Midwest And Mountain West Demand Will Secure Future Success

Key Takeaways

• Strong demand in key regions and a decrease in new apartment supply bolster revenue growth through improved leasing and occupancy rates.
  
• Robust financial positioning and favorable macro conditions support strategic acquisitions and steady revenue growth through effective capital allocation.
  
• Rising property taxes, supply pressures, and increased competition in key markets could pressure net margins, revenue growth, and future investment returns.

Catalysts

An owner and operator of apartment communities committed to providing great homes by focusing on integrity and serving others.

• Centerspace is experiencing strong occupancy and demand, particularly in Midwest and Mountain West regions, with a significant year-over-year increase in occupancy and positive leasing spreads. This is likely to positively impact revenue growth due to higher rental rates and increased tenant retention.
  
• The supply of new apartments is expected to decrease significantly, which should improve leasing spreads and occupancy rates. This is anticipated to strengthen revenue growth as market demand outpaces supply.
  
• Centerspace has a healthy balance sheet with robust liquidity and a low weighted average debt cost, positioning the company well for strategic acquisitions and capital allocation, which can enhance earnings growth through value-adding investments.
  
• Positive macroeconomic conditions, such as low unemployment and strong regional economies, support steady rental increases and revenue growth, as these factors contribute to stable or increasing rent-to-income ratios.
  
• Property tax and other non-controllable expenses are expected to stabilize after one-time increases, allowing for improved net margins as controllable expenses remain efficiently managed.

Centerspace Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Centerspace's revenue will grow by 3.4% annually over the next 3 years.
• Analysts are not forecasting that Centerspace will become profitable in next 3 years. To represent the Analyst Price Target as a Future PE Valuation we will estimate Centerspace's profit margin will increase from -6.8% to the average US Residential REITs industry of 16.1% in 3 years.
• If Centerspace's profit margin were to converge on the industry average, you could expect earnings to reach $47.1 million (and earnings per share of $2.24) by about May 2028, up from $-17.9 million today.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 39.6x on those 2028 earnings, up from -57.5x today. This future PE is lower than the current PE for the US Residential REITs industry at 41.1x.
• Analysts expect the number of shares outstanding to grow by 7.0% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 7.41%, as per the Simply Wall St company report.

Centerspace Future Earnings Per Share Growth

Risks

• Rising property taxes, as evident in Denver, could elevate expenses more than expected, potentially impacting net margins and earnings.
  
• Continued supply pressures in key markets like Denver, despite strong demand, could suppress new lease rates, affecting revenue growth potential.
  
• The disconnect between private and public market pricing could lead to challenges in capital allocation, impacting future investment returns and earnings.
  
• Expected challenges in occupancy decline or rate pressure during peak leasing seasons may affect revenue stability and overall financial projections.
  
• Increased competition and supply in markets like Rochester and Denver could put downward pressure on rent growth and impede revenue increases.

Valuation

• The analysts have a consensus price target of $71.708 for Centerspace based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $79.0, and the most bearish reporting a price target of just $66.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $291.7 million, earnings will come to $47.1 million, and it would be trading on a PE ratio of 39.6x, assuming you use a discount rate of 7.4%.
  
• Given the current share price of $61.42, the analyst price target of $71.71 is 14.3% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.