What changed in this filing

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Item 7. Management’s Discussion and Analysis

2022-02-28 compared with 2021-02-22 · 172 added, 159 removed, 223 unchanged (60% of the section changed)

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Historical results and trends which might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.

We are presenting our result of operations for the years ended December 31, 2020 and 2019.

We are presenting our results of operations for the years ended December 31, 2021 and 2020.

For additional comparison of results of operations for the years ended December 31, 2020 and December 31, 2019, please refer to our Annual Report on Form 10-K filed with the SEC on February 22, 2021.

For additional comparison of results of operations for the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019.

This and other sections of this Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, with respect to our expectations for future periods.

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As of December 31, 2021, we owned interests in 79 apartment communities consisting of 14,441 homes as detailed in Item 2 - Properties.

Property owned, as presented in the consolidated balance sheet, was $1.8 billion at December 31, 2020, compared to $1.6 billion at December 31, 2019.

Property owned, as presented in the consolidated balance sheets, was $2.3 billion at December 31, 2021, compared to $1.8 billion at December 31, 2020.

Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes.

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We enhanced cleaning protocols at our communities and offices, implemented physical distancing in community common spaces, and instituted remote work guidelines for our team members, all in accordance with state and local guidelines.

We are utilizing technology to allow our property teams to interact remotely with prospective residents through virtual leasing.

We have provided rent deferrals to residents and rent abatement to commercial tenants who were financially impacted by the COVID-19 pandemic.

To support our team members working on-site, we have provided additional COVID-19 paid time off and enhanced flextime arrangements.

We provided rent deferrals to residents and rent abatement to commercial tenants who were financially impacted by the COVID-19 pandemic.

Certain states and cities, including some of those in which our apartment communities are located, have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, shelter-in-place or stay-at-home directives, restrictions on types of businesses that may continue to operate, and restrictions on the types of construction projects that may continue.

We cannot predict when restrictions currently in place will expire or whether additional restrictions will be imposed in the future.

We implemented a plan to safely re-open common spaces in several of our communities while adhering to state and local guidelines, but we recognize that an increase in COVID-19 cases in these markets could cause us to close common spaces or take other preventive measures.

The availability of vaccines has led many states and cities to lift restrictions;

however, due to new variants of the virus, we cannot predict whether restrictions will be reinstated or if additional restrictions will be imposed in the future.

We implemented a plan to safely re-open common spaces in our communities while adhering to state and local guidelines, but we recognize that an increase in COVID-19 cases in these markets could cause us to close common spaces or take other preventive measures.

We cannot predict the continued impact of the pandemic, including the impact of the proposed U.S.

vaccine mandate , and the degree to which our business and results of operations may be affected, particularly given the extended duration of the pandemic.

Financial Impact of the COVID-19 Pandemic

Many companies, especially in urban areas, have extended directives for employees to work from home during the COVID-19 pandemic.

These extended directives have resulted in decreased traffic to businesses and, in some cases, closures of businesses in urban areas, which has resulted in lower demand and lower rent increases for our five urban based apartment communities.

The COVID-19 pandemic and these directives have affected our operations and the conduct of business at our apartment communities and offices, but did not have a material impact on our financial condition, operating results, or cash flows for the twelve months ended December 31, 2020.

Absent the ability to contain or treat the COVID-19 virus, with a corresponding re-opening of the economy, the ongoing COVID-19 pandemic may have adverse financial and economic impacts that include, but are not limited to, the following:

The COVID-19 pandemic and these directives have affected our operations but did not have a material impact on our financial condition, operating results, or cash flows for the twelve months ended December 31, 2021.

The ongoing COVID-19 pandemic may have adverse financial and economic impacts that include, but are not limited to, the following:

• cause our residents or commercial tenants to defer or stop rental payments, and abandon or fail to renew leases, which would reduce our primary source of net operating income and cash flows;

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economy to suffer an extended economic slowdown, which could lead to a prolonged recession or even economic depression, which in turn would affect the demand for our apartment communities and could have an adverse impact on our business and operating results.

We have taken the following actions in order to protect our residents and employees, manage expenses and preserve cash flow during the COVID-19 pandemic:

• we eliminated the majority of travel for our team members during 2020 and reduced planned travel through 2021;

• left vacant positions unfilled;

• used onsite team members to perform work normally contracted to third parties;

• we have moved the meetings of our Board of Trustees to virtual meetings, thereby limiting the expense associated with in-person meetings.

Despite our efforts to manage our response to the effects of the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on our rental revenue in future years cannot be determined at present.

Despite our response to the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on our rental revenue in future years cannot be determined at present.

The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with residents, commercial tenants, government officials, and business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse impacts on our business.

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For the year ended December 31, 2021, our highlights included the following:

• Net Loss was $0.15 per diluted share for the year ended December 31, 2020, compared to Net Income of $6.00 per diluted share for the year ended December 31, 2019;

• Same-store year-over-year revenue growth of 2.1%, driven by 1.7% growth in rental revenue and 0.4% growth in occupancy;

• Net Loss was $0.47 per diluted share for the year ended December 31, 2021, compared to Net Loss of $0.15 per diluted share for the year ended December 31, 2020;

• Same-store year-over-year revenue growth of 4.8%, driven by 5.1% growth in rental revenue, offset by a decrease of 0.3% in occupancy;

• Same-store net operating income growth of 4.8%.

• Funded $18.5 million of multifamily construction loans;

• Announced Nashville as one of our target markets;

• Rebranded the Company as Centerspace to reflect both the transformation of the company and its vision for the future.

Acquisitions and Dispositions .

During the year ended December 31, 2021, we completed the following transactions in furtherance of our strategic plan:

• Continued our focus on key growth markets, expanding in Minneapolis, Minnesota and Denver, Colorado, acquiring a total of two apartment communities in these markets, consisting of 647 homes, for an aggregate purchase price of $191.0 million;

• Acquired the remaining noncontrolling interest in 71 France for $12.2 million;

• Disposed of four apartment communities in Grand Forks, North Dakota, a commercial property, and a parcel of unimproved land for an aggregate sale price of $44.3 million.

• Closed on a strategic portfolio acquisition in Minneapolis and St.

Cloud, Minnesota for an aggregate acquisition cost of $359.9 million.

The portfolio is comprised of 14 apartment communities in Minneapolis and three apartment communities in St.

Cloud with a total of 2,696 apartment homes.

In connection with this transaction, we issued 1.8 million Series E preferred units with a par value of $100 per unit.

The Series E preferred units pay a 3.875% dividend rate and are convertible, at the holder’s option, into Units at an exchange rate of 1.2048 Units per Series E preferred unit, representing a conversion price of $83.00 per Unit.

The acquired assets were subject to $126.5 million in mortgage liabilities, of which $20.0 million was assumed at a rate of 4.31% with the remaining amount financed through a $198.9 million Fannie Mae credit facility agreement.

The FMCF includes tranches in 7, 10, and 12-year increments with a weighted average interest rate of 2.78%;

• Acquired Civic Lofts, a 176-home apartment community located in Denver, Colorado for $63.0 million;

• Acquired Union Pointe, a 256-home apartment community located in Longmont, Colorado for $76.9 million;

• Disposed of five apartment communities in Rochester, Minnesota and a commercial property for an aggregate sale price of $62.3 million.

Financing Transactions.

During the year ended December 31, 2021, we completed the following financing transactions:

• We issued 829,078 common shares under the 2019 ATM Program for total consideration, net of commissions and issuance costs, of approximately $59.2 million.

• Issued 1.8 million common shares at an average price of $86.13 per share for total consideration, net of commissions and issuance costs, of approximately $156.4 million;

• Amended and expanded our Note Purchase Private Shelf Agreement to increase the aggregate amount under the agreement from $150.0 million to $225.0 million and issued $50.0 million of 2.7% unsecured Series C Notes due June 6, 2030;

• Issued $125.0 million of unsecured notes with a weighted average interest rate of 2.6% and weighted average maturity of 10.5 years;

• Paid $3.8 million to terminate two interest rate swaps in connection with the pay down of our term loans.

We intend to continue our focus on maximizing the financial performance of the communities in our existing portfolio.

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General and administrative expenses 16,213 13,440 2,773 20.6 %

(Gain) loss on sale of real estate and other investments (27,518) (25,503) (2,015) 7.9 %

Net operating income $ 119,848 $ 104,836 $ 15,012 14.3 %

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29,298 5,424 23,874 440.2 %

Other properties and dispositions 6,763 30,120 (23,357) (77.5) %

Other 2,831 2,147 684 31.9 %

Dispositions 3,250 11,721 (8,471) (72.3) %

Total 201,705 177,994 23,711 13.3 %

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11,790 2,152 9,638 447.9 %

Other properties and dispositions 3,114 14,406 (11,292) (78.4) %

Other 1,120 1,008 112 11.1 %

Dispositions 1,641 5,794 (4,153) (71.7) %

Total 81,857 73,158 8,699 11.9 %

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17,508 3,272 14,236 435.1 %

Other properties and dispositions 3,649 15,714 (12,065) (76.8) %

Other 1,711 1,139 572 50.2 %

Dispositions 1,609 5,927 (4,318) (72.9) %

Total $ 119,848 $ 104,836 $ 15,012 14.3 %

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General and administrative expenses (16,213) (13,440) 2,773 20.6 %

Gain (loss) on sale of real estate and other investments 27,518 25,503 (2,015) 7.9 %

Interest expense (29,078) (27,525) 1,553 5.6 %

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Interest and other income (loss) (2,380) (1,552) (828) 53.4 %

Income (loss) before gain (loss) on sale of real estate and other investments, and gain (loss) on litigation settlement (20,760) (19,388) (1,372) (7.1) %

Gain (loss) on sale of real estate and other investments 25,503 97,624 (72,121) (73.9) %

Gain (loss) on litigation settlement — 6,586 (6,586) (100.0) %

NET INCOME (LOSS) $ (2,101) $ 4,743 $ (6,844) (144.3) %

Dividends to preferred unitholders (640) (640) — —

Net (income) loss attributable to noncontrolling interests – Operating Partnership 212 (6,752) 6,964 (103.1) %

Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units 2,806 212 2,594 1,223.6 %

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities (94) 126 (220) (174.6) %

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The currently offered effective rates on new leases at the community are used as the starting point in determination of the market rates of vacant homes.

We believe that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at is estimated market rate.

We believe that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate.

Weighted average occupancy may not completely reflect short-term trends in physical occupancy, and our calculation of weighted average occupancy may not be comparable to that disclosed by other real estate companies.

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The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store communities are due to the addition of those properties to our real estate portfolio, and accordingly provide less useful information for evaluating the ongoing operational performance of our real estate portfolio.

For the comparison of the twelve months ended December 31, 2020 and 2019, 62 apartment communities were classified as same-store and five apartment communities were non-same-store.

For the comparison of the twelve months ended December 31, 2021 and 2020, 59 apartment communities were classified as same-store and twenty-one apartment communities were non-same-store.

See Item 2 - Properties for the list of communities classified as same-store and non-same-store.

Sold communities are included in “Other” for the periods prior to the sale, which also includes non-multifamily properties and the non-multifamily components of mixed-use properties.

Total revenue decreased by 4.2% to $178.0 million for the year ended December 31, 2020 compared to $185.8 million in the year ended December 31, 2019.

A decrease of $23.4 million from dispositions and other properties was offset by an increase of $12.4 million from five non-same-store apartment communities.

Total revenue increased by 13.3% to $201.7 million for the year ended December 31, 2021 compared to $178.0 million in the year ended December 31, 2020.

Revenue from 21 non-same-store apartment communities and other properties increased by $23.9 million and $684,000, respectively, offset by a decrease of $8.5 million from dispositions.

Revenue from same-store communities increased by 4.8% or $7.6 million in the year ended December 31, 2021, compared to the same period in the prior year.

Approximately 1.7% of the increase was attributable to growth in average rental revenue, which was impacted by $450,000 of additional ratio utility billings ("RUBs") revenue as a result of the acceleration of our billing cycle after transitioning to a new RUBs service provider during the fourth quarter.

Approximately 0.4% of the increase was due to higher occupancy as weighted average occupancy increased from 94.4% to 94.8% for the years ended December 31, 2019 and 2020, respectively.

Approximately 5.1% of the increase was due to higher average rental revenue, offset by a 0.3% decrease in occupancy as weighted average occupancy decreased from 94.7% to 94.4% for the years ended December 31, 2020 and 2021, respectively.

Property operating expenses, including real estate taxes.

Total property operating expenses, including real estate taxes, decreased by 6.6% to $73.2 million in the year ended December 31, 2020 compare d to $78.3 million in the year ended December 31, 2019.

A total of $11.3 million of the decrease was attributable to other properties, primarily due to dispositions, but was partially offset by an increase of $4.5 million from non-same-store apartment communities.

Property operating expenses at same-store communities increased by 2.6% or $1.6 million in the year ended December 31, 2020, compared to the

same period in the prior year.

Insurance and real estate taxes comprised $1.2 million and $1.6 million of the increase, respectively.

The increase in real estate taxes was primarily due to increases in Rochester, Minneapolis, and Denver.

The increase in non-controllable expenses was offset by a $1.2 million decrease in controllable operating expenses, primarily due to decreased snow removal costs, utilities, and cost containment efforts related to the COVID-19 pandemic.

Total property operating expenses, including real estate taxes, increased by 11.9% to $81.9 million in the year ended December 31, 2021 compare d to $73.2 million in the year ended December 31, 2020.

Property operating expenses from non-same-store apartment communities increased by $9.6 million, offset by a decrease of $4.2 million from sold properties.

Property operating expenses at same-store communities increased by 4.8% or $3.1 million in the year ended December 31, 2021, compared to the same period in the prior year.

At same-store communities, controllable expenses (which exclude insurance and real estate taxes), increased by $1.5 million, primarily due to

increases in utilities, compensation costs, turnover and maintenance, and marketing costs of $689,000, $284,000, $278,000, and $239,000, respectively.

Non-controllable expenses at same-store communities increased by $1.7 million primarily due to insurance costs.

Insurance and real estate taxes comprised $1.1 million and $632,000 of the increase, respectively.

Net operating income.

NOI decreased by 2.4% to $104.8 million in the year ended December 31, 2020 compared to $107.4 million in the year ended December 31, 2019.

NOI increased by 14.3% to $119.8 million in the year ended December 31, 2021 compared to $104.8 million in the year ended December 31, 2020.

Net operating income from same-store and non-same-store communities increased by $4.5 million and $14.2 million, respectively, offset by a decrease of $4.3 million from dispositions.

Property management expense.

Property management expense, consisting of property management overhead and property management fees paid to third parties, was $5.8 million in the year ended December 31, 2020 and $6.2 million in the year ended December 31, 2019.

The decrease was primarily driven by compensation costs, reduced travel, and advertising.

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 50.9% to $8.8 million in the year ended December 31, 2021, compared to $5.8 million in the year ended December 31, 2020.

The increase was primarily due to $1.2 million in non recurring technology initiatives as well as $1.2 million in compensation costs due to the filling of open positions and additional staffing related to the acquisition of 17 communities during the year.

Casualty gain (loss).

Casualty loss increased by 48.9% to $1.7 million in the year ended December 31, 2020, compared to $1.1 million in the year ended December 31, 2019.

The increase was primarily due to hail losses that were historically insured at lower deductibles, but beginning in 2020 our carriers limited coverage and increased deductibles for hail and wind-related losses.

We also incurred losses at one property due to plumbing failures.

Related to the 2020 hail losses, in the fourth quarter of 2020 we also incurred $754,000 in capitalized asset replacement costs, with an additional $1.3 million expected to be incurred in 2021.

Casualty loss decreased by 79.3% to $344,000 in the year ended December 31, 2021, compared to $1.7 million in the year ended December 31, 2020.

The decrease was primarily due to weather-related losses that occurred in the prior year which did not occur in the current year.

Depreciation and amortization.

Depreciation and amortization increased by 1.8% to $75.6 million in the year ended December 31, 2020, compared to $74.3 million in the year ended December 31, 2019.

This increase was primarily due to non-same-store properties and offset by decreases from sold properties.

Depreciation and amortization increased by 21.9% to $92.2 million in the year ended December 31, 2021, compared to $75.6 million in the year ended December 31, 2020, attributable to an increase of $21.6 million from non-same-store properties, offset by decreases of $2.3 million and $2.7 million at same-store communities and sold properties, respectively.

General and administrative expenses.

General and administrative expenses decreased by 7.0% to $13.4 million in the year ended December 31, 2020, compared to $14.5 million in the year ended December 31, 2019, primarily attributable to decreases of $680,000 in compensation costs, $178,000 in severance-related costs, $381,000 in consulting costs, $277,000 in legal costs related to our pursuit of a construction defect claim which was resolved in the prior year, and $238,000 in decreased travel due to the COVID-19 pandemic.

These decreases were partially offset by an increase of $402,000 in rebranding costs and $137,000 due to incentive compensation related to higher share award valuations compared to previous awards in the long-term incentive plan.

General and administrative expenses increased by 20.6% to $16.2 million in the year ended December 31, 2021, compared to $13.4 million in the year ended December 31, 2020, primarily attributable to increases of $1.3 million in incentive-based compensation costs related to company performance and share-based compensation arrangements due to the timing and form of grants and $808,000 in non-recurring technology initiatives.

Gain (loss) on sale of real estate and other investments.

In the years ended December 31, 2021 and 2020, we recorded gains on sale of real estate and other investments in continuing operations of $27.5 million and $25.5 million, respectively.

Operating income.

Operating income decreased by 27.0% to $8.3 million in the year ended December 31, 2020, compared to a gain of $11.4 million in the year ended December 31, 2019.

Operating income decreased by 11.7% to $29.9 million in the year ended December 31, 2021, compared to $33.8 million in the year ended December 31, 2020.

Interest expense.

Interest expense decreased 9.9% to $27.5 million in the year ended December 31, 2020, compared to $30.5 million in the year ended December 31, 2019, primarily due to the replacement of maturing debt with lower interest rate debt and lower interest rates on our line of credit.

Interest expense increased 5.6% to $29.1 million in the year ended December 31, 2021, compared to $27.5 million in the year ended December 31, 2020, primarily due to maintaining a larger average daily balance on the line of credit compared to the same period of the prior year and the addition of new unsecured senior notes and the Fannie Mae credit facility, offset by a lower weighted average interest rate.

Loss on extinguishment of debt.

We recorded loss on extinguishment of debt in the years ended December 31, 2020 and 2019 of $23,000 and $2.4 million, respectively, primarily due to prepayment penalties associated with the disposal of assets and the write-off of unamortized loan costs.

Loss on extinguishment of debt increased to $535,000 in the year ended December 31, 2021, compared to $23,000 in the year ended December 31, 2020, primarily due to prepayment penalties associated with the disposal of assets and the write-off of unamortized loan costs.

Interest and other income (loss).

We recorded a loss of $1.6 million in interest and other income (loss) in the year ended December 31, 2020, compared to income of $2.1 million in the prior year.

The decrease was primarily due to a $3.4 million loss from certain marketable securities.

Gain (loss) on sale of real estate and other investments.

In the years ended December 31, 2020 and 2019, we recorded gains on sale of real estate and other investments in continuing operations of $25.5 million and $97.6 million, respectively, primarily related to increased dispositions in 2019.

Gain (loss) on litigation settlement.

In the year ended December 31, 2019, we recorded a gain on litigation settlement of $6.6 million from the settlement of a construction defect claim.

Funds from Operations

We believe that Funds from Operations (“FFO”), which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our operating performance, primarily because its calculation does not assume the value of real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation.

Interest and other income (loss) decreased to $2.4 million loss in the year ended December 31, 2021, compared to a loss of $1.6 million in the prior year.

The decrease was primarily due to a $5.4 million loss related to the termination of interest rate swaps, compared to a $3.4 million loss from marketable securities in the prior year.

Funds from Operations and Core Funds From Operations

We believe that Funds from Operations (“FFO”), which is a non-GAAP standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our operating performance, primarily because its calculation does not assume the value of real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation.

We use the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc.

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FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all cash needs, including the ability to service indebtedness or make distributions to shareholders.

Net loss available to common shareholders for the year ended December 31, 2020 decreased to $1.8 million compared to net income of $71.8 million for the year ended December 31, 2019.

FFO applicable to common shares and Units for the year ended December 31, 2020, decreased to $47.4 million compared to $52.9 million for the year ended December 31, 2019, a change of 10.4%, primarily due to a $6.6 million gain on litigation settlement in the prior year which did not recur in the current year, as well as decreased NOI from sold properties and increased loss on marketable securities in the current year.

The decrease in FFO was partially offset by increases in NOI from same-store and non-same-store communities and reductions in interest expense and prepayment penalties.

Core Funds from Operations ("Core FFO"), a non-GAAP measure, is FFO adjusted for non-routine items or items not considered core to business operations.

By further adjusting for items that are not considered part of core business operations, the company believes that Core FFO provides investors with additional information to compare core operating and financial performance between periods.

Core FFO should not be considered as an alternative to net income or as any other GAAP measurement of performance, but rather should be considered an additional supplemental measure.

Core FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all cash needs, including the ability to service indebtedness or make distributions to shareholders.

Core FFO is a non-GAAP and non-standardized financial measure that may be calculated differently by other REITs and that should not be considered a substitute for operating results determined in accordance with GAAP.

Net loss available to common shareholders for the year ended December 31, 2021 decreased to $6.5 million compared to a net loss of $1.8 million for the year ended December 31, 2020.

FFO applicable to common shares and Units for the year ended December 31, 2021, increased to $54.9 million compared to $47.4 million for the year ended December 31, 2020, a change of 16.0%, primarily due to increased NOI from same-store and non-same-store communities as well as lower casualty losses and a prior year loss of $3.4 million on marketable securities that did not occur in the current year.

These increases were offset by decreased NOI from sold properties, increases in interest expense, property management and general and administrative expenses, and a $5.4 million loss related to termination of interest rate swaps.

For a comparison of FFO applicable to common shares and Units for the years ended December 31, 2020 and 2019, refer to our Annual Report on Form 10-K filed with the SEC on February 22, 2021.

For a comparison of FFO applicable to common shares and Units for the eight months ended December 31, 2018 and 2017 and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019.

Reconciliation of Net Income Available to Common Shareholders to Funds from Operations

Reconciliation of Net Income Available to Common Shareholders to Funds from Operations and Core Funds From Operations

(in thousands, except per share and unit amounts)

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(Gain) loss on sale of real estate (27,518) (25,503)

Funds from operations applicable to common shares and Units $ 47,356 $ 52,866

FFO applicable to common shares and Units $ 54,925 $ 47,356

Adjustments to Core FFO:

Casualty loss (recovery) $ — $ 749

Loss on extinguishment of debt 535 23

Rebranding costs — 402

Technology implementation costs 2,020 —

(Gain) loss on marketable securities — 3,378

(Discount) premium on redemption of preferred shares — (297)

Commercial lease termination proceeds (450) —

Acquisition related costs 230 —

Interest rate swap termination, amortization, and mark-to-market 4,942 —

Amortization of assumed debt (53) —

Other miscellaneous items (64) —

Core FFO applicable to common shares and Units $ 62,085 $ 51,611

FFO applicable to common shares and Units $ 54,925 $ 47,356

Dividends to preferred unitholders 640 640

Funds from operations applicable to common shares and Units - diluted $ 47,996 $ 53,403

FFO applicable to common shares and Units - diluted $ 55,565 $ 47,996

Core FFO applicable to common shares and Units $ 62,085 $ 51,611

Dividends to preferred unitholders 640 640

Core FFO applicable to common shares and Units - diluted $ 62,725 $ 52,251

Per Share Data

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FFO per share and Unit - diluted $ 3.54 $ 3.47

Core FFO per share and Unit - diluted $ 3.99 $ 3.78

Weighted average shares and Units - diluted 15,704 13,835

Liquidity and Capital Resources

We strive to maintain a strong balance sheet and preserve financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise.

We intend to continue to focus on core fundamentals, which include generating positive cash flows from operation, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.

Our primary sources of liquidity are cash and cash equivalents on hand and cash flows generated from operations.

Other sources include availability under our unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under our shelf registration statement, including offerings of common shares under our 2021 ATM Program, and long-term unsecured debt and secured mortgages.

Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to our communities, distributions to the holders of our preferred shares, common shares, Series D preferred units, and Units, value-add redevelopment, common and preferred share buybacks and Unit redemptions, and acquisition of additional communities.

We intend to maintain a strong balance sheet and preserve our financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise.

We intend to maintain our capital structure by taking certain actions, including:

• extending and sequencing our debt maturity dates;

• managing interest rate exposure through the appropriate use of a mix of fixed and floating debt and utilizing our lines of credit and senior notes as appropriate;

• maintaining adequate coverage ratios on our debt obligations;

• where appropriate, accessing the equity markets through our 2019 ATM Program and other offerings under our shelf registration statement.

Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to our communities, distributions to the holders of our preferred shares, common shares, Series D preferred units, Series E preferred units, and Units, value-add redevelopment, common and preferred share buybacks, Unit redemptions, and acquisition of additional communities.

We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities and, from time to time, through draws on our lines of credit.

We believe our ability to generate cash from property operating activities and draws on our lines of credit to be adequate to meet all expected operating requirements and to make distributions to our shareholders in accordance with the REIT provisions of the Internal Revenue Code.

Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are also generally expected to be funded from existing cash on hand, cash flow generated from property operations, draws on our lines of credit and/or new borrowings, and we believe we will have sufficient liquidity to meet our commitments over the next twelve months.

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If we are unable to obtain capital from other sources, we may not be able to pay the distribution required to maintain our status as a REIT, make required principal and interest payments, make strategic acquisitions or make necessary routine capital improvements or undertake value add renovation opportunities with respect to our existing portfolio of operating assets.

As of December 31, 2021, we had total liquidity of approximately $204.8 million, which included $173.5 million available on our line of credit based on the value of unencumbered properties and $31.3 million of cash and cash equivalents.

As of December 31, 2020, we had total liquidity of approximately $97.5 million, which included $97.1 million available on our line of credit based on the value of properties contained in our unencumbered asset pool (“UAP”) and $392,000 of cash and cash equivalents.

As of December 31, 2019, we had total liquidity of approximately $226.5 million, which included $199.9 million available on our line of credit based on the UAP and $26.6 million of cash and cash equivalents.

COVID-19-Related Impacts on Liquidity

We anticipate that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flows generated from operations and availability under our unsecured lines of credit.

Although cash flows may be reduced as a result of lower monthly collections of rent as well as the potential for lower occupancy or reduced rental rates during and after the COVID-19 pandemic, we have other available sources of liquidity such as proceeds from property dispositions, including offerings of preferred and common shares under our shelf registration statement, offerings of common shares under our 2019 ATM Program;

and long term unsecured term loans and secured mortgages.

We have the following contractual obligations over the next twelve months:

• $26.1 million of debt maturities in 2021;

• $20.6 million remaining to fund, under construction and mezzanine loans we originated for the development of a multifamily community in Minneapolis, Minnesota.

Potential Impact of COVID-19-Related Effects on Continuing Debt Availability

Although we are in compliance with our covenants under all of our debt facilities and currently expect to continue to remain in compliance with these covenants, there can be no assurance that we will remain in compliance with those covenants or be able to access these funds depending on the length of the COVID-19 pandemic and the breadth of its impact on the U.S.

economy generally and the credit markets in particular.

generally and the credit markets in particular.

Under the terms of our credit facility, we may be unable to obtain advances under our credit facility if:

• we are unable to make certain representations and warranties, including a certification that, since April 30, 2018, there has been no adverse change in our business, financial condition, operations, performance or properties, taken as a whole, which would reasonably be expected to have a material adverse effect;

• we are unable to make certain representations and warranties, including a certification that, since September 30, 2021, there has been no adverse change in our business, financial condition, operations, performance or properties, taken as a whole, which would reasonably be expected to have a material adverse effect;

• changes in our consolidated property NOI or capitalization rates applicable to the properties in our borrowing base reduce or eliminate availability under our credit facility;

• changes in the nature and composition (including occupancy rate) of the properties in our borrowing base cause these properties to become ineligible to be part of our borrowing base, and if we are not able to replace such properties with other qualifying properties, such ineligibility could reduce or eliminate the availability under our credit facility.

Even if we remain in compliance with the foregoing representations, warranties, and covenants, we may be unable to access the full amount available under our credit facilities if our lenders fail to fund their commitments, which could occur if:

• credit market deterioration or overall economic conditions affect the ability of one or more of our lenders to meet their funding commitments under our revolving credit facility.

If a lender fails to fund its commitment under the revolving credit facility, that portion of the credit facility will be unavailable if the lender’s commitment is not replaced by a new commitment from an alternate lender;

• distressed market conditions cause our lenders to transfer their commitments to other institutions, which could result in committed funds not being available, particularly if consolidation of the commitments under our credit facility or among its lenders were to occur;

• we are unable to obtain additional letters of credit due to a default by any lender in meeting its funding obligations.

As of the date of this filing, we have not experienced any restrictions or limitations on the availability of credit in our markets or with our lenders, although there can be no assurance that we will continue to be able to access the credit markets generally or our credit facility in the future.

We have an unsecured credit facility for $395.0 million, with the commitment allocated to a revolving line of credit for $250.0 million and the remaining $145.0 million allocated between two term loans:

a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million term loan that matures on August 31, 2025.

As of December 31, 2020, our line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in the UAP.

As December 31, 2020, the additional borrowing availability was $97.1 million beyond the $152.9 million drawn, including the balance on our operating line of credit (discussed below).

At December 31, 2019, the line of credit borrowing capacity was $250.0 million based on the UAP, of which $50.1 million was drawn on the line.

The multi-bank line of credit bears interest either at the lender’s base rate plus a margin ranging from 35 to 85 basis points, or LIBOR, plus a margin ranging from 135 to 190 basis points based on our consolidated leverage.

The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.This credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.

We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes.

Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually, under this facility.

An additional $25.0 million remains available under this agreement.

Subsequent to December 31, 2020, we issued $50.0 million of 2.7% unsecured Series C notes, due June 6, 2030.

In concert with this issuance, we amended and expanded our Note Purchase Private Shelf Agreement (the "Agreement") with Prudential to increase the aggregate amount available under the Agreement from $150.0 million to $225.0 million.

After the issuance of Series C notes, we have $50.0 million remaining under the Agreement.

We also have a $6.0 million operating line of credit.

This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances.

This operating line matures on August 1, 2021, with pricing based on a market spread plus the one-month LIBOR index rate.

Mortgage loan indebtedness was $298.4 million on December 31, 2020 and $331.4 million on December 31, 2019.

As of December 31, 2021, we had a multibank, revolving line of credit with total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties.

As of December 31, 2021, the additional borrowing availability was $173.5 million beyond the $76.0 million drawn.

As of December 31, 2020, the line of credit borrowing capacity was $250.0 million based on the value of our unencumbered asset pool (“UAP”), of which $152.9 million was drawn on the line.

The line of credit bears interest either at the lender’s base rate plus a margin ranging from 25 to 80 basis points, or LIBOR, plus a margin ranging from 125 to 180 basis points based on our consolidated leverage.

The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.

This credit facility matures in September 2025 and has an accordion option to increase borrowing capacity up to $400.0 million.

In January 2021, we amended and expanded our private shelf agreement with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc.

(collectively, "PGIM") to increase the aggregate amount available for issuance of unsecured promissory notes to $225.0 million.

We also issued $50.0 million of unsecured senior notes in connection with the amendment.

Under this agreement, we issued $200.0 million unsecured senior notes with $25.0 million remaining available, as of December 31, 2021.

In September 2021, we entered into a note purchase agreement for the issuance of $125.0 million senior unsecured promissory notes, of which $25.0 million was under the private shelf agreement with PGIM.

The following table shows the notes issued under both agreements.

(in thousands)

Amount Maturity Date Interest Rate

Series A $ 75,000 September 13, 2029 3.84 %

Series B $ 50,000 September 30, 2028 3.69 %

Series C $ 50,000 June 6, 2030 2.70 %

Series 2021-A $ 35,000 September 17, 2030 2.50 %

Series 2021-B $ 50,000 September 17, 2031 2.62 %

Series 2021-C $ 25,000 September 17, 2032 2.68 %

Series 2021-D $ 15,000 September 17, 2034 2.78 %

In September 2021, we entered into a $198.9 million Fannie Mae Credit Facility Agreement (“FMCF”) for financing the acquisition of 16 apartment communities.

The FMCF is currently secured by mortgages on those apartment communities.

The notes are interest-only, have varying maturity dates of 7, 10, and 12 years, and a blended weighted average interest rate of 2.78%.

As of December 31, 2021, the FMCF had a balance of $198.9 million.

The FMCF is included within mortgages payable on the Consolidated Balance Sheets.

Mortgage loan indebtedness, excluding the FMCF, was $284.9 million on December 31, 2021 and $298.4 million on December 31, 2020.

As of December 31, 2021, the weighted average rate of interest on our mortgage debt was 3.81%, compared to 3.93% on December 31, 2020.

Refer to Note 6 of our consolidated financial statements contained in this Report for the principal payments due on our mortgage indebtedness and other tabular information.

We also have a $6.0 million unsecured operating line of credit.

This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances.

This operating line matures on November 29, 2022, with pricing based on a market spread plus the one-month LIBOR index rate.

All of our term debt is at fixed rates of interest, with staggered maturities.

This reduces the exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on our results of operations and cash flows.

In November 2019, we entered into an equity distribution agreement in connection with the 2019 ATM Program through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times that we determine.

The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general corporate purposes, which may include the funding of future acquisitions and the repayment of indebtedness.

the year ended December 31, 2020, we issued 829,078 common shares under the 2019 ATM Program at an average price of $71.39 per share, net of commissions.

We had an equity distribution agreement in connection with the 2019 ATM Program through which we could offer and sell common shares having an aggregate gross sales price of up to $150.0 million.

Under the 2019 ATM Program, we sold shares having an aggregate sales price of $149.9 million.

We replaced the 2019 ATM Program with the 2021 ATM program, through which we may offer and sell common shares having an aggregate sales price of up to $250.0 million, in amounts and at times that we determine.

The proceeds from the sale of common shares under the 2021 ATM Program are intended to be used for general corporate purposes, which may include the funding of acquisitions and the repayment of indebtedness.

During the year ended December 31, 2021, we issued 1.8 million common shares under the 2019 and 2021 ATM Programs at an average price of $86.13 per share, net of commissions.

Total consideration, net of commissions and issuance costs, was approximately $156.4 million.

As of December 31, 2021, common shares having an aggregate offering price of up to $158.7 million remained available under the 2021 ATM Program.

On December 5, 2019, our Board of Trustees authorized a new share purchase program to repurchase up to $50 million of our common shares or preferred shares over a one-year period.

Under this repurchase program, we could repurchase common shares or preferred shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC.

This program expired on December 5, 2020.

During the year ended December 31, 2020, we repurchased and retired approximately 237,000 Series C preferred shares for an aggregate cost of $5.6 million, including commissions, at an average price per share of $23.75.

During the year ended December 31, 2019, we repurchased and retired approximately 329,000 common shares for an aggregate cost of $18.0 million, including commissions, at an average price per share of $54.69.

As of December 31, 2020 and 2019, we had 3.9 million and 4.1 million Series C preferred shares outstanding, respectively.

On September 1, 2021, we issued 1.8 million Series E preferred units with a par value of $100 per Series E preferred unit as partial consideration for the acquisition of 17 apartment communities.

The Series E preferred unit holders receive a preferred distribution at the rate of 3.875% per year.

Each Series E preferred unit is convertible, at the holder’s option, into 1.2048 Units, representing a conversion exchange rate of $83 per unit.

The Series E preferred units have an aggregate liquidation preference of $181.4 million.

The holders of the Series E preferred units do not have voting rights and are required to hold the units for one year before they may elect to convert.

As of December 31, 2021 and 2020, we had 3.9 million Series C preferred shares outstanding.

Changes in Cash, Cash Equivalents, and Restricted Cash

As of December 31, 2020, we had restricted cash consisting of $1.9 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $5.0 million in deposits for real estate acquisitions.

As of December 31, 2019, we had restricted cash consisting of $2.3 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $17.2 million in net tax-deferred exchange proceeds remaining from a portion of our dispositions.

As of December 31, 2021, we had cash and cash equivalents of $31.3 million and restricted cash consisting of $2.4 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $5.0 million in deposits for real estate acquisitions.

As of December 31, 2020, we had cash and cash equivalents of $392,000 and restricted cash consisting of $1.9 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $5.0 million in net tax-deferred exchange proceeds remaining from a portion of our dispositions.

The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in our consolidated statements of cash flows in Item 15 of this report.

In addition to cash flows from operations, during the year ended December 31, 2021, we generated capital from various activities, including:

• Receipt of $59.2 million from the issuance of 829,078 common shares under our 2019 ATM Program;

• Disposition of four apartment communities in Grand Forks, North Dakota, one commercial property, and one parcel of unimproved land for an aggregate sale price of $44.3 million;

• Receipt of $10.0 million from repayment of a mortgage receivable;

• Draws of $102.8 million on our line of credit;

• Sale of $3.9 million of marketable securities.

• Receipt of $174.5 million, net of fees, from the issuance of unsecured senior notes;

• Receipt of $61.3 million, net of transaction costs, from the sale of five apartment communities in Rochester, Minnesota and a commercial property;

• Receipt of $196.7 million, net of fees, from the Fannie Mae credit facility which was used to pay off debt as partial consideration for the September 1,2021 portfolio acquisition;

• Receipt of $156.0 million, net of fees, from the issuance of 1.8 million common shares under our 2019 and 2021 ATM Programs.

During the year ended December 31, 2021, we used capital for various activities, including:

• Acquisition of Ironwood Apartments, a 182-home apartment community located in New Hope, Minnesota, an inner-ring suburb of Minneapolis, for an aggregate purchase price of $46.3 million, of which $28.6 million was paid in cash and $17.7 million from payoff of a note receivable and accrued interest;

• Acquisition of Parkhouse Apartment Homes, a 465-home apartment community located in Thornton, Colorado, a suburb of Denver, for an aggregate purchase price of $144.8 million;

• Acquisition of the remaining noncontrolling interest in 71 France for $12.2 million;

• Funding $18.5 million of mezzanine/construction loans;

• Acquisition of Union Pointe, a 256-home apartment community located in Longmont, Colorado, for an aggregate purchase price of $76.9 million;

• Acquisition of a portfolio of 17 apartment communities located in Minneapolis, Minnesota and St.

Cloud, Minnesota, for $15.7 million in cash, the paydown of $106.7 million in existing mortgages, and the remainder through the issuance of Series E preferred units;

• Funding mezzanine and construction loans of $18.6 million;

• Repaying approximately $36.3 million of mortgage principal;

• Repurchasing 237,000 Series C preferred shares for an aggregate cost of approximately $5.6 million;

• Paying distributions on common shares and Units of $35.0 million;

• Paying off $145.0 million in term loans;

• Paying $3.8 million for the termination of interest rate swaps;

• Paying $76.9 million on our lines of credit;

• Paying distributions on common shares, Series E preferred units, and Units of $43.4 million;

• Funding capital improvements for apartment communities of approximately $35.9 million.

Contractual Obligations and Other Commitments

Our primary contractual obligations relate to borrowings under our lines of credit, term loans, unsecured senior notes, and mortgages payable.

The primary line of credit had a $153.0 million balance outstanding at December 31, 2020 and matures in August 2022, with a 12-month option to extend the maturity date, subject to customary conditions.

We also had two term loans with an aggregate balance of $145.0 million at December 31, 2020:

a $70.0 million term loan that matures in January 2024 and a $75.0 million term loan that matures in August 2025.

In addition, we had unsecured senior notes with an aggregate balance of $125.0 million at December 31, 2020.

The $75.0 million of Series A senior notes mature on September 13, 2029 and the $50.0 million of Series B senior notes mature on September 30, 2028.

Our primary contractual obligations relate to borrowings under our lines of credit, unsecured senior notes, and mortgages payable.

The primary line of credit had a $76.0 million balance outstanding at December 31, 2021 and matures in September 2025.

Our unsecured senior notes have an aggregate balance of $300.0 million at December 31, 2021 with varying maturities from September 2028 through September 2034.

(in thousands)

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$ 84,665 $ 2,164 $ 4,584 77,917 —

Notes payable (principal and interest) $ 198,574 $ 10,902 $ 21,804 $ 161,077 $ 4,791

Total $ 675,657 $ 45,220 $ 81,853 $ 183,291 $ 365,293

(1) The future interest payments on the lines of credit were estimated using the outstanding principal balance and interest rate in effect as of December 31, 2021.

Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability to increase rents upon the commencement of new leases or renewal of existing leases, thereby minimizing the risk of inflation.

We fund capital expenditures, primarily to maintain or renovate our apartment communities.

The amounts of these expenditures can vary from year to year depending on the age of the apartment community, timing of planned improvements, and lease turnover.

As of December 31, 2021, we had no significant off-balance-sheet arrangements.

However, the cost to operate and maintain communities could increase at a rate greater than our ability to increase rents, which could adversely affect our results of operations.

Off-Balance-Sheet Arrangements

As of December 31, 2020, we had no significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this Report.

Extreme escalation of costs could have a negative impact on our residents and their ability to absorb rent increases.

We also continue to monitor pressures surrounding supply chain challenges.

A worsening of the current environment could contribute to delays in obtaining construction materials for maintenance or value add projects and result in higher than anticipated costs, which could prevent us from obtaining expected returns on value add projects.

Critical Accounting Estimates

Set forth below is a summary of the accounting estimates that management believes are critical to the preparation of the consolidated financial statements included in this Report.

Real Estate .

7 unchanged sentences

Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally five to twenty years.

Property sales or dispositions are recorded when control of the assets are transferred to the buyer and we have no significant continuing involvement with the property sold.

The gain or loss on disposal is recognized net of certain closing and other costs associated with the disposition.

Acquisition of Investments in Real Estate.

Upon acquisitions of real estate, we assess the fair value of acquired tangible assets (including land, buildings and personal property), which is determined by valuing the property as if it were vacant, and consider whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases and resident relationships) and assumed liabilities, and allocate the purchase price based on these assessments.

The as-if-vacant value is allocated to land, buildings, and personal property based on our determination of the relative fair value

of these assets.

The as-if-vacant value is allocated to land, buildings, and personal property based on our determination of the relative fair value of these assets.

Techniques used to estimate fair value include discounted cash flow analysis and reference to recent sales of comparable properties.

4 unchanged sentences

We also consider information about each property obtained during our pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.

Capitalization of Costs.

We follow the real estate project costs guidance in ASC 970, Real Estate – General, in accounting for the costs of re-development projects.

As real estate is undergoing re-development, all project costs directly associated with and attributable to the construction of a project are capitalized to the cost of the real property.

The capitalization period begins when re-development activities and expenditures begin and ends upon completion, which is when the asset is ready for its intended use.

Generally, rental property is considered substantially complete upon issuance of a certificate of occupancy.

We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators.

8 unchanged sentences

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 7. Management’s Discussion and Analysis