CENTERSPACE 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report. 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 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. 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. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Executive Summary We own, manage, acquire, redevelop, and develop apartment communities. We primarily 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 consisting of 14,441 homes as detailed in Item 2 - Properties. 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. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and developing and training team members to create vibrant apartment communities through resident-centered operations. We believe that delivering superior resident experiences will drive consistent profitability for our shareholders. We have paid quarterly distributions every quarter since our first distribution in 1971. COVID-19 Developments The COVID-19 pandemic has had an impact on our business since March 2020, when it spread to many of the markets in which we own properties. Our first priority continues to be the health and well-being of our residents, team members, and the communities we serve. 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 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. 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 urban based apartment communities. 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. 26 Table of Contents 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; • cause the capital markets generally to become restricted or unavailable, thereby limiting our access to any needed debt or equity capital financing; • impact the business of, or cause the loss of, certain critical third-party suppliers or other service providers; • restrict our ability to continue to pay dividends on a quarterly basis at the current rate; • impair the value of our tangible or intangible assets; • require us to record loss contingencies and incur additional expenses related to our COVID-19 response; or • cause the U.S. 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. 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. Our management remains committed to ensuring the safety of our team members, residents, and communities, and to maintaining the financial stability of our business enterprise for the duration of the COVID-19 pandemic. Significant Transactions and Events for the Year Ended December 31, 2021 Highlights . For the year ended December 31, 2021, our highlights included the following: • 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; and • Same-store net operating income growth of 4.8%. Acquisitions and Dispositions . During the year ended December 31, 2021, we completed the following transactions in furtherance of our strategic plan: • 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; and • 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: • 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; 27 Table of Contents • 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; and • Paid $3.8 million to terminate two interest rate swaps in connection with the pay down of our term loans. Outlook We intend to continue our focus on maximizing the financial performance of the communities in our existing portfolio. To accomplish this, we have introduced initiatives to expand our operating margin by enhancing the resident experience, making value-add investments, and implementing technology solutions and expense controls. We will actively manage our existing portfolio and strategically pursue acquisitions of multifamily communities in our target markets of Minneapolis, Minnesota and Denver, Colorado as opportunities arise and market conditions allow. We will explore potential new markets and acquisition opportunities, including in Nashville, Tennessee, as market conditions allow. Our continued management of a strong balance sheet should provide us with flexibility to pursue both internal and external growth. 28 Table of Contents RESULTS OF OPERATIONS Reconciliation of Operating Income (Loss) to Net Operating Income The following table provides a reconciliation of operating income to net operating income (“NOI”), which is defined below. (in thousands, except percentages) Year Ended December 31, 2021 2020 $ Change % Change Operating income (loss) $ 29,892 $ 33,843 $ (3,951) (11.7) % Adjustments: Property management expenses 8,752 5,801 2,951 50.9 % Casualty loss 344 1,662 (1,318) (79.3) % Depreciation and amortization 92,165 75,593 16,572 21.9 % 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 % Consolidated Results of Operations The following consolidated results of operations cover the years ended December 31, 2021 and 2020. (in thousands) Year Ended December 31, 2021 2020 $ Change % Change Revenue Same-store $ 166,326 $ 158,702 $ 7,624 4.8 % Non-same-store 29,298 5,424 23,874 440.2 % 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 % Property operating expenses, including real estate taxes Same-store 67,306 64,204 3,102 4.8 % Non-same-store 11,790 2,152 9,638 447.9 % 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 % Net operating income Same-store 99,020 94,498 4,522 4.8 % Non-same-store 17,508 3,272 14,236 435.1 % 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 % Property management expense (8,752) (5,801) 2,951 50.9 % Casualty loss (344) (1,662) (1,318) (79.3) % Depreciation and amortization (92,165) (75,593) 16,572 21.9 % 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 % Loss on extinguishment of debt (535) (23) 512 2,226.1 % Interest and other income (loss) (2,380) (1,552) (828) 53.4 % 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 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) % Net income (loss) attributable to controlling interests (29) 4,441 (4,470) (100.7) % Dividends to preferred shareholders (6,428) (6,528) 100 (1.5) % Redemption of preferred shares — 297 (297) 100.0 % NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (6,457) $ (1,790) $ (4,667) 260.7 % 29 Table of Contents Year Ended December 31, Weighted Average Occupancy (1) 2021 2020 Same-store 94.4 % 94.7 % Non-same-store 94.2 % 93.8 % Total 94.3 % 94.7 % (1) Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental revenue. Scheduled rental revenue represents the value of all homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant homes valued at estimated market rents. When calculating actual rents for occupied homes and market rents for vacant homes, delinquencies and concessions are not taken into account. 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 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. December 31, Number of Homes 2021 2020 Same-store 10,672 10,672 Non-same-store 3,769 647 Total 14,441 11,319 Net operating income. NOI is a non-GAAP financial measure which we define as total real estate revenues less property operating expenses, including real estate taxes, which is reconciled to operating income (loss) in the table above. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance. Throughout this Report, we have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for substantially all of the periods being compared and, in the case of development properties, have achieved a target level of physical occupancy of 90%. On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate the performance of existing apartment communities and their contribution to net income. Management believes that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are performing year-over-year. Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing residents, controlling operating costs, and making prudent capital improvements. 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, 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. Revenue. 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 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, 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 30 Table of Contents 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 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 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 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 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 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 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 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. 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). 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. (“Nareit”). Nareit defines FFO as net income or loss calculated in accordance with GAAP, excluding: • depreciation and amortization related to real estate; 31 Table of Contents • gains and losses from the sale of certain real estate assets; and • impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity. The exclusion in Nareit’s definition of FFO of impairment write-downs and gains and losses from the sale of real estate assets helps to identify the operating results of the long-term assets that form the base of our investments, and assists management and investors in comparing those operating results between periods. Due to limitations of the Nareit FFO definition, we have made certain interpretations in applying the definition. We believe all such interpretations not specifically provided for in the Nareit definition are consistent with the definition. Nareit's FFO White Paper 2018 Restatement clarified that impairment write-downs of land related to a REIT’s main business are excluded from FFO and a REIT has the option to exclude impairment write-downs of assets that are incidental to the main business. While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, but rather should be considered as an additional, supplemental measure. 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 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. 32 Table of Contents 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) Year Ended December 31, 2021 2020 Net income (loss) available to common shareholders $ (6,457) $ (1,790) Adjustments: Noncontrolling interests – Operating Partnership (2,806) (212) Depreciation and amortization 92,165 75,593 Less depreciation – non real estate (366) (353) Less depreciation – partially owned entities (93) (379) (Gain) loss on sale of real estate (27,518) (25,503) 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 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 Earnings (loss) per common share - diluted $ (0.47) $ (0.15) 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 33 Table of Contents Liquidity and Capital Resources Overview 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, 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 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. To maintain our qualification as a REIT, we must pay dividends to our shareholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. Under a separate requirement, we must distribute 100% of net capital gains or pay a corporate level tax in lieu thereof. While we have historically satisfied this distribution requirement by making cash distributions to our shareholders, we may choose to satisfy this requirement by making distributions of other property, including, in limited circumstances, our own common shares. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund ongoing operations. We pay dividends from cash available for distribution. Until it is distributed, cash available for distribution is typically invested in investment grade securities or is used to reduce balances outstanding under our line of credit. In the event of deterioration in property operating results, we may need to consider additional cash preservation alternatives, including reducing development activities, capital improvements, and renovations. For the year ended December 31, 2021, we declared cash distributions of $42.7 million to common shareholders and unitholders of Centerspace, LP, as compared to net cash provided by operating activities of $84.0 million and FFO of $54.9 million. Factors that could increase or decrease our future liquidity include, but are not limited to, changes in interest rates or sources of financing, general volatility in capital and credit markets, changes in minimum REIT dividend requirements, and our ability to access the capital markets on favorable terms, or at all. As a result of the foregoing conditions or general economic conditions in our markets that affect our ability to attract and retain residents, we may not generate sufficient cash flow from operations. 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. 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 34 Table of Contents 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 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; or • 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. 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. Debt 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. 35 Table of Contents 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. Equity 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 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, 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 $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; and • 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 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; 36 Table of Contents • Funding mezzanine and construction loans of $18.6 million; • Repaying approximately $36.3 million of mortgage principal; • 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; and • 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, 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) Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Mortgages payable (principal and interest) $ 590,992 $ 43,056 $ 77,269 $ 105,374 $ 365,293 Lines of credit (principal and interest) (1) $ 84,665 $ 2,164 $ 4,584 77,917 — 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. 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. Inflation 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 to manage the impact of inflation on our business. 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. 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 . Real estate is carried at cost, net of accumulated depreciation, less an adjustment for impairment, if any. Depreciation requires an estimate by management of the useful life of each asset as well as an allocation of the costs associated with a property to its various components. As described further below, the process of allocating property costs to its components involves a considerable amount of subjective judgments to be made by management. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We use a 10-37 year estimated life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures, and equipment. Maintenance and repairs are charged to operations as incurred. 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. 37 Table of Contents 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. Techniques used to estimate fair value include discounted cash flow analysis and reference to recent sales of comparable properties. Estimates of future cash flows are based on a number of factors, including the historical operating results, known trends, and market/economic conditions that may affect the property. Land value is assigned based on the purchase price if land is acquired separately or based on a relative fair value allocation if acquired in a portfolio acquisition. Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis include an estimate of carrying costs and foregone rental income during hypothetical expected lease-up periods, consideration of current market conditions, and costs to execute similar leases. 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. Impairment. We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the property against the carrying amount of that property. If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. Recent Accounting Pronouncements For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to our consolidated financial statements appearing elsewhere in this Report.