Investors Real Estate Trust (IRET) Q3 2019 Earnings Call Transcript

Investors Real Estate Trust (IRET 0.59%)
Q3 2019 Earnings Call
Nov 07, 2019, 10:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good day, and welcome to the Investors Real Estate Trust third-quarter 2019 earnings conference call [Operator instructions] Please note this event is being recorded. I would now like to turn the conference over to Jon Bishop, vice president of finance. Please go ahead.

Jon Bishop -- Vice President of Finance

Thank you, and good morning. IRET's Form 10-Q for the third-quarter 2019 was filed yesterday with the SEC after the market closed. In addition, our earnings release and supplemental disclosure package have been posted on our website at iretapartments.com and filed yesterday on Form 8-K. Before we begin our remarks this morning, I need to remind you that during the call, we will discuss our business outlook and will be making certain forward-looking statements about future events based on current expectations and assumptions.

These statements are subject to risks and uncertainties discussed in our release and Form 10-KT and in other recent filings with the SEC. With respect to non-GAAP measures we use on this call, including pro forma measures, please refer to our earnings supplement for a reconciliation to GAAP, the reasons management uses these non-GAAP measures and the assumptions used with respect to any pro forma measures and their inherent limitations. Any forward-looking statements made on today's call represent management's current opinions and the company assumes no obligation to update or supplement these statements that become untrue due to subsequent events. With me this morning is Mark Decker, IRET's president and chief executive officer; as well as Anne Olson, our chief operating officer; and John Kirchmann, our chief financial officer.

At this time, I'd like to turn the call over to Mark.

Mark Decker -- President and Chief Executive Officer

Thanks, Jon. Good morning, everyone and welcome. For our team 2019 is all about executing and working to demonstrate progress off of 2018, which we consider the base year for IRET as a focused housing company. So far this year, things are coming together in a very powerful way.

As owners and operators of the business, we are in a good place and see opportunity for continued growth. Focusing on outcomes. For the third quarter, core FFO per diluted share grew 15% year over year, driven by strength in operations as demonstrated by a 5.3% same-store NOI growth, a lower cost of debt, disciplined management of our controllable expenses as well as our corporate G&A. Year to date, our statistics are equally impressive.

So before we go further, I'd like to thank our team for taking good care of our customers, while delivering outstanding financial results. Thank you, IRET team. One of our largest areas of focus is our Rise by 5 initiative, which we embarked upon a year and a half ago. For the third quarter, we picked up 70 basis points of margin over the prior year and are on track to achieve our goal of greater than 60.5% NOI margins.

Rise by 5 is really a portfolio of initiatives and investments designed to take IRET from being a very good operator to a market leader. One of the elements included in Rise by 5 is actively managing our investments and giving ourselves a chance to succeed. The series of transactions that have occurred since our last conference call in August are a powerful example of how this can work. As you may have read, we made two important investments in our core markets and opportunistically exited from Topeka as well as refined our Bismarck portfolio.

Specifically, we purchased FreightYard Townhomes and Flats in the North neighborhood of Minneapolis and Lugano at Cherry Creek in Denver. Here are some portfolio efficiencies that we gained. We sold 11 communities comprised of 158 buildings and redeployed into two communities with just three buildings. The NOI margin on the assets sold was in the low 50s, while the NOI margin we're purchasing is in the high 60s.

The age of our homes went from an average of 30 years to six years. And while the one building in the Twin Cities is 100 years old, the homes were all completely renovated over the past two years. Our average rents went from $810 to $1,730. In addition, with the new assets falling into existing regions, we were able to get more efficient in our property operations by eliminating three positions.

Due to our operational consistency, active portfolio management activities – and portfolio management activities, we were able to lower our average cost of debt 40 basis points from September 2018 to September 2019, while increasing the length of our average maturities by one-and-a-half years and laddering those maturities. Most notably the $125 million of notes with Prudential represents pricing that is on par with BBB minus REIT issuers. So we are doubly pleased. First that the private placement market is now open to us for long-term unsecured notes and also that our inaugural pricing was able to take into account the work we've done over the past three years to our credit profile.

Accessing capital markets is a critical part of being public. And so today, we entered into a $150 million at-the-market equity distribution program or ATM. We'll be using the cash proceeds from these primary share offerings for general corporate purposes with the goal of increasing per share metrics, improving markets and maintaining a strong balance sheet. Turning to our markets.

We see strength in particular in the Twin Cities, which consistently ranks among the nations metro level leaders for occupancy. Even in light of strong supply, we've seen cap rate compression on investment transactions over the past few months, which we believe demonstrates competence by investors, several of whom are new in the market and see a relative value opportunity. Department fundamentals are also strong in Denver with 96% occupancy marketwide in the third quarter. Demand continues to outpace supply as Denver has and continues to see positive trends in population and job growth.

Looking toward 2020, we expect that over 40% of our NOI will come from top 20 markets that are driven by innovation and play well together in terms of growth instability. The balance of our NOI in 2020 will come from a more efficient and growth-oriented portfolio centered around education, healthcare, government and services. As we mentioned on the last call, we believe the amount of capital interested in multifamily is driving broad-based strength in pricing. We've been focused primarily on the benefits that this is a seller and believe that tertiary markets are pricing closer to primary markets than ever.

This is a big tailwind for our strategy but offers challenges when we go to redeploy the sale proceeds. However, when you consider our NorthStar, which is durable cash flow growth, it is an opportunity – it is an opportune time to sell out of slower growth markets and purchase less capital-intensive assets in growth-oriented markets. We'll continue to be disciplined and opportunistic with our lens on any activities focused around improving per share results, improving our exposure to markets with better opportunities for growth, maintaining a strong balance sheet with access – and maintaining a strong balance sheet with access to many forms of capital. With that, let me pass the mic to Anne Olson, our chief operating officer.

Anne Olson -- Chief Operating Officer

Good morning, and thank you, Mark. With 5.3% same-store NOI growth in the third quarter as compared to the same period last year and are comparable year-to-date same-store NOI growth reaching 4.4% we are demonstrating that our investment in increasing efficiencies and operating acumen are producing results. Our NOI gains are being driven by increases in revenue, particularly in our strategic market of Minneapolis. Revenues across our same-store Minneapolis portfolio are up 6.5% Year to date compared to the same period last year.

Our entire Minnesota portfolio has maintained strong performance throughout 2019 and when looking at that aggregate portfolio, we achieved an increase of 7.3% NOI growth in the third quarter compared to the third-quarter 2018. Revenue across our other markets remains steady with the exception of our North Dakota portfolio. While revenue growth has lagged, our North Dakota market's performed well in the quarters due to strong expense management. Grand Forks has experienced as 6.5% increase in NOI year over year and Bismarck is up 2.4% year over year.

Our focus on controllable expense containment is ongoing and in the third quarter, we reduce same-store controllable expenses by 2.1% over the same period in 2018, bringing our year-to-date controllable expense growth to negative 30 basis points compared to 2018. These measures combined with our revenue enhancing initiatives are not only providing strong NOI growth across our portfolio, but other framework for building an agile and scalable operations platform that can be a competitive advantage as our portfolio grows and changes. These initiatives are also the foundation for margin expansion. While, the work on expanding our margin is producing positive results with 40 basis point increase year to date over the same period last year.

We are facing headwinds and non-controllable expenses. Across our portfolio, we have realized and are anticipating rising real estate tax and insurance costs. This tightens our focus on Rise by 5 initiatives. Our controllable expenses as a percentage of revenue have decreased 120 basis points year to date compared to 2018.

And I'd like to talk about a few of the key initiatives we have undertaken in 2019, where the early results are indicating strong future performance. In February, we changed our approach to our revenue management platform. The increased revenue we are achieving demonstrates that we are capturing the market rents within the portfolio on new leases as well as achieving strong increases on lease renewals. These changes have also helped us move our lease expiration profile to more accurately reflect the seasonality of our markets and we have implemented these changes while maintaining strong occupancy.

In May, we institute a requirement that our residents obtain renters insurance or pay a non-compliance fee. This change is being implemented as our leases roll throughout the remainder of 2019 and into 2020. This initiative reduces our risk and potential costs related to uninsured losses as well as creates additional revenue. As of September 30, 61% of our units are subject to this requirement, with 40% providing evidence of insurance and the remaining residents paying the non-compliance fee.

Upon full implementation, we anticipate this initiative will generate in excess of $1 million in annual revenue. Also in May, we removed the utility reimbursement caps on over 70 of our communities for new leases and upon renewal. We have just started to see the positive impact of this on our financial statements and our third quarter same-store results showed an increase of approximately $54,000 or 7.2% in utility reimbursements compared to third quarter last year. The increase will continue to compound.

And in October, loan we achieved a 41.5% or $85,000 increase over October 2018. Upon a complete lease roll, we are anticipating an increase of approximately $15 per month per unit, resulting in over $2 million of additional revenue annually. Another key to our margin expansion is capitalizing on the value-add opportunity within our same-store portfolio. In the third quarter, we renovated 51 units in Minneapolis, and since we began renovations in this market, we have completed 150 units or approximately 22% of approved and planned renovations.

We expect that achieving our premiums on renovated units will contribute to revenue increases in Minneapolis through 2020, with expected pickup and rental revenue growth from value-add investment in the Omaha market to start showing in the third quarter next year. This quarter's results demonstrate that our team is well prepared to continue to evolve our operating platform to achieve efficiency and organic growth. I'm grateful for the commitment, flexibility and balance that our team members bring to work each day to serve our residents. Now I'll turn it over to John, who has thoroughly verified all of the numbers I just gave you and he is ready to tell you all about core FFO.

John Kirchmann -- Chief Financial Officer

Thank you, Anne. Last night, we reported core FFO for the quarter ending September 30, 2019 of $0.99 per diluted share, an increase of $0.13 or 15% over the same quarter in 2018. Year to date, core FFO is $2.76 per diluted share, compared to $2.49 for the first nine months of 2018, an increase of $0.27 or 11%. The increase in core FFO was primarily due to NOI growth, lower general and administrative expenses, and reduced interest expense from the refinancing of debt at more favorable terms.

The increase was partially offset by higher property management expense and higher casualty losses from weather-related events. Looking at our general and administrative expenses, total G&A decreased by 3% to $10.7 million for the nine months ended September 30, 2019, from $11.1 million in the same period of the prior year, primarily due to decrease is up $707,000 in severance-related costs, $476,000 in legal fees related to our successful pursuit of recovery in a construction defect claim and $241,000 in real estate taxes and sold parcels of land. These decreases were partially offset by an increase of $927,000 in compensation costs, as a result of a decrease in open positions and higher incentive compensation related to expanding the participant pool in our long-term incentive plan. Property management expense was $4.6 million for the first nine months of 2019 and 11% increase compared to $4.1 million in the same period of the prior year.

The increase is primarily due to the implementation of new technology solutions related to improving the resident experience as well as compensation costs, including severance. Moving to capital expenditures, as presented on Page S14 of the supplemental. For the third quarter of 2019, same-store capex was $2.1 million, which was $1 million less than the same period in 2018. Through the first nine months of 2019, same-store capex was $5.2 million, a decrease of $1.6 million compared to the same period in 2018.

For the full year, same-store capex is expected to be in line with calendar year 2018 at $9.5 million to $10 million. Turning to the balance sheet, as of September 30, 2019, we had $155 million in total liquidity, including $147 million available on our corporate revolver. As referenced earlier by Mark in his comments, during the quarter, we entered into a private placement agreement for the issuance of up to $150 million of senior unsecured promissory notes. We view this financing to be validation of the enhancements we have made to our balance sheet and the realization of our goal to obtain investment-grade like debt metrics.

During the quarter, we also entered into a 12-year interest-only $59.9 million mortgage loan priced at a fixed rate of 3.88%. This year has seen our team execute on a number of initiatives and transactions that we believe position us for the future with a more durable and stable cash flow stream. As a result of these activities in our operating results, as presented on Page S15 of our supplemental, we are updating our guidance. We are increasing the midpoint of 2019 full-year core FFO per diluted share by $0.06 to $3.73 by increasing the guidance range to $3.68 to $3.78.

The higher core FFO target is from continued strong results from our operations, disposition and redeployment execution and lower interest costs from favorable terms on our debt refinancing. We are increasing the midpoint of our full-year same-store NOI guidance from 3.5% to 3.75% by increasing the bottom of our guidance range. We now expect same-store NOI growth to be between 3.5% and 4%. We are narrowing the range of our 2019 full-year same-store revenue growth to 3.25% to 3.75%, which left the midpoint unchanged.

And finally, we are narrowing the range of 2019 full-year same-store expense growth to 3% to 3.5%, which left the midpoint unchanged. Please note, we are planning to provide full-year 2020 guidance on our next call, when we discussed the fourth-quarter results of 2019. With that, I will turn the call over to the operator.

Questions & Answers:

Operator

Thank you. [Operator instructions] Our first question today will come from Drew Babin with Baird. Please go ahead.

Drew Babin -- Robert W. Baird and Company -- Analyst

Hey, good morning. I'm just wondering to talk about the exits of Topeka and Bismarck. Obviously, cap rates and markets like this have come down fast and probably are still coming down, while they may be stabilized and some of the more core markets or major markets around the country. Can you give us a little more color on the exit cap rates on these markets as well as, if you're willing to disclose kind of first year expectations on the recent acquisitions?

Mark Decker -- President and Chief Executive Officer

Sure. Yes, so as we said thematically, still a lot of demand in these markets. In Topeka, that went off at a 6% to 6.25% cap so Drew, if you recall, our convention as to give a quarter pinpoint range, so 6% to 6.25% for Topeka. Bismarck was 6.25% to 6.5%.

And then on the buy side, we are – I would say, 4.58% to 4.78%, roughly 4.325% cap going in.

Drew Babin -- Robert W. Baird and Company -- Analyst

OK. That's helpful. And I guess also, obviously, there's a specific growth difference between the markets you're buying and the ones you're exiting, which is probably the major reason why you're doing it. And by our numbers, certainly the long-term demand growth prospects of Minneapolis, Denver are certainly exceed places like Topeka and Bismarck.

Have you internally quantified that at all sort of the IRR expectations of long term of the markets you're exiting versus the ones you're – you have been entering or have been growing in. Could you maybe give a little more color on how management thinks about that?

Mark Decker -- President and Chief Executive Officer

Sure. So I'm going to give you a bit of a long answer. The way we look at it is every quarter we look at every asset and we have judgment around markets and growth prospects generally. But we also have a tenure capital plan for every asset.

And we look at what we think expenses and revenues are going to grow by. And then we look at what – sort of what the after everything cash flow is to the enterprise and we force to rank all the assets. And then we have an NAV that we set against that. So I would call that sort of our point of indifference where we are happy to hold it.

When in the case of Topeka was really, that was an opportunistic sale. So we were getting a lot of feedback from the brokerage community that there was a lot more interest in Topeka than there had been historically. So these are brokers, who are saying, hey, we've been transacting in Topeka for 20 years and historically, you might have two people, who could credibly buy this whole portfolio. Today, we think you're going to have six and your pricing is going to be better.

And we said, well, that's interesting. We'll take it to market on that basis. In the end, we did get eight bids from all really highly qualified buyers and ended up selling that at about 8% to 10% premium to our NAV. So what we thought it was worth, so that was really an opportunistic move for us.

In the case of the Bismarck assets, those were smaller assets with lower rents and in our judgment, a pretty heavy capital load over the next 10 years. So while those cap rates are higher than what we purchased at this sort of after everything cash flow in some cases could be the same or better. And certainly, the growth is better. And we're very grateful for the experience we had in Topeka, but I mean, a fun fact on Topeka's growth in 1960, there were 120,000 – 123,000 people there, and today there's 125,000, and you can buy a single family home there in the low $100,000 range.

So that's an excellent thing in terms of cost of living, but a bad thing in terms of being a landlord. So we were happy to get out of there. That's how we think about it. And again, on the Bismarck side that with much more, I would say, tactical versus opportunistic, where like we have in the case of Minnesota, we really paired our portfolio down to more institutional, larger assets, higher rents, better margins, more efficiencies, etc.

Drew Babin -- Robert W. Baird and Company -- Analyst

OK. That's great detail. I prefer long answers to non-answers for sure.

Mark Decker -- President and Chief Executive Officer

I should just add. On top of all that we put an IRR, an unlevered IRR. So we compare what we're – what we could buy with what we could hold would be another key factor there. Sorry.

Drew Babin -- Robert W. Baird and Company -- Analyst

OK, great. I appreciate it. And just a one more for me. The other income growth, which is kind of been exceeding just growth in pure rents.

And you talked about the penalty fees for not getting renters insurance the reimbursement caps lifting and things like that, which are very important things to doing and very crucial and growing your margins. Should we expect that other income remains a tailwind to the overall revenue growth number next year? Or it sounds like there's plenty of opportunity left and I guess, how far are we from getting to the point where some of the low-hanging fruit in that numbers maybe work through and rent growth kind of goes back to where pure rents are? Or in the case of some of your peers, even on a lower number this growth in other income kind of stalls. Just if you could square that away, that'd be very helpful.

Mark Decker -- President and Chief Executive Officer

Sure. The short answer is yes. And I'll ask Anne to give you some detail.

Anne Olson -- Chief Operating Officer

Yes. Thanks, Drew. We do expect that it will be a tailwind through next year. As I indicated, we are doing a lot of these initiatives on the lease roll.

So we're about 60% of the way through getting units into these programs, which leaves 40% into next year. And so we do think that it will continue to grow. And if you recall, we really started this program a year and a half ago by resetting a lot of our market fees. That is an ongoing – that's ongoing.

So that's just not a one-time thing. So what – we look at that now, every year we're increasing them where we can either garage rent, pet fees, really trying to keep our rents and our overall revenue optimized and in line with market. So we do think that we will see good tailwinds on the revenue side from other revenue opportunities.

Drew Babin -- Robert W. Baird and Company -- Analyst

Great. Thanks all for the color. That's all for me.

Mark Decker -- President and Chief Executive Officer

Thanks, Drew.

Operator

Our next question will come from Rob Stevenson with Janney. Please go ahead.

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

Good morning, guys. Mark, so you sold about one-third of the Bismarck portfolio looks like. How does the asset quality compare with what you sold versus what's remaining for you guys?

Mark Decker -- President and Chief Executive Officer

Yes. So one-third probably by units and less than a quarter by value. Does that answer the question?

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

OK. So theoretically, then the stuff that's remaining is some better quality than what you just sold?

Mark Decker -- President and Chief Executive Officer

Unquestionably, yes.

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

OK. All right. Just trying to think about that. From your standpoint, like how – when you look at it, you've been executing well on the sell side with these transactions, but how strong is the acquisition side for you given where cap rates and demand is for people with much lower cost to capital, even though yours has come down of late, you've got these recent disposition proceeds as well as some potential future proceeds as some of the other properties your marketing are sold.

How confident are you that you could close in the near term on acquisition or two? Are these proceeds likely to be used to reduce debt maybe fund redevelopment in the near term?

Mark Decker -- President and Chief Executive Officer

I mean, we're, highly confident in our ability to redeploy the money. I would say, thematically, since I've been here, we've had more ideas than capital. I would consider it our job to continue that in balance. So we have a lot of good ideas for what to do with future proceeds, whether they come from asset sales or the ATM in both Denver and Minne.

So we feel good about that.

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

OK. And then John, pragmatically, is there a limit? Are you guys going to run anywhere close to a limit even if you sell more assets in terms of rolls and an ability to sell in any given year?

John Kirchmann -- Chief Financial Officer

No. We don't have any issues there.

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

All right. And then last one –

John Kirchmann -- Chief Financial Officer

We do actually monitor that and track that and make sure we're in compliance with all those guidelines, our rules. And we do not have any limiting factors.

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

OK. And then last one from me, Anne or John. So same-store expense growth is 2.8% year to date. The revised guidance is 3% to 3.5% is a numerically implies a 4% plus for the fourth quarter.

What's driving same-store expense growth in the fourth quarter up more than 4%?

John Kirchmann -- Chief Financial Officer

Yes. Great question. We have a very tough comp in our fourth quarter 2018. If you go back and look at our performance that quarter was a very strong quarter.

So there are some comp issues just with some favorable resolutions that happen to them. In addition, we had did some initiatives around staffing and structuring in the third quarter of 2018 and kind of as we've gone through this year, we've had a pretty nice comp and by the fourth quarter of 2018, those had all been implemented. So we don't have as strong as comp there to offset some of those expenses, the expense growth we're seeing on the non-controllable side.

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

OK. Thanks guys. I appreciate it.

Operator

Our next question will come from Barry Oxford with D.A. Davidson. Please go ahead.

Barry Oxford -- D.A. Davidson -- Analyst

Great. Thanks, guys. Mark, when you look into 2020 and your acquisitions, are you eyeing some newer growth markets? Or will your goal be more to get economies of scale in the current markets that you're in?

Mark Decker -- President and Chief Executive Officer

So when you say growth markets, you're talking Denver and Minne, or the Twin Cities.

Barry Oxford -- D.A. Davidson -- Analyst

Correct.

Mark Decker -- President and Chief Executive Officer

Yes. I mean, the answer is, I guess we'd like to finish starting in Denver. We perceive there to be some benefits from a procurement and human capital perspective to have a few more deals there. We have, right now, we own three communities in Denver, and I think we'd love to own four or five.

And then we really would like to turn to other markets. And when we think about other markets, I mean, speaking broadly, we're thinking three to six or four to eight kind of in total. If we built it out, all the way and those markets would have similar characteristics to Denver and Minneapolis in terms of population north of a million, heavy been toward innovation, lots of growth, good overall housing dynamics for someone who's in the apartment business, maybe some different weather and seasonality. So things like that, we're not really looking at any market right now beyond the Twin Cities in Denver, but we're doing work around the economics and multi-family dynamics of those markets.

Barry Oxford -- D.A. Davidson -- Analyst

Right. And then looking at acquisition and disposition for 2020, will they come roughly in line together or will one outstrip the other, by a wide margin. I know you're not giving 2020 guidance. I'm talking by a wide margin.

Mark Decker -- President and Chief Executive Officer

Yes. I mean our – if everything goes the way we plan, we would be biased toward – we would be a net buyer in 2020 by margin.

Barry Oxford -- D.A. Davidson -- Analyst

OK. Great.

Mark Decker -- President and Chief Executive Officer

That laid plans very – we'll see.

Yes. And I mean, I think directionally we're far more interested on the size of the per share FFO and distributable cash than the size of the company.

Barry Oxford -- D.A. Davidson -- Analyst

Right. Yes, no. Absolutely. That makes sense.

All right. Thanks guys. I appreciate it.

Operator

Our next question will come from John Kim with BMO Capital Markets. Please go ahead.

John Kim -- BMO Capital Markets -- Analyst

Thank you. You have some like atypical occupancy patterns, where I can see this quarter was down 90 basis points sequentially, but 140 basis points year over year on a same-store basis. Can you just remind us what this is attributable to?

Anne Olson -- Chief Operating Officer

Yes. Good question. It's really attributable to our goal of optimizing revenues. So we have and we are willing to let occupancy dip a little bit when we're seeing a really strong rent growth.

So overall the revenue in the rents – the rent trend looks really good and it has allowed occupancy to come down a little bit. Also we have and we have talked about in the past the tough lease expiration schedule with the seasonality of our markets. Most people are moving in the summer. It's a pretty heavy load in the summer.

We have been working on our revenue management system to really get that in line with the seasonality to make it a little bit easier on the property and have undertaken a lot of initiatives in that regard that those things take time to move. So I think the occupancy trend, it's really due to our goal to optimize revenue overall and get the higher – achieve the higher rents and also our lease expiration profile.

John Kim -- BMO Capital Markets -- Analyst

OK. I may have missed this, but what were the blended least growth rates this quarter new and renewal and where are renewals going out right now?

Anne Olson -- Chief Operating Officer

Yes. So renewals now in October are going out right around our October numbers, 2.7%, which is right in line with our overall same-store Year to date. Our blended is right at 2.4%. So, we still feel pretty good about where the leases are coming in.

John Kim -- BMO Capital Markets -- Analyst

OK. A question maybe from Mark. The Minneapolis City Council, earlier this month or last month. Actually it was looking at rent control as potential measure.

Can you comment and how that may impact your portfolio going forward?

Mark Decker -- President and Chief Executive Officer

Yes. I think as a practical matter, we think that that it's a real policy debate because there are real issues with affordability and housing. We don't see that as a large threat. The city did enact what they call the 2040 plan, which allows for a lot more density, which I think probably will help more in terms of getting supply bill.

They have also enacted an inclusionary zoning policy, which put a bunch of developers kind of into the queue early. So there's a lot coming out of the ground here in particular in the Downtown. And I think that we'll have kind of a surge of supply and then it'll really peter out as that inclusionary zoning works its way in. There's also some – there's been some arguing around screening criteria here in town.

But in general, I think rent control is unlikely, but I'm not a politician. It's something we certainly watch, but that we're not actively concerned about.

John Kim -- BMO Capital Markets -- Analyst

So from an investment perspective, it doesn't put you on pause as far as new acquisitions in the markets.

Mark Decker -- President and Chief Executive Officer

It does not and we've not seen it stop anyone else. And I mentioned in my prepared remarks, we really are seeing and listening to some of the other calls, it sounds like this is happening broadly. But we're seeing some tightening in pricing, higher pricing and we're seeing a lot of new participants in the market. So I'd say the interest in this market is stronger than ever.

John Kim -- BMO Capital Markets -- Analyst

Got it. OK. And then my final question is on your balance sheet, which looks like leverage has been increasing on a net debt EBITDA basis. Where does improving the balance sheet fall in your priorities versus earnings growth? And I guess, improving the concentration in your top 20 markets?

Mark Decker -- President and Chief Executive Officer

Yes. Top three but third. So we are most focused on metrics, core FFO and distributable cash. I mean, our view is there is greater risk in the event of a downturn given where we are today being in markets that have cap rates that gap out quickly, financing that gaps out quickly, demand at the apartment level that slows quickly than there is to having the leverage levels that we have today.

We've also done quite a bit of work to ladder those maturities. So, all debt is not created equal as you know, and we've worked very hard to improve the form of the debt we have. And we're going to continue to do that. So it's something we think about constantly.

It is a priority. I did note in your note, the comment on leverage, it did tick up, but that's really kind of a point in time thing when you consider the asset that we sold. We had a small industrial asset that we sold in the Twin Cities and then we had the Bismarck portfolio that brings it down probably a quarter turn. And I would say, for certain we aren't trying to tell the market we're comfortable with more leverage.

We were happy with kind of where we were going into this quarter. I think you'll see us work our way back toward that level through a combination of sales potential, capital raises, et cetera.

John Kim -- BMO Capital Markets -- Analyst

Great. Thank you.

Mark Decker -- President and Chief Executive Officer

Thanks, John.

Operator

Our next question will come from Jim Sullivan with BTIG. Please go ahead.

Jim Sullivan -- BTIG -- Analyst

Thank you. Couple of operations questions for me. First of all, the earlier question about the occupancy trend and looking at individual markets on a sequential quarter basis. The biggest drop in occupancy was Minneapolis.

And I'm curious, the reasons behind that, I know your value-add program is kind of concentrated there, so that may be a factor. But, just curious how you expect that market's occupancy rate to trend over the next two quarters?

Anne Olson -- Chief Operating Officer

Yes. Thanks. When we look – you nailed it. It's really vacancy loss associated with our value-add program.

As Mark mentioned earlier, we do think and see that Minneapolis has one of the strongest overall occupancy trends historically. And we feel that in our assets that are not in our value-add programs. So really what is impacting the Minneapolis occupancy is simply the value-add, which you have going in two large – two of our largest assets here.

Jim Sullivan -- BTIG -- Analyst

OK. Just a little bit further on the value-add. I know that's kind of – I think kind of point two in the capital allocation priority list. What's the average period to complete the value-add projects?

Anne Olson -- Chief Operating Officer

I think overall, when we look at an asset, we're looking at generally two to four years to complete a project. Some of them are much shorter, but if we're talking about in unit turns, we do those on the least roll. We have done some projects in much shorter timeframe. I think we finished our very first whole building kind of renovation, we did those in occupied units early or mid last year.

That only took us about three or four months. But, if we're going to roll through and renovate full units, it's about two to four years.

Jim Sullivan -- BTIG -- Analyst

My question was really focused on an individual unit basis. Once the lease terminates and you start the value-add to when the unit is ready to be released. How many days or weeks are we talking about?

Anne Olson -- Chief Operating Officer

Yes. We target under 30 days and we have been able to do that, at our – one of our Minneapolis assets, we're currently averaging 19 days and at the other Minneapolis asset we're at 28 days just under 30.

Jim Sullivan -- BTIG -- Analyst

OK. And then kind of a related question, also you specified in prior presentations, a value-add menu. I think total of about $33 million. And again, I know you may update that when you give your guidance for 2020, and I know this is a multiyear effort.

But is the value-add menu likely to grow materially from where it is a year when you come out with your next presentation?

Anne Olson -- Chief Operating Officer

Yes. I think at the beginning of 2020 we will start underwriting projects that will – we're just launching in Omaha – in the third quarter, we launched the Omaha project with our tests units and we'll start seeing that that's a very significant project down there, it affects six of our assets in Omaha and Lincoln. And so at the beginning of 2020, we will look to underwrite the next set of value-add. We do expect that the pipeline will grow of approved projects that are in the queue.

Jim Sullivan -- BTIG -- Analyst

And so far, and I know it's early days, the yields obtained on the projects are in line with underwriting.

Anne Olson -- Chief Operating Officer

Yes. Yes, we've been pleased so far. We do monitor it closely. Really looking at if there's an – maybe increased costs or decreased costs, what that means for the premium we need to achieve.

And we're trying to stay very nimble as we roll through the projects.

Jim Sullivan -- BTIG -- Analyst

OK. And then final question for me on the revised outlook. You've changed the average shares outstanding number there, increasing it. Is that because of where the share price is currently and the potential buy backs that you may or may not do?

John Kirchmann -- Chief Financial Officer

Part of that too is now, we have some dilution from – so it's building in that dilution, which would've increase the shares.

Yes. So our guidance doesn't anticipate any buy backs or share issuances.

Jim Sullivan -- BTIG -- Analyst

OK. Very good. Thank you.

Mark Decker -- President and Chief Executive Officer

Thanks, Jim.

Operator

[Operator instructions] Our next question will come from Buck Horne with Raymond James. Please go ahead.

Buck Horne -- Raymond James -- Analyst

Close enough, guys. Yes, a long time listener, first time caller here guys. But I wanted to go back to maybe the capex guidance. If I could just to understand, I think it sounds like there's a ketchup in capex spending in the fourth quarter.

Just maybe walk me through the timing of that spend and just also curious as you're looking out ahead with the introduction of some younger buildings into the portfolio, if we think about 2020 capex related spending, all else equal. Should the spend level in aggregate be same, better, lower then this year?

John Kirchmann -- Chief Financial Officer

Yes. So going to your first question as far as fourth quarter and full-year guidance around capex. So we got a late start because of late winter, but we've been getting these projects teed up and they are off and roaring now. So, the real focus is, prior to winter setting in to get a lot of these projects done.

But the work going into the spin, we're going to have in the fourth quarter, it's really been going on for three to four months to get these up and running. As far as next year, that is the thesis. And as we go into these newer assets that are per unit capex will be lower with these assets. We look at it on a yield basis, right? So relative to rent the cost of turn a – buy a stow for a unit that gets $800 of rent is not that different from the cost of a stow from a unit that gets $1,700 of rent.

So, we are definitely planning and seeing improvement from that going into the future.

Buck Horne -- Raymond James -- Analyst

Great. And just thinking about real estate taxes, just how strong asset pricing has been particularly in Minne and Denver. Do you think that's going to start to effect tax appraisals going into next year? Or how do you think about budgeting for estimated taxes next year or in future? Just given what's happening with – does the capital markets activity affect how the tax outlook looks for you guys?

John Kirchmann -- Chief Financial Officer -- Analyst

Yes. It's affected by growth and transactions more than anything. And we've been seeing it my three years here and the valuations are going up and taxes are going up. We do expect that to continue into 2020.

We have – every time we get an asset valuation we compare it to where our valuation is. And we do appeal a number of those. But typically speaking, we are seeing taxes increase in – we are expecting taxes to increase in 2020. We're actually getting the valuations now and we're seeing those increases in the valuation.

What we don't get yet and we won't get until later this month or December, really what those mill rates are to give you – that prevents me from giving you a little clearer picture. But evaluations are going up for 2020.

Buck Horne -- Raymond James -- Analyst

And my last one just real quick. Looking at the debt maturities for 2020 and 2021, what your thoughts? Are there any opportunities to refinance or pay those off early or just any other opportunities to drive your interest rate costs a little bit lower in the near term?

John Kirchmann -- Chief Financial Officer

Yes. So, we have about $60 million to $70 million of debt at an weighted average rate of 5.2% that we have access to over the next 24 months. So we really pared that down with some of the financing activity we've done in this past quarter, the third quarter. But there is still some fruit out there to be harvested.

Mark Decker -- President and Chief Executive Officer

Yes. Buck, just to add to that. I think we feel like we've been very – this has been a very fortunate tailwind for us. We weren't planning on this financing environment.

And it's really a big part of what catalyzed us moving to sell some of these assets earlier that sort of we're able to pull that good news forward and still deliver good per share metrics, while also improving the quality of the portfolio. So, good news is, it was there, bad news is, it's not as much as it was six months ago.

Buck Horne -- Raymond James -- Analyst

Thanks, guys. Congrats.

Mark Decker -- President and Chief Executive Officer

Yes. Thanks so much.

Operator

This will conclude our question-and-answer session. I would now like to turn the conference back over to Mark Decker for any closing remarks.

Mark Decker -- President and Chief Executive Officer

Thanks, John. We appreciate everyone's interest in the company and wish everyone a happy and healthy holiday. Thanks for your time today. And if you are attending IRET's annual meeting in L.A.

next week, we hope to see you there.

Operator

[Operator signoff]

Duration: 54 minutes

Call participants:

Jon Bishop -- Vice President of Finance

Mark Decker -- President and Chief Executive Officer

Anne Olson -- Chief Operating Officer

John Kirchmann -- Chief Financial Officer

Drew Babin -- Robert W. Baird and Company -- Analyst

Rob Stevenson -- Janney, Montgomery, Scott -- Analyst

Barry Oxford -- D.A. Davidson -- Analyst

John Kim -- BMO Capital Markets -- Analyst

Jim Sullivan -- BTIG -- Analyst

Buck Horne -- Raymond James -- Analyst

More IRET analysis

All earnings call transcripts