markets in a high year would have $10 billion of volume out of $180 billion of total volume. When you push that marginal dollar out, it's -- it obviously helps compress returns and rates are another big factor there. So I've read a bunch of those same things. In fact, some of them maybe you wrote. But a lot of the commentary I would agree with, cap rates have definitely come in.

Are you a buyer in Nashville if pricing remains in the 3s or are you willing to pivot to another expansion market?

I mean, we're a buyer as long as it's accretive. And we are a long-term believer in the asset. And I guess you could possibly count in some modest dilution if you feel really strong about the out-year growth. But in general, we don't have a lot of happy agreement in our boardroom when we come with those kinds of ideas. So we're focused on per share cash flow growth and how we do that. So I mean, one of the things that we've really liked about having Nashville in our world, as I've talked about before, is it opened our opportunity set up 50% because we were previously really mostly hunting in the Twin Cities and Denver, and now it's Twin Cities, Denver and Nashville. So it gives us some better perspective. But if that market continued to long term just not be open to us, I guess we'd have to consider. I don't believe that, that will happen, but we'll have to see.

Final question for me is, I think you provided an October update as far as renewals up 2.1% and the collection rate. But I was wondering if you could also provide an update on occupancy as well as the new lease rate growth?

Yes. Our new leases in October, these are preliminary numbers because we're just a couple of days at the end of the month, and things are still getting entered. But our weighted average occupancy today is 92.8%. And our new lease rates in October looked like they were about...

94.9%.

I'm sorry. 94.9%.

Yes.

Sorry. I'm sorry about that. And our new lease rates were down 1.1%. So we still are seeing a little bit of a decrease. That's only on about 200 leases for October, so it's not a huge volume. As we talked about earlier, our expiration profile is much lower in these winter months.

Just to make sure, 94.9%?

Yes, 94.9%, sorry.

And that's weighted average for October or at month end?

That's for October.

That's weighted average same-store.

Our next question comes from Amanda Sweitzer with Baird.

Just following up on the transaction market. Have you guys started to see any price discovery in the urban cores of your target market? And then has your thinking changed at all in terms of where you want to be within those target markets, apart from some of the comments you made earlier about avoiding pockets with higher supply?

Yes, Amanda. Yes, so I mean, I can give you a story of recent activity. There was an asset in Downtown St. Paul that was for sale that -- roughly, it was nice rehab of an old building. It was rumored to be for sale last summer. We really liked it. I think the price talk last summer was, call it, $60 million. It has come to market. I don't know if it's been put under agreement, but I believe the price talk was around $45 million, which would have been something like $200 a door, so well below replacement cost. The asset has some interesting unique physical aspects because it's a converted office building. So there's some -- there's a lot of commercial -- a lot more commercial space than you might like.

But the point is people's perspective on Downtown St. Paul has changed a lot from a great market with some nice little pockets of great activity going on and lots of things to do to now ecolabs out of the office and they're going to be and some of the other major employers are as well. And so what we're seeing in our own property is folks who took an apartment, maybe they worked 4 or 5 days a week and lived at our apartment and then had a cabin in Wisconsin as their primary residence are just living there. So when some of those employers come back, we expect they'll be living with us again. And until then, they're not.

So when I look at the -- when we looked at that asset and we priced it in that $45 million range, it's pricing at mid-6 to high 7 kind of unlevered IRR with pretty reasonable assumptions, but you're really betting on Downtown St. Paul, which just doesn't feel great right now because there's just not a lot of activity in the city. So again, we're having a hard time convincing ourselves to buy into the theme we're already seeing and the things we own in the downtown area where people are less excited about living there because there's just less -- people pay a premium to live downtown. If all the things you pay a premium for aren't available, the premium doesn't make a lot of sense.

So I mean that's one small, for instance, where I can tell you, we looked at it pre-COVID and post. I think, directionally, that owner and most owners are in a spot where they don't need to sell. I mean, that owner doesn't need to sell. If they do, they've gone from hitting a home run to a double. I mean, they did a really good job turning that property and -- but they're only going to sell if they have a good thing to put the money into because they could probably hold out and do better later. That may be [helpful], Amanda.

No, helpful anecdotes. And then can you just stack rank -- as you think about the balance sheet, stack rank how you think about sources of acquisition capital today between levering up, selling additional assets or issuing equity via the ATM?

Yes. We would stack rank levering up the lowest and be sort of dispassionate between sales or ATM or capital raises, again focusing on doing our best to maintain or extend our per share kind of earnings power. So we're not uncomfortable where we are with leverage today. I'd say we're comfortable. One of the key things we're focused on is maintaining access to the private placement market, which we certainly have access to that today if we want it. So that's a big governor in our mind.

Yes. Amanda, I would just add, I think the Parkhouse is a good model for the type of acquisition that we like to do. We raised close to $60 million on the ATM, shed some pretty inefficient assets for excellent pricing for about $40 million, and then we're able to transact on a $145 million asset in a great submarket.

Our next question comes from Jim Sullivan with BTIG.

Yes. Just a first question for Anne. You talked a little bit about the value-add program earlier. And given what's happening with cap rates in the markets tightening and tough to sometimes get across the finish line on properties you might like. Just curious what the scope is for expanding that, say, over the next 6 to 8 quarters. I think you used the word that you were careful about the underwriting and you had pretty ambitious ROI targets. You've hit it on what you've done so far. So what kind of scope is there for you to increase that, given maybe the lack of attractively priced acquisitions?

Yes, that's a great question and I think one we're thinking a lot about. We are actively looking at and underwriting more value-add projects within our portfolio. It's an important part of our budget process each year that we talk with our community and regional managers about where they see opportunities, what they're hearing, where -- how much more rent they think that they could get. They're the ones who are interacting every day with the prospects and hearing, well, I didn't like your kitchen or I want to go to a nicer building with a better clubhouse or what those amenities are. So we can do all the research on the market comps and all the underwriting, but we also use the time during our budget season to really touch base and hear what our community leaders think could be beneficial for their communities.

And the value-add process for us goes everything from renovating units to looking at amenities to how we can create efficiencies by investing in infrastructure or technology within the communities to make them better. So I think our plan is to consistently do $10 million to $15 million of investment a year. And we feel like we have a pipeline forward to do that. So it is going to expand over time because that amount will compound. These projects take 2 or 3 years. So if we outlay $10 million to $15 million of investment in year 1 and $10 million to $15 million in year 2, in your -- over time, we're building on that because it takes 2 to 3 years in most instances to spend that money. So I think we do have a pretty good opportunity.

And one thing that we're going to be really cognizant about, especially given the trend right now, is in our markets that might be smaller, we often see little or no supply. And so what is the opportunity in those market to really push rents or move to the top of the market in rents. So markets that we have not quite gotten to look at yet, but where we see really strong growth over time, including markets like Billings or Rapid City. Our North Dakota portfolio has been really well situated after some of the dispositions we've done there. So there could be some opportunities there to refresh and stay at the top of the markets in those areas where we see very little supply.

Yes. I'm just going to circle back and add to something I said earlier because I mentioned mid-3s in Nashville, and I've already gotten several notes about it. So I should qualify that is for the nicest, newest stuff in Nashville. That's not a market-wide cap rate. That's new -- our new product, that's just come off lease-up and things like that. So -- sorry, Jim, just to tack on that general thought.

No, no problem. I appreciate that. I guess the other part of the value-add question, though, given the compression in cap rates and what we'll call secondary markets, is that achieving that yield on cap spend, combined with the cap rate compression, only expands presumably the value-creation opportunity that you're perceiving in doing this.

That's right. And yes, I think we -- and we're thinking about that closely. One of the questions that we ask for every value-add project is, with respect to the risk-return profile, is where are the cap rates? Where do we believe our NAV is? What would -- if we just sold that opportunity to a value-add buyer, who will underwrite the returns on the value-add and kind of pay you for that. We always do that analysis, too, to think about what is the value we're going to create versus the value we could get for the asset to allow someone else to take on the risk of the value-add.

Yes. And the real challenge, I think, is you can't spend NAV and you can't spend earnings per share or people can measure it. So I think one of the natural questions that I feel like you're dancing around is, why aren't you selling more stuff? And the answer is, we certainly consider it. We will consider it. The Grand Forks sale really was opportunistic and not something that we had planned when we got to the beginning of the year. We were really surprised to see the level of interest in those assets when we launched in June in kind of the new world. So it's definitely on our mind constantly and something we talk about in an investment committee along with these value-add deals all the time.

And then a question for John on costs. You made a number of cautionary comments about areas where there -- where you're concerned about potential cost increases. Most of those items that you mentioned, John, I think I'm right, really fall into the category of noncontrollable, when particularly you're talking about real estate taxes and insurance. And I just wonder if you can give us some kind of ballpark guesstimate in terms of the increases that you might be facing in '21 in percentage terms versus what you've had to face already this year.

Sure. Jim, I would say they fall into 2 buckets. The first bucket are really items that there were savings in this year because of COVID, closing common area facilities, our self-insured health care costs, people not being able to get into their physicians. So those are going to be returning to normal levels in the future. So that will be the first bucket. And then as you mentioned, the noncontrollable bucket. We have had some initial discussions on insurance premiums and are getting feedback that we should expect things in the 10% to 20% range for increases. And we are out with brokers now getting bids and locking that down, and we will definitely have that locked down by the time we come on this call next quarter. But indicative pricing, despite pretty big increases last year, if you recall, we had a premium increase in -- of 25% to 30% last year.

With less coverage. I mean, the quality -- it's more for less.

That's right, with higher aggregates and more restrictive deductibles. So it was a little surprising to us that initial pricing. And once again, I don't have final pricing to share, but that's what we're hearing from our brokers.

On real estate taxes, we have not seen any increases yet, and that may be longer term. But it so happens most our markets will send out their valuations really in the next 4 to 6 weeks. So once again, we'll have a much better feel of what those increases are when we come on the call next quarter. But it's something we're concerned about, but we have no visibility yet as to what those increases are.

Yes. I mean, on the bright side there, Jim, a lot of our portfolio has been, I'll say, marked to the state-of-the-art because almost half of our portfolio has been purchased in the last few years. So if you have owned an asset for a long time, you're going to get market increases. If you just transacted on it, it's really hard to argue that it's not worth what you just paid for it. So we feel like we have relatively up-to-date taxes, which is not a positive because it means we're sort of getting taxed at the full level. On the other hand, it should lessen our exposure to sort of surprises like we had last year in Rochester, where that is the case where we had on those assets for a while.

And then on the insurance front, I mean, I guess the good news for us is that everyone is affected by that. Habitational insurance is just an area where the underwriters did a poor job making money in most of the mid-teens, and they've really been trying to call that back while also licking their wounds from a bunch of other really large losses kind of across the globe. So if you have a piece of real estate where someone is sleeping and living for an entire 24-hour period, as we do and hotels do and senior housing and so forth, your insurance is going up because there's just been poor experience there from the insurance community.

Sure. I appreciate that detail. And then just a final question for me. When you talk about the acquisition opportunities, I'm just curious, even though you may hesitate to commit capital to some of the urban markets, but I just wonder whether you're seeing any signs of distress with developers who are struggling to achieve their lease-up objectives in this market and potentially those assets might be coming on the market or are available at what might be pretty attractive pricing if looked at from a long-term perspective.

Yes. I do think -- that is -- I think the areas of most opportunity are in the downtown markets and deals that are in lease-up for certain are an area where -- I mean, we've seen several large national merchants who have large equity partners and multiple deals in multiple markets lower their exposure. And if that asset was par -- if par was February 1, you might be able to buy that asset in the 93 to 97 territory today. And you're obviously taking more risk on the lease-up.

Another area where we've seen a similar theme is something that did get leased up, but its last 7 months of lease-up have been the last 7 months. So they filled the asset, but they probably did it or certainly did it at rents that were lower than they expected. So the cash flow stream that's in place that you're buying may be -- there may be some better opportunity for that to grow relatively quickly once we get to firmer ground in terms of the recovery.

And then, listen, we would absolutely pursue either of those types of scenarios, and we're underwriting those things every day. We do believe in urban centers long term. It's just a question of how much risk -- are you getting paid for the risk. It's not clear that you are at this point. I think it's much clearer in the asset -- in the area or the example you just described of new asset in a market you understand, that feels a little bit better.

(Operator Instructions) Our next question comes from Buck Horne with Raymond James.

You addressed many of my questions, especially insurance costs. I did have one point I was -- maybe I'm a little slow on picking up the clarification here, but just on the casualty loss in the quarter, just help me understand, so the $90,000 -- I guess, the $91,000 or so that flowed through the income statement, but there's an add-back in the core FFO for $545,000, just what was the difference between those 2 figures again?

Sure. So the $90,000 is really comprised of -- we had a little over $600,000 or maybe -- almost $700,000 loss this year -- or this quarter. We also had a reversal, a change in the estimate from a prior quarter loss. So that's what shrinks that number in the current quarter and why the net is $90,000. As far as the add-back to core FFO, of that, the loss -- the incident we had this quarter that we had a loss, some of that was -- a portion of that loss was the write-off of an existing asset. So we have to do a complete roof replacement. So we write that asset off. And that's a noncash transaction, and we add that back to our core FFO. And then as we spend that -- yes, and then as we spend the replacement cost, you'll see that go through our capital expenditures.

Buck, you need to know that somewhere, Mike Dance and Jeff Caira are smiling because we had a lot of discussion around that.

Good. Just wanted to clarify, make sure I understood the moving parts. I appreciate that. And the other cost piece of the equation for me was just the SG&A run rate. You guys have made a lot of progress controlling those expenses. Obviously, some of that related to this post-pandemic world we're in. I'm just curious, of the cost you kind of outlined that we're potentially going to come back to you next year, is that going to affect the SG&A run rate where you're at now? Or how sustainable is this current SG&A run rate?

Yes, Buck. So as I mentioned in my comments, some of those are due to open positions. We do intend to fill those open positions as part of COVID and part of some cost constraints and just the difficulty interviewing and evaluating the positions. We've held those open, but a lot of our team members have been pulling double wait. And so the plan would be that we would rehire those. Also, to a less extent, in 2021, travel, conference, all those type of costs will return, but we don't think we'll go back to pre-COVID levels in 2021 in those areas. So we're still going to get some savings there.

I mean, G&A has been a focus of ours from day 1. So while the pandemic and some decisions we've made have contributed reducing those costs, as a -- we don't see those returning to pre-COVID levels in 2021 once you apply inflation factors, if that makes sense at all, like if you took our 2019 cost applied inflation factors to 2021, we do anticipate keeping some of those savings.

This concludes our question-and-answer session. I would like to turn the call back over to Mark Decker for any closing remarks.

Thanks, Aileen, and thanks, everyone, for your time and interest in IRET. We wish everybody a safe and health holiday. And if you haven't already, get out and vote. Thanks so much.

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.