Item 2. Management’s Discussion and Analysis
Item 2. 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 June 30, 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. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “assumes,” “may,” “projects,” “outlook,” “future,” and variations of those words and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial condition, or plans expressed or implied by the forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond the our control and could differ materially from actual results and performance.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
• 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;
• 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, energy costs, 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 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;
• reliance on a single asset class (multifamily) and certain geographic areas of the U.S.;
• inability to expand operations into new or existing markets successfully;
• failure of new acquisitions to achieve anticipated results or be efficiently integrated;
• inability to complete lease-up of projects on schedule and on budget;
• failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and/or tax protection payments;
• inability to fund capital expenditures out of cash flow;
• inability to pay, or need to reduce, dividends on common shares;
• financing risks, including the potential inability to meet existing covenants in existing credit facilities or to obtain new debt or equity financing on favorable terms, or at all;
• level and volatility of interest or capitalization rates or capital market conditions;
• loss contingencies and the availability and cost of casualty insurance for losses;
• inability to continue to satisfy complex rules in order to maintain status as a REIT for federal income tax purposes, inability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax purposes, and the risk of changes in laws affecting REITs;
• inability to attract and retain qualified personnel;
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• cyber liability or potential liability for breaches of privacy or information security systems;
• inability to address catastrophic weather, natural events, and climate change;
• inability to comply with laws and regulations applicable to the business and any related investigations or litigation; and
• other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.
New factors may also arise from time to time that could have an adverse effect on our business and results of operations. Except as otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements to reflect events, circumstances, or changes in expectations after the date on which this Report is filed. Readers also should review the risks and uncertainties detailed from time to time in filings with the SEC, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2021.
Executive Summary
We own, manage, acquire, redevelop, and develop apartment communities. We primarily focus on investing in markets characterized by stable and growing economies, 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 June 30, 2022, we owned interests in 83 apartment communities consisting of 14,838 apartment homes. Property owned, as presented in our Condensed Consolidated Balance Sheets at historical cost, was $2.4 billion at June 30, 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 our business and shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.
COVID-19
The COVID-19 pandemic has affected our business since March 2020. Our first priority continues to be the health and well-being of our residents, team members, and the communities we serve. 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. 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 financial position and operating results, as well as potential adverse impacts on our business. 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 June 30, 2022
For the three months ended June 30, 2022, revenue increased by $16.5 million to $63.1 million, compared to $46.7 million for the three months ended June 30, 2021, due to same-store communities and 23 non-same-store communities, offset by dispositions. Total expenses increased by $15.3 million to $59.3 million for the three months ended June 30, 2022, compared to $43.9 million for the three months ended June 30, 2021 due to increased property operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses. Non-GAAP Funds from Operations (“FFO”) applicable to common shares and Units for the three months ended June 30, 2022 increased by $5.4 million to $19.1 million compared to $13.7 million for the three months ended June 30, 2021. See the description of FFO on page 27 and the reconciliation of net income available to common shareholders to FFO on page 28. This increase was primarily due to increased NOI from same-store and non-same-store communities, offset by increased interest, property management, and general and administrative expenses, and decreased interest income and NOI from dispositions. The drivers of these changes are discussed in more detail in the “Results of Operations” section below.
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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”) (non-GAAP), which is defined below.
(in thousands, except percentages)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Operating income (loss) $ 3,835 $ 29,573 $ (25,738) (87.0) % $ (76) $ 31,214 $ (31,290) (100.2) %
Adjustments:
Property management expenses 2,721 2,085 636 30.5 % 4,974 3,852 1,122 29.1 %
Casualty (gain) loss 382 (27) 409 * 980 74 906 *
Depreciation and amortization 24,768 19,308 5,460 28.3 % 55,769 39,300 16,469 41.9 %
General and administrative expenses 5,221 3,797 1,424 37.5 % 9,721 7,703 2,018 26.2 %
Gain (loss) on sale of real estate and other investments (27) (26,840) 26,813 (99.9) % (27) (26,840) 26,813 (99.9) %
Net operating income $ 36,900 $ 27,896 $ 9,004 32.3 % $ 71,341 $ 55,303 $ 16,038 29.0 %
* Not a meaningful percentage
Consolidated Results of Operations
The following consolidated results of operations cover the three and six months ended June 30, 2022 and 2021.
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(in thousands, except percentages)
Three Months Ended June 30, Six Months Ended June 30,
2022 2021 $ Change % Change 2022 2021 $ Change % Change
Revenue
Same-store $ 48,867 $ 43,762 $ 5,105 11.7 % $ 95,758 $ 86,956 $ 8,802 10.1 %
Non-same-store 13,334 1,195 12,139 1,015.8 % 25,841 2,242 23,599 1,052.6 %
Other 915 664 251 37.8 % 1,831 1,332 499 37.5 %
Dispositions — 1,035 (1,035) (100.0) % — 2,774 (2,774) (100.0) %
Total 63,116 46,656 16,460 35.3 % 123,430 93,304 30,126 32.3 %
Property operating expenses, including real estate taxes
Same-store 19,700 17,610 2,090 11.9 % 38,915 35,140 3,775 10.7 %
Non-same-store 6,286 357 5,929 1,660.8 % 12,614 701 11,913 1,699.4 %
Other 230 258 (28) (10.9) % 560 521 39 7.5 %
Dispositions — 535 (535) (100.0) % — 1,639 (1,639) (100.0) %
Total 26,216 18,760 7,456 39.7 % 52,089 38,001 14,088 37.1 %
Net operating income
Same-store 29,167 26,152 3,015 11.5 % 56,843 51,816 5,027 9.7 %
Non-same-store 7,048 838 6,210 741.1 % 13,227 1,541 11,686 758.3 %
Other 685 406 279 68.7 % 1,271 811 460 56.7 %
Dispositions — 500 (500) (100.0) % — 1,135 (1,135) (100.0) %
Total $ 36,900 $ 27,896 $ 9,004 32.3 % $ 71,341 $ 55,303 $ 16,038 29.0 %
Property management expenses (2,721) (2,085) 636 30.5 % (4,974) (3,852) 1,122 29.1 %
Casualty gain (loss) (382) 27 409 * (980) (74) 906 *
Depreciation and amortization (24,768) (19,308) 5,460 28.3 % (55,769) (39,300) 16,469 41.9 %
General and administrative expenses (5,221) (3,797) 1,424 37.5 % (9,721) (7,703) 2,018 26.2 %
Gain (loss) on sale of real estate and other investments 27 26,840 26,813 99.9 % 27 26,840 26,813 99.9 %
Interest expense (7,561) (7,089) 472 6.7 % (15,276) (14,320) 956 6.7 %
Interest and other income (loss) (17) 619 (636) (102.7) % 1,046 1,050 (4) (0.4) %
NET INCOME (LOSS) $ (3,743) $ 23,103 $ (26,846) (116.2) % $ (14,306) $ 17,944 $ (32,250) (179.7) %
Dividends to Series D preferred unitholders (160) (160) — — (320) (320) — —
Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units 950 (1,386) 2,336 (168.5) % 3,107 (917) 4,024 (438.8) %
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities (38) (19) (19) 100.0 % (61) (36) (25) 69.4 %
Net income (loss) attributable to controlling interests (2,991) 21,538 (24,529) (113.9) % (11,580) 16,671 (28,251) (169.5) %
Dividends to preferred shareholders (1,607) (1,607) — — (3,214) (3,214) — —
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (4,598) $ 19,931 $ (24,529) (123.1) % $ (14,794) $ 13,457 $ (28,251) (209.9) %
* Not a meaningful percentage
Three Months Ended June 30, Six Months Ended June 30,
Weighted Average Occupancy (1)
2022 2021 2022 2021
Same-store 94.8 % 94.9 % 94.3 % 94.8 %
Non-same-store 95.0 % 93.1 % 94.8 % 91.8 %
Total 94.8 % 94.8 % 94.4 % 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 apartment 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. Market rates are determined using the currently offered effective rates on new leases at the community and are used as the starting point in determination of the market rates of vacant apartment homes. Centerspace believes 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 the calculation of weighted average occupancy may not be comparable to that disclosed by other REITs.
Number of Apartment Homes June 30, 2022 June 30, 2021
Same-store 11,319 11,319
Non-same-store 3,519 256
Total 14,838 11,575
NOI is a non-GAAP financial measure, which we define as total real estate revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate
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because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expenses. 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.
We have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the case of newly-constructed 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 full period-over-period operating comparisons for existing apartment communities and their contribution to net income. We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how a fixed pool of communities are performing year-over-year. We use this measure to assess whether or not we have been successful in increasing NOI, raising average rental revenue, renewing the leases on existing residents, controlling operating costs, and making prudent capital improvements. 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 six months ended June 30, 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. Revenue increased by 35.3% to $63.1 million for the three months ended June 30, 2022, compared to $46.7 million in the three months ended June 30, 2021. Revenue from non-same-store communities increased by $12.1 million and revenue from other properties increased by $251,000, offset by a decrease of $1.0 million from dispositions. Revenue from same-store communities increased 11.7% or $5.1 million in the three months ended June 30, 2022, compared to the same period in the prior year. The increase was attributable to 11.8% growth in average monthly revenue per occupied home for the three months ended June 30, 2022, offset by a decrease of 0.1% in occupancy as weighted average occupancy decreased from 94.9% in the three months ended June 30, 2021 to 94.8% for the three months ended June 30, 2022.
Revenue increased by 32.3% to $123.4 million for the six months ended June 30, 2022, compared to $93.3 million in the six months ended June 30, 2021. Revenue from non-same-store communities increased by $23.6 million and revenue from other properties increased by $499,000, offset by a decrease of $2.8 million from dispositions. Revenue from same-store communities increased 10.1% or $8.8 million in the six months ended June 30, 2022, compared to the same period in the prior year. The increase was attributable to 10.6% growth in average monthly revenue per occupied home for the six months ended June 30, 2022, offset by a decrease of 0.5% in occupancy as weighted average occupancy decreased from 94.8% in the six months ended June 30, 2021 to 94.3% for the six months ended June 30, 2022.
Property operating expenses, including real estate taxes . Property operating expenses, including real estate taxes, increased by 39.7% to $26.2 million in the three months ended June 30, 2022, compared to $18.8 million in the same period of the prior year. An increase of $5.9 million at non-same-store communities was offset by a decrease $535,000 from dispositions. Property operating expenses, including real estate taxes, at same-store communities increased by 11.9% or $2.1 million in the three months ended June 30, 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 $1.8 million, primarily due to increased utilities, repairs and maintenance costs, and on-site compensation. Non-controllable expenses at same-store communities increased by $305,000, due to insurance costs and real estate taxes.
Property operating expenses, including real estate taxes, increased by 37.1% to $52.1 million in the six months ended June 30, 2022, compared to $38.0 million in the same period of the prior year. An increase of $11.9 million at non-same-store communities was offset by a decrease of $1.6 million from dispositions. Property operating expenses, including real estate taxes, at same-store communities increased by 10.7% or $3.8 million in the six months ended June 30, 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 $3.3 million, primarily due to increased utilities, repairs and maintenance costs, and on-site compensation. Non-controllable expenses at same-store communities increased by $494,000, primarily due to insurance costs.
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Property management expenses . Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 30.5% to $2.7 million in the three months ended June 30, 2022, compared to $2.1 million in the same period of the prior year. The increase is primarily due to $490,000 in compensation costs and $136,000 related to technology initiatives.
Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 29.1% to $5.0 million in the six months ended June 30, 2022, compared to $3.9 million in the same period of the prior year. The increase is primarily due to $770,000 in compensation costs and $217,000 related to technology initiatives.
Casualty gain (loss). Casualty gain (loss) increased to a loss of $382,000 in the three months ended June 30, 2022, compared to a gain of $27,000 in the same period of the prior year. The increase is due to lower than usual loss experience in the prior year.
Casualty gain (loss) increased to a loss of $980,000 in the six months ended June 30, 2022, compared to a loss of $74,000 in the same period of the prior year. The increase is due to lower than usual loss experience in the prior year.
Depreciation and amortization. Depreciation and amortization increased by 28.3% to $24.8 million in the three months ended June 30, 2022, compared to $19.3 million in the same period of the prior year, attributable to an increase of $6.4 million from non-same-store properties, offset by decreases from same-store and sold properties.
Depreciation and amortization increased by 41.9% to $55.8 million in the six months ended June 30, 2022, compared to $39.3 million in the same period of the prior year, attributable to an increase of $18.6 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 37.5% to $5.2 million in the three months ended June 30, 2022, compared to $3.8 million in the same period of the prior year, primarily attributable to $1.1 million from abandoned pursuit costs and increases in professional and consulting fees, travel costs, and salary related expense, offset by a decrease in short-term and long-term incentive costs.
General and administrative expenses increased by 26.2% to $9.7 million in the six months ended June 30, 2022, compared to $7.7 million in the same period of the prior year, primarily attributable to $1.1 million from abandoned pursuit costs, $495,000 in compensation costs and $364,000 in professional and consulting fees.
Interest expense. Interest expense increased by 6.7% to $7.6 million in the three months ended June 30, 2022, compared to $7.1 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 expense increased by 6.7% to $15.3 million in the six months ended June 30, 2022, compared to $14.3 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 $17,000 in the three months ended June 30, 2022, compared to income of $619,000 in the same period of the prior year. The decrease was primarily due to interest income on mortgages receivable that were outstanding in the prior year.
Interest and other income decreased to $1.0 million in the six months ended June 30, 2022, compared to $1.1 million in the same period of the prior year. The decrease was primarily due to interest income on mortgages receivable outstanding in the prior year, offset by a gain on the mark to market adjustment for an interest rate swap contract.
Net income (loss) available to common shareholders. Net loss available to common shareholders decreased to a loss of $4.6 million for the three months ended June 30, 2022, compared to net income of $19.9 million in the three months ended June 30, 2021.
Net loss available to common shareholders decreased to a loss of $14.8 million for the six months ended June 30, 2022, compared to net income of $13.5 million in the six months ended June 30, 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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We use the definition of Funds from Operations 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;
• 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 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 this definition. We believe that all such interpretations not specifically provided for in the Nareit definition are consistent with this 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 of the our needs, including our 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, we believe 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 June 30, 2022, increased to $19.1 million compared to $13.7 million for the comparable period of the prior year, an increase of 39.6%. This increase was primarily due to increased NOI from same-store and non-same-store communities, offset by increased interest, property management, and general and administrative expenses, and decreased interest income and NOI from dispositions.
FFO applicable to common shares and Units for the six months ended June 30, 2022, increased to $37.6 million compared to $26.6 million for the comparable period of the prior year, an increase of 41.4%. This increase was primarily due to increased NOI from same-store and non-same-store communities, offset by increased interest, property management, general and administrative expenses, and casualty loss, and decreased NOI from dispositions.
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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 June 30, Six Months Ended June 30,
2022 2021 2022 2021
Net income (loss) available to common shareholders $ (4,598) $ 19,931 $ (14,794) $ 13,457
Adjustments:
Noncontrolling interests – Operating Partnership and Series E preferred units (950) 1,386 (3,107) 917
Depreciation and amortization 24,768 19,308 55,769 39,300
Less depreciation – non real estate (101) (87) (202) (185)
Less depreciation – partially owned entities (7) (24) (28) (48)
(Gain) loss on sale of real estate and other investments (27) (26,840) (27) (26,840)
FFO applicable to common shares and Units $ 19,085 $ 13,674 $ 37,611 $ 26,601
Adjustments to Core FFO:
Non-cash casualty (gain) loss 163 — 188 —
Loss on extinguishment of debt 5 — 5 —
Technology implementation costs (1)
447 447 550 860
Interest rate swap termination, amortization, and mark-to-market 205 — (408) —
Amortization of assumed debt (116) — (231) —
Pursuit costs 1,127 — 1,127 —
Other miscellaneous items 100 3 96 3
Core FFO applicable to common shares and units $ 21,016 $ 14,124 $ 38,938 $ 27,464
FFO applicable to common shares and Units $ 19,085 $ 13,674 $ 37,611 $ 26,601
Dividends to preferred unitholders 160 160 320 320
FFO applicable to common shares and Units - diluted $ 19,245 $ 13,834 $ 37,931 $ 26,921
Core FFO applicable to common shares and units $ 21,016 $ 14,124 $ 38,938 $ 27,464
Dividends to preferred unitholders 160 160 320 320
Core FFO applicable to common shares and Units - diluted $ 21,176 $ 14,284 $ 39,258 $ 27,784
Per Share Data
Earnings (loss) per common share - diluted $ (0.30) $ 1.48 $ (0.97) $ 1.02
FFO per share and Unit - diluted $ 1.02 $ 0.95 $ 2.03 $ 1.87
Core FFO per share and Unit - diluted $ 1.12 $ 0.98 $ 2.10 $ 1.93
Weighted average shares - basic 15,369 13,353 15,233 13,216
Effect of redeemable operating partnership units 995 916 978 939
Effect of Series D preferred units 228 228 228 228
Effect of Series E preferred units 2,186 — 2,186 —
Effect of dilutive restricted stock units and stock options 48 17 57 18
Weighted average shares and Units - diluted 18,826 14,514 18,682 14,401
(1) Costs are related to a two-year implementation.
Acquisitions and Dispositions
We had no acquisitions or dispositions during the three months ended June 30, 2022.
Distributions Declared
Distributions of $0.73 and $1.46 per common share and Unit were declared during the three and six months ended June 30, 2022, respectively. Distributions of $0.70 and $1.40 per common share and Unit were declared during the three and six months ended June 30, 2021, respectively. Distributions of $0.4140625 and $0.828125 per Series C preferred share were declared during the three and six months ended June 30, 2022 and 2021. Distributions of $0.9655 and $1.931 per Series D preferred unit
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were declared during the three and six months ended June 30, 2022 and 2021. Distributions of $0.968750 and $1.937500 per Series E preferred unit were declared during the three and six months ended June 30, 2022.
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 operations, 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 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 June 30, 2022, we had total liquidity of approximately $196.2 million, which included $183.0 million available on the lines of credit and $13.2 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.
Debt
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, an accordion option to increase borrowing capacity up to $400.0 million, and extended the maturity date to September 2025. As of June 30, 2022, the line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties. As of June 30, 2022, the additional borrowing availability was $177.0 million beyond the $73.0 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. 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. Under the private shelf agreement with PGIM, we have issued $200.0 million unsecured senior notes with $25.0 million remaining available. The following table shows the notes issued under both private shelf 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 (the “FMCF”) for the financing of certain apartment communities. The FMCF is currently secured by mortgages on those apartment communities. The notes are
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interest-only, have varying maturity dates of 7, 10, and 12 years, and a blended, weighted average interest rate of 2.78%. As of June 30, 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 $302.4 million and $284.9 million at June 30, 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 June 30, 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. 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.
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. 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 may be used for general corporate purposes, including the funding of acquisitions and the repayment of indebtedness. During the six months ended June 30, 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 June 30, 2022, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program.
On June 13, 2022, the Board of Trustees approved a new share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to an aggregate of $50.0 million of the Company's outstanding common shares. Under the Share Repurchase Program, the Company is authorized to repurchase common shares through open market purchases, privately-negotiated transactions, block trades or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources or other financial and operational performance, market conditions, securities law limitations, and other factors. During the six months ended June 30, 2022, the Company had no share repurchases under this program. As of June 30, 2022, the Company had $50.0 million remaining authorized for purchase under this program.
Changes in Cash, Cash Equivalents, and Restricted Cash
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 six months ended June 30, 2022, we generated capital from various activities, including:
• Receiving $31.6 million in net proceeds from the issuance of 321,000 common shares under the 2021 ATM Program.
During the six months ended June 30, 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 $25.9 million of mortgage principal;
• Repaying $3.0 million on the line of credit;
• Paying $3.2 million for the termination of interest rate swaps; and
• Funding capital improvements for apartment communities of approximately $13.9 million.
Contractual Obligations and Other Commitments
Contractual obligations and other commitments were disclosed in our Form 10-K for the year ended December 31, 2021. There have been no material changes to our contractual obligations and other commitments since that report was filed.
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Inflation and Supply Chain
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. Supply chain and inflationary pressures are likely to result in increasing operating expenses, specifically, increases in energy costs, salary related costs, and construction materials for repairs and maintenance or value add projects. A worsening of the current environment could contribute to delays in obtaining construction materials and result in higher than anticipated costs, which could prevent us from obtaining expected returns on value add projects.
Access to the financial markets remains strong; however, a prolonged disruption of the markets or a decline in credit and financing conditions could negatively affect our ability to access capital necessary to fund our operations or refinance maturing debt in the future. Additionally, rising interest rates could negatively impact our borrowing costs for any variable rate borrowings or refinancing activity.
Off-Balance Sheet Arrangements
As of June 30, 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
In preparing the Condensed Consolidated Financial Statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. 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 six months ended June 30, 2022.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.