Centerspace's Q3 2025: Contradictions Emerge in Leverage Strategy, Denver Market Outlook, and Minneapolis Recovery

Guidance:

• Full-year Core FFO per diluted share expected $4.88–$4.96 (midpoint lowered $0.02).
• 2025 same-store NOI growth expected 3.0%–3.5%; same-store revenues +2.0%–2.5% (Denver concessions noted).
• Same-store expenses expected to increase ~75 basis points; concession amortization will impact Q4 and 2026.
• Net debt/EBITDA expected to move to low 7x by year-end; pro forma average debt rate ~3.6% and average maturity ~7.2 years.

Business Commentary:

• Same-Store Revenue and NOI Growth:
• Centerspace reported 4.5% year-over-year growth in NOI within its same-store portfolio for Q3, driven by 2.4% increase in same-store revenues and a 2.2% increase in average monthly revenue per occupied home.
• The growth was due to solid increases in revenue coupled with excellent execution on expenses, despite adjustments related to strategic transactions.

• Strategic Transaction Activity:
• The company executed strategic initiatives, including acquisitions in Colorado and Utah, and dispositions in Minnesota, expected to recycle approximately $212 million of capital.

• These moves were aimed at enhancing market position, portfolio quality, and efficiency, along with strategic capital recycling activities.

• Lease and Demand Dynamics:

• Lease rates peaked in mid-Q2 and remain positive at 1.3% for the quarter and 1.6% year-to-date.

• Retention exceeded expectations, hitting 60% in peak leasing quarters, with significant new lease growth in markets like North Dakota (5.2%) and Denver's higher tenant incomes.

• Denver Market Challenges and Recovery:

• Denver experienced 3.5% blended lease rate decline in Q3 due to supply pressures, with concessions ranging from no concessions to 6 weeks free.
• Despite these challenges, expectations are for Denver's demand to outpace supply in the back half of 2026, indicating a potential recovery in 2027.

Sentiment Analysis:

Overall Tone: Positive

• Management highlighted operational strength: 4.5% YOY same-store NOI growth, Q3 Core FFO $1.19/share, and disciplined capital recycling ($212M expected recycled). They acknowledged a $0.02 midpoint reduction to Core FFO due to timing, G&A and interest, but reiterated improved debt profile (net debt/EBITDA to low 7x) and optimism for Denver normalization into 2026–27.

Q&A:

• Question from Brad Heffern (RBC Capital Markets): How do you balance repurchases against goals of reducing leverage and increasing float?
  Response: Buybacks in the quarter were small, funded from excess St. Cloud sale proceeds, viewed as a good use of capital while remaining mindful of leverage objectives.

• Question from Brad Heffern (RBC Capital Markets): Outlook for Minneapolis — return to normalcy or above‑average catch-up?
  Response: Management expects Minneapolis is returning to normalcy and should outperform into 2026, potentially ranking in the top five U.S. rent‑growth markets.

• Question from Robin Haneland (BMO Capital Markets): What is your earn‑in for 2026?
  Response: Earn‑in sits just above ~1%, reflecting Denver weakness and concession activity.

• Question from Robin Haneland (BMO Capital Markets): Can you elaborate on Denver concession levels and duration?
  Response: Concessions vary across the market; in our portfolio they range from none to ~6 weeks free (market up to ~8–10 weeks); portfolio concessions are roughly at or slightly below market levels.

• Question from Robin Haneland (BMO Capital Markets): How do Fort Collins/Loveland lease trends differ from Denver?
  Response: Fort Collins materially outperformed due to muted supply: ~450 bps higher rent growth and ~600–700 bps stronger absorption versus Denver over recent periods.

• Question from Robin Haneland (BMO Capital Markets): How will the $88.1M Minneapolis sale proceeds be recycled?
  Response: Proceeds have been allocated to recent acquisitions (Salt Lake City and Fort Collins) and will be used primarily to pay down acquisition‑related debt.

• Question from James Feldman (Wells Fargo): Blended lease growth outlook for Q4 and expectations for Jan/Feb?
  Response: Q4 renewals remain strong (high‑2% to low‑3%); new‑lease trade‑outs remain negative; portfolio exposure ~low‑5% and occupancy stable; near‑term Jan/Feb visibility hinges on Denver concession reversals.

• Question from James Feldman (Wells Fargo): What drove higher G&A and any one‑time items to model for 2026?
  Response: Q3 G&A spike was driven by non‑run‑rate fees/legal and true‑ups; run‑rate remains ~$28M; tax true‑ups normalized and insurance expected to be low single‑digit—no major one‑offs forecast for 2026.

• Question from Connor Mitchell (Piper Sandler): When will Denver turn the corner on supply/demand?
  Response: Management expects demand to outpace supply in the back half of 2026, with clearer improvement into 2027.

• Question from Robert Stevenson (Janney): Was the lower value‑add CapEx guidance due to Minnesota sales or a pullback?
  Response: The reduction was timing‑driven related to dispositions and not a thematic pullback from redevelopment across the core portfolio.

• Question from Robert Stevenson (Janney): When do the $93M of secured debt maturities occur in 2026?
  Response: Those secured maturities are scheduled in the first half of 2026 (spread across Q1 and Q2, completed by June).

• Question from Ami Probandt (UBS): Why is same‑store revenue growth decelerating in Omaha and North Dakota?
  Response: Deceleration is primarily an offset from Denver's weakness; Omaha and North Dakota remain solid but are smaller portfolio weights and see seasonal effects entering winter.

• Question from Richard Anderson (Cantor Fitzgerald): Will the spread between sale and purchase cap rates persist as you pursue the trade strategy?
  Response: Management sees target cap rates largely stable today; strong bid for secondary/tertiary assets persists, so buy/sell differentials are expected to remain but will be monitored by market and asset quality.

• Question from Mason P. Guell (Robert W. Baird): Which smaller markets will outperform next year and when will larger markets lead?
  Response: North Dakota is expected to continue outperforming in 2026, Minneapolis is next, and Denver/Minneapolis may lead more meaningfully into 2027 as supply tails off.

• Question from Buck Horne (Raymond James): Any signs of renter credit or demand deterioration among younger cohorts?
  Response: No material deterioration observed: incomes are up, rent‑to‑income ~22%, bad debt remains low, retention strong, and no meaningful evidence of doubling up.

Contradiction Point 1

Leverage and Capital Allocation

It involves changes in financial strategies, specifically regarding leverage and capital allocation, which are critical indicators for investors and stakeholders.

Stock buybacks are attractive but compete with reducing leverage and increasing liquidity. How do you balance these priorities? - Brad Heffern(RBC Capital Markets)

2025Q3: We think about this opportunity every day. The repurchase is a small use of proceeds, just a few million dollars. We agree it's a good use of capital and signals our conviction about the company's value. - Anne Olson(CEO)

What is the long-term plan for leverage and how long will it take to achieve it? - James Feldman(Wells Fargo)

2025Q2: Long-term goal is leverage below 7, ideally the 5s. We aim to lower leverage through excess sale proceeds and increasing scale. We're focused on maintaining leverage while repositioning the portfolio. - Anne Olson(CEO)

Contradiction Point 2

Denver Market Performance

It involves differing expectations and assessments of the Denver market's performance and potential recovery, which can impact investment decisions and financial forecasts.

With flat same-store revenue due to Denver's weakness, what are your expectations for 2026 earnings? - Robin Haneland(BMO Capital Markets Equity Research)

2025Q3: Earn-in currently stands at about 1%, slightly above, driven by concessions in Denver. - Bhairav Patel(CFO)

How will the Denver market perform for the remainder of the year? When will rent inflection occur, especially regarding new rate growth? - Jamie Feldman(Wells Fargo)

2025Q1: We are seeing improvement in Denver with a 200 basis point increase in new lease spreads between March and April. We expect demand to stabilize new lease rates by the end of this year, and we are optimistic about Denver's long-term prospects. - Anne Olson(CEO)

Contradiction Point 3

Minneapolis Market Recovery

It reflects differing expectations regarding the recovery and performance of the Minneapolis market, which can impact strategic decisions and investor confidence.

Will Minneapolis return to normalcy or see above-average performance? - Brad Heffern(RBC Capital Markets, Research Division)

2025Q3: We're seeing a return to normalcy in Minneapolis. For next year, we expect Minneapolis to outperform historically. It's expected to be in the top 5 U.S. markets for rent growth headed into 2026. - Anne Olson(CEO)

Is the Midwest apartment market performance overly conservative early this year, or is performance ahead of expectations? - Brad Heffern(RBC Capital Markets)

2025Q1: In Minneapolis, we've seen some softness in market conditions in late 2022 and into early 2023. We recognize that demand has weakened, but we still expect market rent growth to be above average for the year at a weighted average of about 2.7%. - Anne Olson(CEO)

Contradiction Point 4

Concessions and Renewal Growth

It involves changes in market conditions, particularly regarding concessions and renewal growth, which directly impact revenue and operational strategies.

What are the concession levels in Denver and how long are they expected to persist? - Robin Haneland(BMO Capital Markets)

2025Q3: Concession levels in Denver range from no concessions to 6 weeks free. We're either at or slightly under the market average. - Anne Olson(CEO)

How much did Denver negatively impact renewal lease growth? - Robert Stevenson(Janney)

2025Q2: Denver impacted growth by 20-30 basis points due to flat renewals. Other markets like North Dakota, Omaha, and Minneapolis performed well. - Anne Olson(CEO)

Contradiction Point 5

Supply and Demand Dynamics in Denver

It involves differing assessments of the supply and demand dynamics in the Denver market, which can impact strategic planning and operational decisions.

How do Denver's supply dynamics compare to those of Boulder and Fort Collins? - Connor Mitchell(Piper Sandler & Co., Research Division)

2025Q3: Supply in Denver peaked later, demand will exceed supply in late 2026, into 2027. Fort Collins has a more muted supply profile and better rent growth. - Grant Campbell(SVP of Investments and Capital Markets)

Can you break down the 2.4% blended growth rate between new and renewal business? Also, can you comment on the improvement versus 2024? - John Kim(BMO)

2024Q4: Denver had the largest negative new lease growth...Overall, Denver has been better absorbing additional supply than Minneapolis. - Anne Olson(CEO)