Centerspace 2026 Q2 Earnings Call

Thank you. Good morning. Centerspace's Form 10-Q for the quarter ended June 30th, 2026, was filed with the SEC yesterday after market close. Our earnings release and supplemental disclosure package are available on centerspacehomes.com and were filed on Form 8-K. Today's remarks include forward-looking statements based on management's current views and assumptions. These statements are subject to risks and uncertainties discussed in our risk factors and other SEC filings. We cannot guarantee these statements will materialize, and you should not place undue reliance on them. Please refer to our earnings release for reconciliations of any non-GAAP measures discussed on today's call. Joining me today are Bhairav Patel, our Chief Financial Officer, and Grant Campbell, Senior Vice President of Investments in Capital Markets. During our remarks, we will give a brief update related to our portfolio repositioning and operating trends.

After which, Graham will elaborate on the status of our dispositions and investment activities. We'll close out with Bharath providing context for the guidance updates we outlined in our release last evening. In the last 14 months, we have sold or are under contract to sell 20 communities for approximately $530 million. These transactions have significantly improved the profile of our portfolio and balance sheet, increasing exposure to institutional markets, eliminating exposure to tertiary markets like St. Cloud, Rapid City, and Bismarck, and reducing leverage. Executing this strategy is intentional. Our goal is a higher quality portfolio with stronger growth potential, lower Net Debt to EBITDA, and greater financial flexibility. Operationally, the quarter was in line with our expectations. We have updated our same-store reporting to reflect disposition activity. Now our same-store results are more weighted to Denver and Minneapolis.

This impacted our overall revenue, which was flat year-over-year, primarily due to concessions in the Denver market. However, disciplined expense management led to NOI growth of 30 basis points in the second quarter when compared to the second quarter of 2025. Expenses declined 10 basis points year-over-year as our teams controlled costs across categories. Most of the savings came from lower R&M costs, including turn expenses. Within the same store, we had an excellent quarter for retention. Of residents with lease expirations, 61.3% of our residents renewed at a renewal rate growth of 3.4%. New lease rate growth was a negative 60 basis points, which was an improvement of 190 basis points over the first quarter and resulted in blended lease growth of 1.8%. The blended lease increases have held steady through July.

While Denver remains softer as new supply continues to be absorbed, it is notable that our blended spreads for July were positive. Overall, the softness in Denver is offset by strong results out of North Dakota, Nebraska, and Minnesota. In particular, Minneapolis delivered blended rent growth of 3.4%, with retention at 65%, evidence that the market has absorbed the elevated supply that had challenged many markets across the country. We are capturing rent increases in markets where supply has been absorbed and new supply is muted. Outside of the Mountain West, all of our markets had blended lease growth in June in excess of 3%. While we believe we have stability in operations and an opportunity as deliveries diminish in the Mountain West into 2027, we also have a strong opportunity to capture value through our portfolio repositioning.

Grant, can you discuss more specifics on our disposition and capital markets activities?

Thanks, Anne, good morning, everyone. We continue making progress on our portfolio optimization and de-leveraging plan announced in early June. On June 29th, we sold Civic Lofts in Denver, Colorado, for $30 million. This was a smaller community relative to our other Denver assets and no longer core to our long-term strategy in that market. The transaction represented a mid 3% cap rate on T12 financials, including non-stabilized vacancy and concessions this particular urban Denver sub-market is experiencing today. From a stabilized operations perspective, the transaction represents a low 5% cap rate. More broadly in Denver, first half of the year transaction volume is down 46% from the same time period in 2025 and 72% compared to 2024. Despite lower transaction volumes, high conviction investors have recently been active on individual community acquisitions.

We have seen recent acquisitions at significant discounts to replacement costs in urban submarkets with going-in cap rates at mid 4% and below, along with select newer vintage suburban communities pricing at high 4% to low 5% in place cap rates. These investment decisions are informed by first half of 2026 absorption figures being the highest on record in Denver, market's continued high cost of homeownership, and deceleration of the new construction pipeline. Moving to other portfolio markets, on July 9th, we closed the sale of five communities in Rapid City, South Dakota, for $66 million. This sale exited us from the Rapid City market. In Bismarck, North Dakota, we remain in process on executing the sale of six communities for approximately $150 million with closing expected in August. This transaction will exit us from the Bismarck market.

Pricing on the Rapid City and Bismarck sales is a mid 6% cap rate, highlighting the capital interest in secondary markets driven by healthy regional economies and measured new supply pipelines. In total, our disposition activity in Denver, Rapid City, and Bismarck includes 12 communities, two market exits, and total sale price of approximately $245 million, all consistent with pro forma outcomes described in our early June portfolio optimization plan. In addition to these initiatives, we also made the decision to sell two communities in Minneapolis. This was driven by strong asset pricing received given the strength of Minneapolis fundamentals, management of our portfolio concentrations, and further advancement of balance sheet strategy. On July 14th, we closed the sale of Red 20 and Ironwood to newer vintage communities totaling 312 homes, which sold for $73.8 million.

In aggregate, all 2026 disposition activity includes 14 communities, 1,810 apartment homes, and total sale price of approximately $320 million. These sales improve our overall portfolio quality and operating efficiency, including average rent per community increasing 1.4% and average homes per community increasing from 201 to 222. Our 2026 dispositions have allowed us to move forward with certainty and speed in executing de-leveraging outcomes associated with our strategic review and manage related tax implications. All of our sales priced inside of the implied mid to high 7% portfolio cap rate, our stock currently trades at. Given this valuation disconnect, we bought back shares in the quarter, repurchasing $2.5 million at an average price of $55.54 per share. While active with buybacks, we are also focused on our leverage profile, seeking to strike an appropriate balance between the two, this quarter's initiatives achieve this.

I'll now turn it over to Bhairav to discuss our financial results, balance sheet, and revised guidance.

Thanks, Grant, hello, everyone. Last night we reported second quarter Core FFO of $1.27 per diluted share, driven by a 30 basis point year-over-year increase in same-store NOI as revenues and expenses remained relatively flat. Our same-store results exclude NOI from the 14 communities sold or held for sale as of quarter end. As a result, they are not comparable to first quarter same-store results or prior same-store guidance, both of which included those assets. Turning to full-year 2026 expectations, the reconstitution of our same-store pool to exclude the 14 communities now results in expected same-store NOI growth ranging from flat to down 1% year-over-year. At the midpoint, we expect revenue growth of 50 basis points and expense growth of 2%.

Most of the change in same-store guidance reflects the updated same-store pool, as Bismarck and Minneapolis had strong first halves and were expected to continue performing well. These communities will not meaningfully contribute to earnings in the second half of the year. As a result, we are lowering our Core FFO midpoint to $4.63 per share. We will use the proceeds to fully repay our line of credit and expect to have approximately $100 million of cash on hand, including $50 million-$60 million earmarked for a special distribution that may be required to maintain our REIT status. We continue to refine our taxable income projections, and any required special distribution would likely occur in the fourth quarter. Lastly, we expect full-year net G&A and property management expenses of $28.3 million at the midpoint, excluding non-routine severance and strategic review items.

The reductions we implemented in connection with the dispositions reflect our ongoing effort to align our overhead structure with the evolution of our portfolio. The reduction in overhead this year does not fully capture the total impact because several actions were implemented mid-year. We expect our annualized run rate, which better captures the overall impact, to be lower by approximately $2 million because of the realignment. Moving to the balance sheet, we ended the quarter with more than $240 million of liquidity. Annualized Net Debt to EBITDA was 7.3 times, down sharply from 8.2 times in Q1. We had approximately $1 billion of debt outstanding, with a weighted average rate of 3.6% and a weighted average maturity of 6.7 years. Disposition activity after quarter end will further strengthen our position.