CENTERSPACE 10-K

Item 1. Business OVERVIEW Centerspace (“we,” “us,” “our,” “Centerspace,” or the “Company”), formerly known as Investors Real Estate Trust, is a real estate investment trust (“REIT”) organized under the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of apartment communities. Our current emphasis is on making operational enhancements that will improve our residents’ experience, redeveloping some of our existing apartment communities to meet current market demands, and acquiring new apartment communities in target markets, including the Minneapolis/St. Paul and Denver metropolitan areas. We focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of December 31, 2021, we owned interests in 79 apartment communities, containing 14,441 homes and having a total real estate investment amount, net of accumulated depreciation, of $1.8 billion. Our corporate headquarters is located in Minot, North Dakota. We also have a corporate office in Minneapolis, Minnesota. Website and Available Information Our internet address is www.centerspacehomes.com. We make available, free of charge, through the “SEC filings” tab under the Investors section of our website, our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, Transition Report on Form 10-KT, and amendments to such reports, and proxy statements for our Annual Meetings of Shareholders, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports are filed with or furnished to the SEC. These reports are also available at www.sec.gov. We also make press releases, investor presentations, and certain supplemental information available on our website. Current copies of our Code of Conduct; Code of Ethics for Senior Financial Officers; and Charters for the Audit, Compensation, and Nominating and Governance Committees of our Board of Trustees are also available on our website under the “Corporate Governance” tab under the Investors section of our website. Copies of these documents are also available free of charge to shareholders upon request addressed to the Secretary at Centerspace, P.O. Box 1988, Minot, North Dakota 58702-1988. Information on our website does not constitute part of this Report. STRUCTURE We were organized under the laws of North Dakota on July 31, 1970, and have operated as a REIT under Sections 856-858 of the Internal Revenue Code of 1986, as amended (the “Code”), since our formation. On February 1, 1997, we were restructured as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”), and we conduct our daily business operations primarily through our operating partnership, Centerspace, LP, formerly known as IRET Properties (the “Operating Partnership”). The 3 Table of Contents sole general partner of Centerspace, LP is Centerspace, Inc., formerly known as IRET, Inc., a North Dakota corporation and our wholly owned subsidiary. All of our assets and liabilities have been contributed to Centerspace, LP, through Centerspace, Inc., in exchange for the sole general partnership interest in Centerspace, LP. Centerspace, LP holds substantially all of the assets of the Company. Centerspace, LP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of limited partnership units (“Units”), which is one of the reasons the Company is structured in this manner. As of December 31, 2021, Centerspace, Inc. owned a 83.3% interest in Centerspace, LP. The remaining interest in Centerspace, LP is held by individual limited partners. BUSINESS STRATEGIES Our business is focused on our mission - to provide a great home - for our residents, our team members and our investors. We fulfill this mission by providing renters well-located options in various price ranges. While fulfilling our mission, we are seeking consistent earnings growth through exceptional operations, disciplined capital allocation, and market knowledge and efficiencies. Our operations and investment strategies are the foundation for fulfilling our mission and furthering our vision of being a premier provider of apartment homes in vibrant communities by focusing on integrity and serving others. Operations Strategy We manage our apartment communities with a focus on providing an exceptional resident experience and maximizing our property financial results. Our initiatives to optimize our operations include: • Providing an exceptional customer experience to enhance resident satisfaction and retention; • Attracting, developing, and retaining diverse talent to enable a culture of engagement; • Scaling our business to enhance efficiencies; • Leveraging technology and systems; and • Demonstrating an organizational commitment to ESG. Investment Strategy Our business objective under our current strategic plan is to employ an investment strategy that encompasses: • Seeking opportunities to increase distributable cash flow; • Managing our balance sheet to maintain flexibility and enhance growth opportunities; and • Investing in high-quality and efficient rental communities. FINANCING AND DISTRIBUTIONS To fund our investment and capital activities, we rely on a combination of issuance of common shares, preferred shares, Units in exchange for property, and borrowed funds. We regularly issue dividends to our shareholders. Each of these is described below. At-the-Market Offering In September 2021, we entered into an equity distribution agreement in connection with a new at-the-market offering program (the “2021 ATM Program”), replacing our prior at-the-market offering program (the “2019 ATM Program”). Under the 2021 ATM Program, we may offer and sell common shares having an aggregate sales price of up to $250.0 million, in amounts and at times determined by management. Under the 2021 ATM Program, we may enter into separate forward sale agreements. 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 future acquisitions, construction and mezzanine loans, community renovations, and the repayment of indebtedness. During the year ended December 31, 2021, we issued 1.8 million common shares under both the 2019 ATM Program and 2021 ATM Program 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, we had common shares having an aggregate offering price of up to $158.7 million remaining available under the 2021 ATM Program. Issuance of Senior Securities On October 2, 2017, we issued 4,118,460 shares of 6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C preferred shares”). As of December 31, 2021, 3,881,453 shares remained outstanding. Depending on 4 Table of Contents future interest rates and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares. The Series C preferred shares are redeemable, at our option, on October 2, 2022. Bank Financing and Other Debt As of December 31, 2021, we owned 48 apartment communities that were not encumbered by mortgages and which were available to provide credit support for our unsecured borrowings. Our primary unsecured credit facility (“unsecured credit facility”) is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has 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, priced at an interest rate of 2.74%, including the impact of our interest rate swap. This credit facility was amended on September 30, 2021 to extend the maturity date to September 2025 and provide for an accordion option to increase borrowing capacity up to $400.0 million. Prior to the amendment, the unsecured credit facility also had unsecured term loans of $70.0 million and $75.0 million. During the year ended December 31, 2021, these term loans were paid in full. 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 the issuance of unsecured senior promissory notes (“unsecured senior 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, at a blended weighted average interest rate of 2.78%. As of December 31, 2021, the FMCF had a balance of $198.9 million. As of December 31, 2021, we owned 15 apartment communities that served as collateral for mortgage loans, in addition to the apartment communities secured by the FMCF. All of these mortgages payable were non-recourse to us other than for standard carve-out obligations. We also have a $6.0 million operating line of credit, which is designed to enhance treasury management activities and more effectively manage cash balances. As of December 31, 2021, our ratio of total indebtedness to total gross real estate investments was 37.2%. Issuance of Securities in Exchange for Property Our organizational structure allows us to issue shares and Units of Centerspace, LP in exchange for real estate. The Units generally are redeemable, at our option for cash or common shares on a one-for-one basis. Generally, Units receive the same per unit cash distributions as the per share dividends paid on common shares. Our Declaration of Trust, as amended (our “Declaration of Trust”), does not contain any restrictions on our ability to offer limited partnership units of Centerspace, LP in exchange for property. As a result, any decision to do so is vested solely in our Board of Trustees. 5 Table of Contents 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. On February 26, 2019, we issued 165,600 Series D preferred units as partial consideration for the acquisition of SouthFork Townhomes. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862% per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issue price. Each Series D preferred unit is convertible, at the holder’s option, into 1.37931 Units, representing a conversion exchange rate of $72.50 per unit. The holders of the Series D preferred units do not have any voting rights. Distributions to Shareholders The Code requires a REIT to distribute 90% of its net taxable income, excluding net capital gains, to its shareholders, and a separate requirement to distribute 100% net capital gains or pay a corporate level tax in lieu thereof. We have distributed, and intend to continue to distribute, enough of our taxable income to satisfy these requirements. Our general practice has been to target cash distributions to our common shareholders and the holders of limited partnership units of approximately 65% to 90% of our funds from operations and to use the remaining funds for capital improvements or the reduction of debt. Distributions to our common shareholders and unitholders in the years ended December 31, 2021 and 2020 totaled approximately 80% and 81%, respectively, on a per share and unit basis of our funds from operations. For additional information on our sources of liquidity and funds from operations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.” HUMAN CAPITAL We strive to be a great place to work and offer competitive benefits and training programs to our team members. Our objective is to attract and reward individuals with the talent and skills to help support our business objectives and make our communities home for our residents. Our total rewards program includes competitive compensation, paid leave, paid holidays, volunteer time, health and dental benefits, discounted rental rates on our apartments, employee assistance program, life insurance, 401(k) plan, and more. As of December 31, 2021, we had 462 employees (394 full-time and 68 part-time) across multiple states. Training is important, and we facilitate that through a learning management system which allows us to provide custom training as well as utilize a library of multifamily focused courses specializing in customer service, sales, leadership, diversity, and fair housing. We take great pride in our pay for performance strategy where team members are aligned with overall company performance as well as specific performance metrics based on roles. Our annual performance management process invites team members to complete a self-review along with their manager's assessment. The results of these assessments are a component of the merit increase and pay for performance strategy. We are committed to providing a workplace that is safe and free from any form of discrimination or harassment and embraces inclusiveness. As part of our Environmental, Social, and Governance (ESG) initiatives, we publish an annual ESG report detailing our efforts related to furthering our mission - through providing corporate sponsorship in the communities which we serve, offering paid time off for team members to volunteer, training and compensation programs, and our commitment to diversity, equity, and inclusion. As of December 31, 2021: • The average tenure of our team members is 4.3 years; • 52% of our total team members, 55% of our senior management, and 43% of our Board of Trustees are female; • We have over 200 custom courses on our learning management system; • Over 12,000 training courses were completed by team members; • Our online reputation management scores increased from 3.46 out of 5 stars to 3.48 out of 5 stars; and • 479 volunteer hours were completed by team members. INSURANCE We purchase general liability and property insurance coverage for each of our properties. We also purchase limited terrorism, environmental, and flood insurance as well as other types of insurance coverage related to a variety of risks and exposures. 6 Table of Contents There are certain types of losses that may not be covered or could exceed coverage limits. Due to changing market conditions, our insurance policies are also subject to increasing deductibles and coverage limits. Based on market conditions, we may change or potentially eliminate insurance coverages or face higher deductibles or other costs. Although we believe that we have adequate insurance coverage on our properties, we may incur losses, which could be material, due to uninsured risks, deductibles and/or losses in excess of coverage limits, any of which could have a material adverse effect on our business. COMPETITION There are numerous housing alternatives that compete with our apartment communities in attracting residents. Our apartment communities compete directly with other apartment communities, condominiums, and single-family homes in the areas in which our properties are located. If the demand for our apartment communities is reduced or competitors develop or acquire competing housing, rental and occupancy rates may decrease, which could have a material adverse effect on our business. Additionally, we compete with other real estate investors, including REITs, to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the cost of those acquisitions. GOVERNMENT REGULATION See the discussion under the caption “ Risks Related to Our Properties and Operations -- We may be responsible for potential liabilities under environmental laws” in Item 1A, Risk Factors, for information concerning the potential effects of environmental matters on our business, “ Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs and investment strategies ” in Item 1A, Risk Factors, for information concerning the potential effects of compliance with disabled persons and other safety regulations on our business, “ Changes in federal or state laws and regulations relating to climate change could result in increased costs to our business, including capital expenditures to improve the energy efficiency of our existing communities or new development communities without a corresponding increase in revenue ” in Item 1A, Risk Factors, for information concerning the potential effects of climate change regulation on our business, “ Complying with zoning and permitting law may affect our acquisition, redevelopment, and development costs ” in Item 1A. Risk Factors, for information concerning the potential costs associated with zoning and permitting regulations, and “ 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 ” in Item 1A Risk Factors, for information concerning the potential effects of regulations related to the COVID-19 pandemic, which discussions thereunder are incorporated by reference into this Item 1. 7 Table of Contents