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Item 2. Management’s Discussion and Analysis

2022-05-02 compared with 2021-11-01 · 112 added, 183 removed, 191 unchanged (61% of the section changed)

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included in this report on Form 10-Q for the quarter ended September 30, 2021 (the “Report”), the audited financial statements for the year ended December 31, 2020, which are included in Form 10-K filed with the SEC on February 22, 2021, and the risk factors in Item 1A, “Risk Factors,” of Form 10-K for the year ended December 31, 2020.

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included in this report on Form 10-Q for the quarter ended March 31, 2022 (the “Report”), the audited financial statements for the year ended December 31, 2021, which are included in Form 10-K filed with the SEC on February 28, 2022, and the risk factors in Item 1A, “Risk Factors,” of Form 10-K for the year ended December 31, 2021.

This discussion and analysis, 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 Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to the expectations for future periods.

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

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

• the impact of the Russian invasion of Ukraine, including sanctions imposed on Russia by the U.S.

and other countries, on inflation, trade, and general economic conditions;

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

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

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

• timely access to material required to renovate apartment communities;

• timely access to material and labor required to renovate apartment communities;

• adverse changes in our markets, including future demand for apartment homes in those markets, barriers of entry into new markets, limitations on the ability to increase rental rates, inability to identify and consummate attractive acquisitions and dispositions on favorable terms, inability to reinvest sales proceeds successfully, and inability to accommodate any significant decline in the market value of real estate serving as collateral for mortgage obligations;

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• inability to complete lease-up of projects on schedule and on budget;

• inability to sell non-core properties on terms that are acceptable;

• failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and/or tax protection payments;

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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 apartment homes and retention of residents.

As of September 30, 2021, we owned interests in 79 apartment communities consisting of 14,275 apartment homes.

Property owned, as presented in our Condensed Consolidated Balance Sheets, was $2.2 billion at September 30, 2021, compared to $1.8 billion at December 31, 2020.

As of March 31, 2022, we owned interests in 83 apartment communities consisting of 14,838 apartment homes.

Property owned, as presented in our Condensed Consolidated Balance Sheets, was $2.4 billion at March 31, 2022, compared to $2.3 billion at December 31, 2021.

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

We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and creating vibrant apartment communities through service-oriented operations.

We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for the business and shareholders.

We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and

creating vibrant apartment communities through service-oriented operations.

We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for our business and shareholders.

We have paid quarterly distributions continuously since our first distribution in 1971.

COVID-19 Developments

The COVID-19 pandemic has affected 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 team members, all in accordance with state and local guidelines.

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

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

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

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.

Certain states and cities, including some of those in which our apartment communities are located, 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;

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We implemented a plan to safely re-open common spaces in our communities while adhering to state and local guidelines, but 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 operations and the conduct of business at apartment communities and offices, but did not have a material impact on our financial condition, operating results, or cash flows.

The ongoing COVID-19 pandemic and the new variants of the virus could result in adverse financial and economic impacts that could 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 tangible or intangible assets;

• require us to record loss contingencies and incur additional expenses related to its COVID-19 response;

• 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 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:

• reduced planned travel for team members through 2021;

• left vacant positions unfilled;

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

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

Despite our efforts to manage our r esponse to the effects of the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on rental revenue for 2022 and in future years cannot be determined at present.

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Our management remains committed to ensuring the safety of team members, residents, and communities, and to maintaining the financial stability of our business enterprise for the duration of the COVID-19 pandemic.

Overview of the Three Months Ended September 30, 2021

On September 1, 2021, we 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%.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing acquisitions and dispositions during the nine months ended September 30, 2021 and 2020.

For the three months ended September 30, 2021, revenue increased by $6.3 million to $50.4 million, compared to $44.1 million for the three months ended September 30, 2020, primarily due to same-store and non-same-store communities, offset by dispositions.

Total expenses increased by $7.1 million to $49.3 million for the three months ended September 30, 2021, compared to $42.1 million for the three months ended September 30, 2020 primarily due to increased property operating expenses, depreciation and amortization, and general and administrative expenses.

Funds from Operations (“FFO”) applicable to common shares and Units for the three months ended September 30, 2021 decreased by $3.3 million to $9.3 million compared to $12.6 million for the three months ended September 30, 2020.

This decrease was primarily due to losses related to termination of interest rate swaps, increased property management and general and administrative expenses, and decreased NOI from dispositions, offset by increased NOI from same-store and non-same-store communities.

Overview of the Three Months Ended March 31, 2022

On January 4, 2022, we acquired a portfolio of three apartment communities located in Minneapolis, Minnesota for an aggregate purchase price of $70.3 million.

The acquisition was financed through the assumption of $41.6 million in mortgage debt, the issuance of 209,000 Units, and cash.

On January 26, 2022, we acquired Noko Apartments located in Minneapolis, Minnesota for an aggregate purchase price of $46.6 million.

We financed the development of Noko Apartments with a construction loan and a mezzanine loan, which were exchanged as partial consideration in the amount of $43.3 million for the acquisition with the remaining in cash.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing acquisitions and dispositions during the three months ended March 31, 2022 and 2021.

For the three months ended March 31, 2022, revenue increased by $13.7 million to $60.3 million, compared to $46.6 million for the three months ended March 31, 2021, primarily due to same-store and non-same-store communities, offset by dispositions.

Total expenses increased by $19.2 million to $64.2 million for the three months ended March 31, 2022, compared to $45.0 million for the three months ended March 31, 2021 primarily due to increased property operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses.

Funds from Operations (“FFO”) applicable to common shares and Units for the three months ended March 31, 2022 increased by $5.6 million to $18.5 million compared to $12.9 million for the three months ended March 31, 2021.

This increase was primarily due to increased NOI from same-store and non-same-store communities and a gain on the mark to market adjustment for an interest rate swap contract, offset by increased property management and general and administrative expenses, and decreased NOI from dispositions.

The drivers of these changes are discussed in more detail in the “Results of Operations” section below.

Results of Operations

Reconciliation of Operating Income to Net Operating Income

Reconciliation of Operating Income (Loss) to Net Operating Income

The following table provides a reconciliation of operating income to net operating income (“NOI”) (non-GAAP), which is defined below.

(in thousands, except percentages)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 $ Change % Change 2021 2020 $ Change % Change

Operating income $ 1,144 $ 2,002 $ (858) (42.9) % $ 5,518 $ 6,530 $ (1,012) (15.5) %

Three Months Ended March 31,

2022 2021 $ Change % Change

Operating income (loss) $ (3,911) $ 1,641 $ (5,552) (338.3) %

Property management expenses 2,253 1,767 486 27.5 %

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Consolidated Results of Operations

The following consolidated results of operations cover the three and nine months ended September 30, 2021 and 2020.

The following consolidated results of operations cover the three months ended March 31, 2022 and 2021.

(in thousands, except percentages)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 $ Change % Change 2021 2020 $ Change % Change

Three Months Ended March 31,

2022 2021 $ Change % Change

Same-store $ 46,891 $ 43,194 $ 3,697 8.6 %

Non-same-store 12,507 1,047 11,460 1,094.6 %

Other properties 1,120 833 287 34.5 % 2,415 2,208 207 9.4 %

Other 916 668 248 37.1 %

Dispositions — 1,739 (1,739) (100.0) %

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Non-same-store 6,329 345 5,984 1,734.5 %

Other properties 317 229 88 38.4 % 873 759 114 15.0 %

Other 329 264 65 24.6 %

Dispositions — 1,103 (1,103) (100.0) %

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Non-same-store 6,178 702 5,476 780.1 %

Other properties 803 604 199 32.9 % 1,542 1,449 93 6.4 %

Other 587 404 183 45.3 %

Dispositions — 636 (636) (100.0) %

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Dividends to preferred shareholders (1,607) (1,607) — —

Redemption of Preferred Shares — (1) 1 (100.0) % — 297 (297) (100.0) %

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (10,196) $ (6,474) $ (3,722) 57.5 %

Three Months Ended September 30, Nine Months Ended September 30,

Three Months Ended March 31,

Weighted Average Occupancy (1)

2021 2020 2021 2020

Same-store 93.9 % 94.7 %

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

Number of Apartment Homes September 30, 2021 September 30, 2020

Number of Apartment Homes March 31, 2022 March 31, 2021

Same-store 11,319 11,319

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

For the comparison of the nine months ended September 30, 2021 and 2020, twenty apartment communities were non-same-store.

For the comparison of the three months ended March 31, 2022 and 2021, 23 apartment communities were non-same-store.

Sold communities are included in “Dispositions,” while “Other” includes non-multifamily properties and the non-multifamily components of mixed-use properties.

Revenue increased by 14.2% to $50.4 million for the three months ended September 30, 2021, compared to $44.1 million in the three months ended September 30, 2020.

Revenue from non-same-store communities and other properties increased by $6.1 million and $287,000, respectively, offset by a decrease of $2.6 million from dispositions.

Revenue from same-store communities increased 6.2% or $2.5 million in the three months ended September 30, 2021, compared to the same period in the prior year.

The increase was attributable to 6.2% growth in average rental revenue for the three months ended September 30, 2021 and 2020, respectively.

Revenue increased by 8.5% to $143.7 million for the nine months ended September 30, 2021, compared to $132.5 million in the nine months ended September 30, 2020.

Revenue increased by 29.3% to $60.3 million for the three months ended March 31, 2022, compared to $46.6 million in the three months ended March 31, 2021.

Revenue from non-same-store communities and other properties increased by $11.5 million and $248,000, respectively, offset by a decrease of $1.7 million from dispositions.

Revenue from same-store communities increased 3.3% or $3.9 million in the nine months ended September 30, 2021, compared to the same period in the prior year.

The increase was attributable to 3.3% growth in average rental revenue for the nine months ended September 30, 2021 and 2020, respectively.

Revenue from same-store communities increased 8.6% or $3.7 million in the three months ended March 31, 2022, compared to the same period in the prior year.

The increase was attributable to 9.5% growth in average rental revenue for the three months ended March 31, 2022, offset by a decrease of 0.8% in occupancy as weighted average occupancy decreased from 94.7% in the three months ended March 31, 2021 to 93.9% for the three months ended March 31, 2022.

Property operating expenses, including real estate taxes .

Property operating expenses, including real estate taxes, increased by 9.8% to $20.4 million in the three months ended September 30, 2021, compared to $18.5 million in the same period of the prior year.

Property operating expenses, including real estate taxes, increased by 34.5% to $25.9 million in the three months ended March 31, 2022, compared to $19.2 million in the same period of the prior year.

An increase of $6.0 million at non-same-store communities was offset by a decrease $1.1 million from dispositions.

Property operating expenses, including real estate taxes, at same-store communities increased by 4.4% or $717,000 in the three

months ended September 30, 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 $319,000, primarily due to increased compensation and utilities costs.

Non-controllable expenses at same-store communities increased by $398,000, primarily due to insurance costs.

Property operating expenses, including real estate taxes, increased by $3.1 million to $58.4 million in the nine months ended September 30, 2021, compared to $55.2 million in the same period of the prior year.

An increase of $4.9 million at non-same-store communities was offset by a decrease of $3.3 million from dispositions.

Property operating expenses, including real estate taxes, at same-store communities increased by 2.9% or $1.4 million in the nine months ended September 30, 2021, compared to the same period of the prior year.

At same-store communities, controllable expenses (which exclude insurance and real estate taxes), increased by $521,000, primarily due to increases in compensation and utilities costs.

Property operating expenses, including real estate taxes, at same-store communities increased by 9.6% or $1.7 million in the three months ended March 31, 2022, 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 increased utilities and repairs and maintenance costs.

Non-controllable expenses at same-store communities increased by $187,000, primarily due to insurance costs.

Property management expenses .

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 52.8% to $2.2 million in the three months ended September 30, 2021, compared to $1.4 million in the same period of the prior year.

The increase is primarily due to $364,000 in nonrecurring technology initiatives as well as $276,000 in compensation costs due to the filling of open positions.

Property management expense increased by 39.5% to $6.1 million in the nine months ended September 30, 2021, compared to $4.3 million in the same period of the prior year.

The increase is primarily due to $889,000 in nonrecurring technology initiatives as well as $586,000 in compensation costs due to the filling of open positions.

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 27.5% to $2.3 million in the three months ended March 31, 2022, compared to $1.8 million in the same period of the prior year.

The increase is primarily due to $265,000 in compensation costs.

Casualty gain (loss).

Casualty gain (loss) decreased by 111.0% to a gain of $10,000 in the three months ended September 30, 2021, compared to a loss of $91,000 in the same period of the prior year.

The decrease is primarily due to weather related losses in the prior year which have not occurred in the current year.

Casualty gain (loss) decreased by 95.2% to $64,000 in the nine months ended September 30, 2021, compared to $1.3 million in the same period of the prior year.

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

Casualty gain (loss) increased by 492.1% to a loss of $598,000 in the three months ended March 31, 2022, compared to a loss of $101,000 in the same period of the prior year.

The increase is due to losses in the current year which did not occur in the prior year.

Depreciation and amortization.

Depreciation and amortization increased by 18.2% to $22.4 million in the three months ended September 30, 2021, compared to $19.0 million in the same period of the prior year, attributable to an increase of $4.8 million from non-same-store properties, offset by a decrease of $350,000 from same-store properties and $906,000 from sold properties.

Depreciation and amortization increased by 11.6% to $61.7 million in the nine months ended September 30, 2021, compared to $55.3 million in the same period of the prior year, attributable to an increase of $10.4 million from non-same-store properties, offset by decreases of $1.9 million and $2.0 million at same-store communities and sold properties, respectively.

Depreciation and amortization increased by 55.1% to $31.0 million in the three months ended March 31, 2022, compared to $20.0 million in the same period of the prior year, attributable to an increase of $12.2 million from non-same-store properties, offset by decreases from same-store and sold properties.

General and administrative expenses.

General and administrative expenses increased by 39.1% to $4.3 million in the three months ended September 30, 2021, compared to $3.1 million in the same period of the prior year, primarily attributable to $374,000 in incentive-based compensation costs related to company performance and share-based compensation arrangements due to the timing and form of grants, $261,000 in nonrecurring technology initiatives, and $204,000 in nonrecurring consulting costs.

General and administrative expenses increased by 23.4% to $12.0 million in the nine months ended September 30, 2021, compared to $9.7 million in the same period of the prior year, 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 $597,000 in nonrecurring technology initiatives.

General and administrative expenses increased by 15.2% to $4.5 million in the three months ended March 31, 2022, compared to $3.9 million in the same period of the prior year, primarily attributable to $473,000 in compensation costs and $273,000 in professional and consulting fees, offset by a decrease of $376,000 in technology costs.

Interest expense.

Interest expense increased by 7.8% to $7.3 million in the three months ended September 30, 2021, compared to $6.8 million in the same period of the prior year, primarily due to maintaining a larger average 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.

Interest expense increased by 4.8% to $21.6 million in the nine months ended September 30, 2021, compared to $20.6 million in the same period of the prior year, primarily due to maintaining a larger average 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.

Interest expense increased by 6.7% to $7.7 million in the three months ended March 31, 2022, compared to $7.2 million in the same period of the prior year, primarily due to the addition of new unsecured senior notes and the Fannie Mae credit facility, offset by a lower weighted average interest rate.

Interest and other income (loss).

Interest and other income decreased to a loss of $5.1 million in the three months ended September 30, 2021, compared to income of $277,000 in the same period of the prior year.

The decrease was primarily due to a $5.4 million loss related to the termination of interest rate swaps in the current period.

Interest and other income decreased to a loss of $4.0 million in the nine months ended September 30, 2021, compared to a loss of $2.0 million in the same period of the prior year.

The change was primarily due to a $5.4 million loss related to the termination of interest rate swaps in the nine months ended September 30, 2021, compared to a $3.4 million loss in the value of marketable securities during the nine months ended September 30, 2020.

Interest and other income increased to $1.1 million in the three months ended March 31, 2022, compared to $431,000 in the same period of the prior year.

The increase was primarily due to a $582,000 gain on the mark to market adjustment for an interest rate swap contract.

Net income (loss) available to common shareholders.

Net income available to common shareholders decreased to a loss of $11.1 million for the three months ended September 30, 2021, compared to net income of $18.0 million in the three months ended September 30, 2020.

Net income available to common shareholders decrease to net income of $2.4 million for the nine months ended September 30, 2021, compared to a net loss of $4.2 million in the same period of the prior year.

Funds from Operations .

Net loss available to common shareholders decreased to a loss of $10.2 million for the three months ended March 31, 2022, compared to a net loss of $6.5 million in the three months ended March 31, 2021.

Funds from Operations and Core Funds from Operations .

We believe that Funds from Operations (“FFO”), which is a non-GAAP financial measures used as a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding 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.

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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 of the our needs, including our ability to service indebtedness or make distributions to shareholders.

FFO applicable to common shares and Units for the three months ended September 30, 2021, decreased to $9.3 million compared to $12.6 million for the comparable period ended September 30, 2020, a decrease of 26.1%.

FFO applicable to common shares and Units for the nine months ended September 30, 2021, increased to $35.9 million compared to $33.7 million for the same period of the prior year, an increase of 6.7%.

The increase was 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 a decrease in NOI from dispositions as well as losses related to termination of interest rate swaps and increases in property management and general and administrative expenses.

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

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.

FFO applicable to common shares and Units for the three months ended March 31, 2022, increased to $18.5 million compared to $12.9 million for the comparable period ended March 31, 2021, an increase of 43.3%.

This increase was primarily due to increased NOI from same-store and non-same-store communities and a gain on the mark to market adjustment for an interest rate swap contract, offset by increased interest, property management, and general and administrative expenses, and decreased NOI from dispositions.

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)

Three Months Ended September 30, Nine Months Ended September 30,

2021 2020 2021 2020

Three Months Ended March 31,

Net income (loss) available to common shareholders $ (10,196) $ (6,474)

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Less depreciation – partially owned entities (21) (24)

(Gain) loss on sale of real estate — (25,676) (26,840) (25,486)

Funds from operations applicable to common shares and Units $ 9,314 $ 12,611 $ 35,915 $ 33,656

FFO applicable to common shares and Units $ 18,526 $ 12,927

Adjustments to Core FFO:

Non-cash casualty (gain) loss 25 —

Technology implementation costs 103 413

Interest rate swap termination, amortization, and mark-to-market (613) —

Amortization of assumed debt (115) —

Other miscellaneous items (4) —

Core FFO applicable to common shares and units $ 17,922 $ 13,340

FFO applicable to common shares and Units $ 18,526 $ 12,927

Dividends to preferred unitholders 160 160

Funds from operations applicable to common shares and Units - diluted $ 9,474 $ 12,771 $ 36,395 $ 34,136

FFO applicable to common shares and Units - diluted $ 18,686 $ 13,087

Core FFO applicable to common shares and units $ 17,922 $ 13,340

Dividends to preferred unitholders 160 160

Core FFO applicable to common shares and Units - diluted $ 18,082 $ 13,500

Per Share Data

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FFO per share and Unit - diluted $ 1.01 $ 0.92

Core FFO per share and Unit - diluted $ 0.98 $ 0.95

Weighted average shares and Units - diluted 18,542 14,282

Acquisitions and Dispositions

On September 1, 2021, we 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 acquired assets were subject to approximately $126.5 million in mortgage liabilities, of which $20.0 million was assumed at a rate of 4.31% with the remaining amount refinanced 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%.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing acquisitions and dispositions during the nine-month periods ended September 30, 2021 and 2020.

On January 4, 2022, we acquired a portfolio of three apartment communities located in Minneapolis, Minnesota for an aggregate purchase price of $70.3 million.

The acquisition was financed through the assumption of $41.6 million in mortgage debt, the issuance of 209,000 Units, and cash.

On January 26, 2022, we acquired Noko Apartments located in Minneapolis, Minnesota for an aggregate purchase price of $46.6 million.

We financed the development of Noko Apartments with a construction loan and a mezzanine loan which were exchanged as partial consideration for the acquisition.

Distributions Declared

Distributions of $0.72 and $2.12 per common share and Unit were declared during the three and nine months ended September 30, 2021, respectively.

Distributions of $0.70 and $2.10 per common share and Unit were declared during the three and nine months ended September 30, 2020, respectively.

Distributions of $0.4140625 and $1.242188 per Series C preferred share were declared during the three and nine months ended September 30, 2021 and 2020, respectively.

Distributions of $0.9655 and $2.8965 per Series D preferred unit were declared during the three and nine months ended September 30, 2021 and 2020, respectively.

Distributions of $0.322917 per Series E preferred unit were declared during the three and nine months ended September 30, 2021.

Distributions of $0.73 and $0.70 per common share and Unit were declared during the three months ended March 31, 2022 and 2021, respectively.

Distributions of $0.4140625 per Series C preferred share were declared during the three months ended March 31, 2022 and 2021.

Distributions of $0.9655 per Series D preferred unit were declared during the three months ended March 31, 2022 and 2021.

Distributions of $0.968750 per Series E preferred unit were declared during the three months ended March 31, 2022.

Liquidity and Capital Resources

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

Other sources include availability under the unsecured lines of credit, proceeds from property dispositions, including restricted cash

related to net tax deferred proceeds, offerings of preferred and common shares under the shelf registration statement, including offerings of common shares under the 2021 ATM Program, and long-term unsecured debt and secured mortgages.

Other sources include availability under the unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under the shelf registration statement, including offerings of common shares under the 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 communities, distributions to the holders of preferred shares, common shares, Series D and Series E preferred units, and Units, value-add redevelopment, common and preferred share buybacks and Unit redemptions, and acquisitions of additional communities.

Although we believe that our financial condition and liquidity are sufficient to meet our reasonably anticipated liquidity demands, factors that could impact our future liquidity include, but are not limited to, volatility in capital and credit markets, the ability to access capital and credit markets, the effects of the COVID-19 pandemic, including its potential impact on our ability to access the capital and credit markets on reasonable terms (or at all), the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

As of September 30, 2021, we had total liquidity of approximately $219.8 million, which included $199.0 million available on the lines of credit and $20.8 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 on the lines of credit and $392,000 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 the 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;

offerings of preferred and common shares under the shelf registration statement, including offerings of common shares under the 2021 ATM Program;

and long term unsecured term loans and secured mortgages.

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

• no debt maturities remaining in 2021;

• $29.8 million debt maturities in 2022;

• approximately $3.9 million remaining to fund under a mezzanine loan 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 the 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.

Under the terms of our credit facility, we may be unable to obtain advances under the 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 the 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 unencumbered properties may reduce or eliminate availability under the credit facility;

• changes in the nature and composition (including occupancy rate) of our unencumbered properties could reduce or eliminate the availability under the credit facility.

Even if we remain in compliance with the foregoing representations, warranties, and covenants, it may be unable to access the full amount available under the 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 the 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 the 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 its markets or with its lenders, although there can be no assurance that we will continue to be able to access the credit markets generally or the credit facility in the future.

As of March 31, 2022, we had total liquidity of approximately $223.3 million, which included $210.0 million available on the lines of credit and $13.3 million of cash and cash equivalents.

As of December 31, 2021, we had total liquidity of approximately $211.3 million, which included $180.0 million on the lines of credit and $31.3 million of cash and cash equivalents.

On September 30, 2021, we amended and restated our unsecured credit facility.

The amended agreement provides for a revolving line of credit for $250.0 million, a $400.0 million accordion option, and extends the maturity date to September 2025.

Prior to the amendment, the unsecured credit facility included $145.0 million allocated between two term loans:

a $70.0 million unsecured term loan and a $75.0 million unsecured term loan, which have been paid in full as of September 30, 2021.

As of September 30, 2021, the line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties.

As of September 30, 2021, the additional borrowing availability was $193.0 million beyond the $57.0 million drawn.

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

In January 2021, we amended and expanded our private shelf agreement to increase the aggregate amount available for issuance of unsecured senior promissory notes to $225.0 million.

The amended agreement provides for a revolving line of credit for $250.0 million, an accordion option to increase borrowing capacity up to $400.0 million, and extended the maturity date to September 2025.

As of March 31, 2022, the line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties.

As of March 31, 2022, the additional borrowing availability was $204.0 million beyond the $46.0 million drawn.

At December 31, 2021, the line of credit borrowing capacity was $250.0 million based on the value of unencumbered properties, of which $76.0 million was drawn on the line.

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 senior promissory notes to $225.0 million.

Under this agreement, we issued $200.0 million unsecured senior notes with $25.0 million remaining available.

In September 2021, we entered into a note purchase agreement for the issuance of $125.0 million of senior unsecured promissory notes.

In September 2021, we entered into a note purchase agreement for the issuance of $125.0 million of 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.

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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 months, and a blended, weighted average interest rate of 2.78%.

As of September 30, 2021, the FMCF had a balance of $198.9 million.

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 March 31, 2022 and December 31, 2021, the FMCF had a balance of $198.9 million.

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

Mortgage loan indebtedness, excluding the FMCF, was $293.5 million and $298.4 million at September 30, 2021 and December 31, 2020, respectively.

Mortgage loan indebtedness, excluding the FMCF, was $326.1 million and $284.9 million at March 31, 2022 and December 31, 2021, respectively.

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

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

As of September 30, 2021, the weighted average interest rate on mortgage debt was 3.83%, compared to 3.93% as of December 31, 2020.

As of March 31, 2022, the weighted average interest rate on mortgage debt was 3.85%, compared to 3.81% as of December 31, 2021.

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

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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.

During the three months ended September 30, 2021, 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 determined by management.

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 determined by management.

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 nine months ended September 30, 2021, we issued 1.1 million common shares under the 2019 and 2021 ATM programs at an average price of $78.63 per share, net of commissions.

During the three months ended March 31, 2022, we issued 321,000 common shares under the 2021 ATM program at an average price of $98.89 per share, net of commissions.

Total consideration, net of commissions and issuance costs, was $31.7 million.

As of September 30, 2021, common shares having an aggregate offering price of up to $230.1 million remained available under the 2021 ATM Program.

As of March 31, 2022, common shares having an aggregate offering price of up to $126.6 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 $83.00 per unit.

Each Series E preferred unit is convertible, at the holder's option, into 1.2048 Units.

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

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The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in the Condensed Consolidated Statements of Cash Flows in Part I, Item 1 above.

In addition to cash flow from operations, during the nine months ended September 30, 2021, we generated capital from various activities, including:

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

• Receiving $59.2 million, net of transaction costs, from the sale of five apartment communities in Rochester, Minnesota;

• Receiving $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;

• Receiving $85.9 million in net proceeds from the issuance of 1.1 million common shares under the 2019 and 2021 ATM Programs.

During the nine months ended September 30, 2021, we used capital for various activities, including:

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

• Acquiring 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 of mezzanine and construction loans of $17.5 million;

In addition to cash flow from operations, during the three months ended March 31, 2022, we generated capital from various activities, including:

• Receiving $31.7 million in net proceeds from the issuance of 321,000 common shares under the 2021 ATM Program.

During the three months ended March 31, 2022, we used capital for various activities, including:

• Acquiring four apartment communities in Minneapolis, Minnesota for $9.1 million in cash with the remainder of the purchase price in issuance of Units, assumption of mortgage debt, and the exchange of mortgages receivable which we financed;

• Repaying $2.2 million of mortgage principal;

• Repaying $30.0 million on the line of credit;

• Paying off $145.0 million in term loans;

• Paying $3.2 million for the termination of interest rate swaps;

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There have been no material changes to our contractual obligations and other commitments since that report was filed.

Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability, subject to market conditions, 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.

Off-Balance Sheet Arrangements

As of September 30, 2021, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of March 31, 2022, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

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A summary of critical accounting policies is included in our Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022 under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements in this report for additional information.

There have been no other significant changes to the our critical accounting policies during the nine months ended September 30, 2021.

There have been no other significant changes to the our critical accounting policies during the three months ended March 31, 2022.

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-Q

Item 2. Management’s Discussion and Analysis