What changed in this filing

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Item 1A. Risk Factors

2022-02-28 compared with 2021-02-22 · 69 added, 52 removed, 326 unchanged (27% of the section changed)

5 unchanged sentences

The current pandemic of COVID-19 and the potential future outbreak of other highly infectious or contagious diseases may materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our equityholders.

One of the most significant risk factors is the continuing adverse effects of the COVID-19 pandemic and its associated potential economic impact on our financial condition, results of operations, and cash flows as well as the adverse effects on our residents and commercial tenants, the real estate market, and the global economy and financial markets generally.

The extent to which COVID-19 continues to impact us and our residents and commercial tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

Moreover, you should interpret many of the other risks identified in this Report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

Moreover, the ongoing COVID-19 pandemic and continuing restrictions intended to prevent and mitigate its spread could have

The COVID-19 pandemic has and may continue to impact our financial condition, results of operations, and cash flows as well as adversely affect our residents and commercial tenants, the real estate market, and the global economy and financial markets generally.

The continued effects of COVID-19 will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

Moreover, many of the other risks identified in this Report may be heightened because of the adverse impacts of COVID-19.

The ongoing COVID-19 pandemic and continuing restrictions intended to prevent and mitigate its spread could have

additional adverse effects on our business, including with regards to:

• the COVID-19 pandemic and its ongoing effects on our employees, residents, and commercial tenants, third party vendors and suppliers, and apartment communities, as well as our cash flow, business, financial condition, and results of operations;

• our employees, residents, and commercial tenants, third party vendors and suppliers, and apartment communities, as well as our cash flow, business, financial condition, and results of operations;

• deteriorating economic conditions and rising unemployment rates in the markets where we own apartment communities or in which we may invest in the future;

• government actions or regulations arising out of the COVID-19 pandemic that limit economic and consumer activity or affect the operation of our properties;

• rental conditions in our markets, including occupancy levels and rental rates, our potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors, including the impact of the COVID-19-related governmental rules and regulations relating to rental rates, evictions, and other rental conditions;

• changes in operating costs, including real estate taxes, utilities, insurance costs, healthcare costs, and expenses related to complying with COVID-19 restrictions or otherwise responding to the COVID-19 pandemic.

• rental conditions in our markets, including occupancy levels and rental rates, changes in tax and housing laws, or other factors, including the impact of the COVID-19-related governmental rules and regulations relating to rental rates, evictions, and other rental conditions;

• changes in operating costs related to complying with COVID-19 restrictions or otherwise responding to the COVID-19 pandemic.

Our financial performance is subject to risks associated with the real estate industry and ownership of apartment communities.

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• acquisition agreements are subject to customary closing conditions, including completion of due diligence investigations, and we may be unable to complete an acquisition after making a non-refundable deposit and incurring other acquisition-related costs;

• expected occupancy, rental rates, and operating expenses of acquired apartment communities may differ from the actual results, or from those of our existing apartment communities;

• actual results may differ from expected occupancy, rental rates, and operating expenses of acquired apartment communities, or from those of our existing apartment communities;

• we may be unable to obtain financing for acquisitions on favorable terms, or at all;

• competition for these properties could cause us to pay higher prices or prevent us from purchasing a desired property at all;

• we may be subject to unknown liabilities from acquired properties, with either no recourse or limited recourse against prior owners or other third parties with respect to these unknown liabilities;

• we may be subject to unknown liabilities from acquired properties, with either no or limited recourse against prior owners or other third parties;

• we may be unable to quickly and efficiently integrate new acquisitions into our existing operations.

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Our current or future insurance may not protect us against possible losses.

We carry comprehensive liability, fire, extended coverage, and other insurance with respect to our properties at levels that we believe to be adequate and comparable to coverage customarily obtained by owners of similar properties.

We carry comprehensive liability, fire, cyber, extended coverage, and other insurance with respect to our properties at levels that we believe to be adequate and comparable to coverage customarily obtained by owners of similar properties.

However, the coverage limits of our current or future policies may be insufficient to cover the full cost of repair or replacement of all potential losses, or our level of coverage may not continue to be available in the future or, if available, may be available only at unacceptable cost or with unacceptable terms.

We also do not maintain coverage for certain catastrophic events like hurricanes and earthquakes because the cost of such insurance is deemed by management to be higher than the risk of loss due to the location of our properties.

In most cases, we have to renew our insurance policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance

markets, including the possibility of rate increases.

In most cases, we have to renew our insurance policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance markets, including the possibility of rate increases.

In addition, a reduction of the number of insurance providers or the unwillingness of existing insurance providers to write insurance for multifamily properties may reduce the potential availability and/or cost for obtaining insurance on our properties.

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Some of our apartment communities are located in areas that may experience catastrophic weather and other natural events from time to time, including snow or ice storms, flooding, tornadoes, or other severe or inclement weather.

During the year ended December 31, 2020, many of our markets were impacted by a series of adverse weather-related events.

These events included extreme cold, record-setting snowfall, extensive hail storms in certain markets, and tornadoes, which caused excess ice and snow accumulation, water and hail damage, and other weather-related damage to some of our apartment communities.

Although most of these losses were covered by insurance, these or other adverse and natural events could cause damage or losses that may be greater than insured levels.

These adverse and natural events could cause damage or losses that may be greater than insured levels.

In the event of a loss in excess of insured limits, we could lose all or a portion of our investment in an affected property as well as additional revenue from that apartment community.

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Our operations are concentrated in certain regions of the United States, and we are subject to general economic conditions in the regions in which we operate.

Our overall operations are concentrated in the Midwest region and portions of the West region of the United States.

Our overall operations are concentrated in the Midwest and Mountain West regions of the United States.

Our performance could be adversely affected by economic conditions in, and other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and other regulatory conditions, and competition from other communities and alternative forms of housing.

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In addition, we may fail to provide quality housing and continuous access to amenities as a result of other factors, including mechanical failure, power failure, inclement weather, physical or electronic security breaches, vandalism or acts of terrorism, or other similar events.

Any of these issues could cause our residents to terminate or fail to renew their leases, could expose us to additional costs or liability claims, and could damage

our reputation, any of which could impact our ability to provide quality housing and consistent operation of our apartment communities, which in turn could materially affect our business and results of operations.

Any of these issues could cause our residents to terminate or fail to renew their leases, could expose us to additional costs or liability claims, and could damage our reputation, any of which could impact our ability to provide quality housing and consistent operation of our apartment communities, which in turn could materially affect our business and results of operations.

Competition may negatively impact our earnings.

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We may have limited ability to change our portfolio of properties quickly in response to our strategic plan and changes in economic or other conditions, and the prohibitions under the federal income tax laws on REITs holding property for sale and related regulations may affect our ability to sell properties.

Under certain circumstances, the Internal Revenue Code (the “Code”) imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year.

Under certain circumstances, the Code imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year.

Our ability to dispose of assets also may be limited by constraints on our ability to use disposition proceeds to make acquisitions on financially attractive terms.

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We face risks associated with security breaches or disruptions, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, or persons inside our organization.

The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by

computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions around the world have increased.

The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions around the world have increased.

In the normal course of business, we and our service providers (including service providers engaged in providing web hosting, property management, leasing, accounting and/or payroll software/services) collect and retain certain personal information provided by our residents, employees, and vendors.

We also rely extensively on computer systems to process transactions and manage our business.

While we and our service providers employ a variety of data security measures to protect confidential information on our systems and periodically review and improve our data security measures, we cannot provide assurance that we or our service providers will be able to prevent unauthorized access to this personal information, that our efforts to maintain the security and integrity of the information that we and our service providers collect will be effective, or that attempted security breaches or disruptions would not be successful or damaging.

Even the most well-protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target.

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A security breach or other significant disruption involving computer networks and related systems could cause substantial costs and other negative effects, including litigation, remediation costs, costs to deploy additional protection strategies, compromising of confidential information, and reputational damage adversely affecting investor confidence.

In November 2021, we suffered a ransomware attack on our information technology systems.

Promptly upon detection of the attack, we launched an investigation and notified law enforcement, legal counsel and engaged other incident response experts.

We recovered all of our critical operational data, and the incident did not have a material impact on our business, operations or financial results.

We implemented additional and enhanced measures to reinforce the security of our information technology systems for any cyber-attack we may face in the future.

However, notwithstanding every measure taken to address cybersecurity matters, and although we have not experienced any material losses relating to this incident, we cannot assure you that we will not suffer additional losses related to similar cyber-attacks in the future.

We may be responsible for potential liabilities under environmental laws.

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Even when we have a controlling interest, certain major decisions may require partner approval, such as the sale, acquisition, or financing of a property.

A terrorism attack, other geopolitical crisis, or widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, could negatively affect various aspects of our business, including our workforce and supply chains, and could make it more difficult and expensive to meet our obligations to our residents.

Our operations are susceptible to

national or international events, including acts or threats of war or terrorism, political instability, natural disasters, and health epidemics or pandemics.

These risks include a widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, resulting in a worldwide pandemic that has affected hundreds of countries around the world, including the U.S.

A war, terrorism attack, other geopolitical crisis, or widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, could negatively affect various aspects of our business, including our workforce and supply chains, and could make it more difficult and expensive to meet our obligations to our residents.

Our operations are susceptible to national or international events, including acts or threats of war or terrorism, political instability, natural disasters, and health

epidemics or pandemics.

In late February 2022, Russian-led military forces illegally invaded Ukraine, and prolonged conflict and disruption in the region is likely.

In response to this invasion, the United States, the United Kingdom, the European Union and other countries and organizations initiated a range of formal and informal sanctions against Russia, Belarus and certain Russian and Belarussian officials, individuals, industries and businesses.

The war in Ukraine, the sanctions and any future expansion of or reaction to either of them are likely to have wide-ranging and unpredictable effects on the world economy and financial markets, which could materially and adversely affect our business and results of operations.

We could also be adversely affected by a widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic.

The COVID-19 pandemic has resulted in travel bans, quarantines, and work restrictions that prohibit many employees from going to work.

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If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments or refinance the debt at maturity, the mortgagor could foreclose upon the property, appoint a receiver, and receive an assignment of rents and leases or pursue other remedies, including taking ownership of the property, all with a consequent loss of revenues and asset value.

Foreclosures also could affect our ability to obtain new debt and could create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code and impeding our ability to obtain financing for our other properties.

Foreclosures also could affect our ability to obtain new debt and could create

taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code and impeding our ability to obtain financing for our other properties.

Restrictive covenants in our debt agreements may limit our operating and financial flexibility, and our inability to comply with these covenants could have significant implications .

Our indebtedness, which at December 31, 2021 totaled outstanding borrowings of approximately $859.8 million, contains a number of significant restrictions and covenants.

These restrictions and covenants include financial covenants relating to fixed charge coverage ratios, maximum secured debt, maintenance of

unencumbered asset value, and total debt to total asset value, among others and certain non-financial covenants.

These restrictions and covenants include financial covenants relating to fixed charge coverage ratios, maximum secured debt, maintenance of unencumbered asset value, and total debt to total asset value, among others and certain non-financial covenants.

These may limit our ability to make future investments and dispositions, add incremental secured and recourse debt, and add overall leverage.

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In order to minimize any counterparty credit risk, we enter into hedging arrangements only with investment grade financial institutions.

Potential changes to LIBOR could affect our financing covenants .

Changes to LIBOR could affect our financing covenants .

LIBOR has been used as a primary benchmark for short-term interest rates, including under our credit facility.

Financial Conduct Authority (FCA), which regulates LIBOR, has announced it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but it will not use its powers to compel contributions beyond such date.

The ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced it plans to extend publication of USD LIBOR (excluding one-week and two-month tenor) by 18 months to June 2023.

However, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021.

Financial Conduct Authority (FCA), which regulates LIBOR, ceased providing the one-week and two-month U.S.

dollar LIBOR settings and all non-U.S.

dollar LIBOR settings as of January 1, 2022.

The ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced it plans to cease providing the remaining U.S.

dollar LIBOR settings immediately after June 30, 2023.

Although the FCA does not expect these remaining LIBOR settings to become unrepresentative before the cessation date, it is unknown whether any banks will continue to voluntarily submit rates for the calculation of LIBOR, or whether LIBOR will continue to be published by its administrator based on these submissions, or on any other basis, after such dates.

A joint statement by key regulatory authorities called on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021.

The Alternative References Rates Committee, a steering committee comprised of large U.S.

financial institutions, has proposed replacing USD LIBOR with a new index calculated by short-term repurchase agreements - Secured Overnight Financing Rate (SOFR).

At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere.

Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of financing.

The market transition away from LIBOR and toward SOFR or another alternate reference rate has been and is expected to continue to be complicated and to include the development of term and credit adjustments to accommodate differences between LIBOR and SOFR or any other alternate reference rate as well as adjustments to other market conventions.

During the market transition away from the remaining LIBOR settings, LIBOR may experience increased volatility, and the overnight Treasury repurchase market underlying SOFR may also experience disruptions from time to time, which may result in unexpected fluctuations in SOFR.

While market activity in SOFR-linked financial instruments has continued to develop, the progress has been uneven and there can be no guarantee that SOFR will become widely accepted and used across market segments and financial products in a timely manner or that any other alternative reference rate will be developed.

Although the full impact of such reforms and actions, together with any transition away from LIBOR and toward , including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of financing.

In addition, as it relates to future and derivatives contracts, ISDA master agreements between counterparties may need to be amended or replaced, including derivative contracts in which we are invested.

There can be no assurance that a new global standard will be agreed upon or that any new rate will be reflective of the original interest rate and credit risk included within LIBOR, any of which could have a material adverse effect on our financing costs as well as our business and results of operations.

There can be no assurance that SOFR or another new global standard will be agreed upon or that any new rate will be reflective of the original interest rate and credit risk included within LIBOR, any of which could have a material adverse effect on our financing costs as well as our business and results of operations.

Risks Related to Our Shares

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Sales of substantial amounts of our common or preferred shares in the public market, or the perception that such sales or issuances might occur, may dilute the interests of the current common shareholders and could adversely affect the market price of our common shares.

In addition, as a REIT, we are required to make distributions to holders of our equity securities of at least 90% of our REIT taxable income, determined before a deduction for dividends paid and excluding any net capital gain.

In addition, as a REIT, we are required to make distributions to holders of our equity securities of at least 90% of our REIT taxable income, determined before a deduction for

dividends paid and excluding any net capital gain.

This limits our ability to retain cash or earnings to fund future growth and makes us more dependent on raising funds through other means, which may include raising additional equity capital.

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Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting.

If we were to identify one or more material weaknesses in our internal control over financial reporting, we could lose

investor confidence in our financial reporting and results of operations, which in turn could have an adverse effect on our stock price.

If we were to identify one or more material weaknesses in our internal control over financial reporting, we could lose investor confidence in our financial reporting and results of operations, which in turn could have an adverse effect on our stock price.

Certain provisions of our Declaration of Trust may limit a change in control and deter a takeover.

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Risks Related to Tax Matters

We may incur tax liabilities as a consequence of failing to qualify as a REIT, which could force us to borrow funds during unfavorable market conditions.

We may incur tax liabilities if we were to fail to qualify as a REIT, which could force us to borrow funds during unfavorable market conditions.

We have elected to be taxed as a REIT under the Code.

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The fact that we hold substantially all of our assets (except for qualified REIT subsidiaries) through Centerspace, LP, our operating partnership, and its subsidiaries, and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us.

If Centerspace, LP or one or more of our subsidiaries is determined to be taxable as a corporation, we may fail to qualify as a REIT.

If Centerspace, LP or one or more of our

subsidiaries is determined to be taxable as a corporation, we may fail to qualify as a REIT.

Either our failure to qualify as a REIT, for any reason, or the imposition of taxes on excess net income from non-qualifying sources, could adversely affect our business and our ability to make distributions to our shareholders and pay amounts due on our debt.

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This treatment would reduce funds available for investment or distributions to the holders of our securities due to the additional tax liability to us for the year or years involved, and we would no longer be able to deduct, and would not be required to make, distributions to our shareholders.

To the extent that distributions to the holders of our securities had been made in anticipation of qualifying as a REIT, we may need short-term debt or long-term debt or proceeds from asset sales or sales of common shares to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible

capital expenditures, the creation of reserves or required debt or amortization payments.

The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.

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Treasury Department, which may result in revisions to regulations and interpretations as well as statutory changes.

We cannot predict whether, when, or to what extent the Tax Cuts and Jobs Act of 2017 and any new U.S.

federal tax laws, regulations, interpretations, or rulings will impact the real estate investment industry or REITs.

Prospective investors are urged to consult their tax advisers regarding the effect of the Tax Cuts and Jobs Act of 2017 and potential future changes to the federal tax laws of an investment in our shares or Units.

At any time, the U.S.

federal income tax laws governing REITs or the administrative and judicial interpretations of those laws may be amended.

We cannot predict when or if any new U.S.

federal income tax law, regulation or administrative and judicial interpretation, or any amendment to any existing U.S.

federal income tax law, regulation or administrative or judicial interpretation, will be adopted, promulgated or become effective and any such law, regulation or interpretation may take effect retroactively.

Several recent proposals have been made that would make substantial changes to the U.S.

federal income tax laws generally.

We cannot predict whether any of these proposed changes will become law, or the long-term effect of any future law changes on REITs and their shareholders generally.

We and our shareholders could be adversely affected by any such change in, or any new, U.S.

federal income tax law, regulation or administrative and judicial interpretation.

Dividends payable by REITs may be taxed at higher rates than dividends of non-REIT corporations, which could reduce the net cash received by our shareholders and may be detrimental to our ability to raise additional funds through any future sale of our stock.

Dividends paid by REITs to U.S.

shareholders that are individuals, trusts, or estates are generally not eligible for the reduced tax rate applicable to qualified dividends received from non-REIT corporations but, under the 2017 Tax Cuts and Jobs Act, U.S.

shareholders that are individuals, trusts, and estates generally may deduct 20% of ordinary dividends from a REIT (for taxable years beginning after December 31, 2017 and before January 1, 2026).

shareholders that are individuals, trusts, or estates are generally not eligible for the reduced tax rate applicable to qualified dividends received from non-REIT corporations.

For taxable year beginning before January 1, 2026, non-corporate taxpayers may deduct up to 20% of certain pass-through business income, including “qualified REIT dividends” (generally, dividends received by a REIT shareholder that are not designated as capital gain dividends or qualified dividend income), subject to certain limitations, resulting in an effective maximum U.S.

federal income tax rate of 29.6% on such income.

Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs, such tax rate is still higher than the tax rate applicable to regular corporate qualified dividends.

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From time to time, we dispose of properties in transactions intended to qualify as “like-kind exchanges” under Section 1031 of the Code.

If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis.

If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such

transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis.

If we are unable to meet the technical requirements of a desired Section 1031 exchange, we may be required to make a special dividend payment to our shareholders if we are unable to mitigate the taxable gains realized.

The failure to reinvest proceeds from sales of properties into tax-deferred exchanges could necessitate payments to unitholders with tax protection agreements.

We have tax protection agreements in place on twenty properties.

We have tax protection agreements in place on thirty-four properties.

If these properties are sold in a taxable transaction, we must make the unitholders associated with these particular properties whole through the payment of their related tax.

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Even if we qualify as a REIT under the U.S.

tax code, we may be subject to certain federal, state, and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income,

property, and transfer taxes, such as mortgage recording taxes.

Any of these taxes would decrease cash available for distribution to our shareholders.

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 1A. Risk Factors