What changed in this filing

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Item 7. Management’s Discussion and Analysis

2023-02-21 compared with 2022-02-28 · 153 added, 156 removed, 239 unchanged (56% of the section changed)

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

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

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

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

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Executive Summary

We own, manage, acquire, redevelop, and develop apartment communities.

We are a real estate investment trust, or REIT that owns, manages, acquires, redevelops, and develops apartment communities.

We primarily focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents.

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

COVID-19 Developments

The COVID-19 pandemic has had an impact on our business since March 2020, when it spread to many of the markets in which we own properties.

Our first priority continues to be the health and well-being of our residents, team members, and the communities we serve.

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

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

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

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

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

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

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

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

Financial Impact of the COVID-19 Pandemic

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

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

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

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

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

• cause the capital markets generally to become restricted or unavailable, thereby limiting our access to any needed debt or equity capital financing;

• impact the business of, or cause the loss of, certain critical third-party suppliers or other service providers;

• restrict our ability to continue to pay dividends on a quarterly basis at the current rate;

• impair the value of our tangible or intangible assets;

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

• cause the U.S.

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

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

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

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

Significant Transactions and Events for the Year Ended December 31, 2022

For the year ended December 31, 2022, our highlights included the following:

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

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

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

• Net Loss was $1.35 per basic and diluted share for the year ended December 31, 2022, compared to Net Loss of $0.47 per basic and diluted share for the year ended December 31, 2021;

• Core FFO per diluted share, a non-GAAP measure, increased 11.0% (refer to reconciliations of Funds from Operations and Core Funds from Operations beginning on page 31 for additional detail) to $4.43 from $3.99;

• Same-store year-over-year net operating income growth of 9.0% driven by same-store revenue growth of 10.0% (refer to reconciliation of Operating Income (Loss) to Net Operating Income on page 28 for additional detail).

Acquisitions and Dispositions .

During the year ended December 31, 2022, we completed the following transactions in furtherance of our strategic plan:

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

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

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

Cloud with a total of 2,696 apartment homes.

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

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

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

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

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

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

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

• Acquired a portfolio of three apartment communities in the Minneapolis, Minnesota area, totaling 267 apartment homes, for an aggregate purchase price of $70.3 million;

• Acquired Noko Apartments, a 130 home apartment community, located in Minneapolis, Minnesota for an aggregate purchase price of $46.6 million;

• Acquired Lyra Apartments, a 215 home apartment community in Centennial, Colorado for an aggregate purchase price of $95.0 million.

Financing Transactions.

During the year ended December 31, 2022, we completed the following financing transactions:

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

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

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

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

• Issued 321,000 common shares at an average price of $98.89 per share for total consideration, net of commissions and issuance costs, of approximately $31.4 million;

• Repurchased 432,000 common shares for total consideration of $29.1 million and an average of $67.23 per share;

• Closed on a $100.0 million term loan which bears interest at a floating rate of 120 to 175 basis points over the Secured Overnight Financing Rate (“SOFR”) based upon our leverage ratio and is for a 364-day term with an option to extend for an additional 364-day term.

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

To accomplish this, we have introduced initiatives to expand our operating margin by enhancing the resident experience, making value-add investments, and implementing technology solutions and expense controls.

We will actively manage our existing portfolio and strategically pursue acquisitions of multifamily communities in our target markets of Minneapolis, Minnesota and Denver, Colorado as opportunities arise and market conditions allow.

We will explore potential new markets and acquisition opportunities, including in Nashville, Tennessee, as market conditions allow.

Our continued management of a strong balance sheet should provide us with flexibility to pursue both internal and external growth.

We will actively manage our existing portfolio and strategically pursue acquisitions of multifamily communities and selective dispositions as opportunities arise and

market conditions allow.

We will explore potential new markets and acquisition opportunities as market conditions allow.

We seek to manage a strong balance sheet that should provide us with flexibility to pursue both internal and external growth.

RESULTS OF OPERATIONS

Reconciliation of Operating Income (Loss) to Net Operating Income

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

We are presenting our results of operations for the years ended December 31, 2022 and 2021.

For additional comparison of results of operations for the years ended December 31, 2021 and December 31, 2020, please refer to our Annual Report on Form 10-K filed with the SEC on February 28, 2022.

Non-GAAP Financial Measures

Net operating income.

Net operating income (“NOI”) is a non-GAAP financial measure which we define as total real estate revenues less property operating expenses, including real estate taxes, which is reconciled to operating income (loss).

Refer to the reconciliation of Operating Income (Loss) to Net Operating Income below.

We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing costs, property management expenses, casualty losses, and general and administrative expense.

NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance.

Throughout this Report, we have provided certain information on a same-store and non-same-store basis.

Same-store apartment communities are owned or in service for substantially all of the periods being compared and, in the case of development properties, have achieved a target level of physical occupancy of 90%.

On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate the performance of existing apartment communities and their contribution to net income.

Management believes that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are performing year-over-year.

Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing residents, controlling operating costs, and making prudent capital improvements.

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

For the comparison of the twelve months ended December 31, 2022 and 2021, 60 apartment communities were classified as same-store and 24 apartment communities were non-same-store.

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

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

Reconciliation of Operating Income (Loss) to Net Operating Income (non-GAAP)

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

(in thousands, except percentages)

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Net operating income $ 148,079 $ 119,848 $ 28,231 23.6 %

Consolidated Results of Operations

The following consolidated results of operations cover the years ended December 31, 2021 and 2020.

GAAP and Non-GAAP Financial Measures

The following table metrics, including GAAP and non-GAAP measures, cover the years ended December 31, 2022 and 2021.

(in thousands)

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Same-store (1)

$ 197,348 $ 179,348 $ 18,000 10.0 %

Non-same-store (1)

55,602 16,276 39,326 241.6 %

Other 2,831 2,147 684 31.9 %

3,766 2,831 935 33.0 %

Dispositions (1)

— 3,250 (3,250) (100.0) %

Total 256,716 201,705 55,011 27.3 %

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Same-store (1)

80,368 72,009 8,359 11.6 %

Non-same-store (1)

27,063 7,087 19,976 281.9 %

Other 1,120 1,008 112 11.1 %

1,203 1,120 83 7.4 %

Dispositions (1)

3 1,641 (1,638) (99.8) %

Total 108,637 81,857 26,780 32.7 %

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Same-store (1)

116,980 107,339 9,641 9.0 %

Non-same-store (1)

28,539 9,189 19,350 210.6 %

Other 1,711 1,139 572 50.2 %

2,563 1,711 852 49.8 %

Dispositions (1)

(3) 1,609 (1,612) (100.2) %

Total $ 148,079 $ 119,848 $ 28,231 23.6 %

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Interest expense (32,750) (29,078) 3,672 12.6 %

Loss on extinguishment of debt (535) (23) 512 2,226.1 %

Interest and other income (loss) 1,248 (2,915) 4,163 (142.8) %

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Dividends to preferred shareholders (6,428) (6,428) — —

Redemption of preferred shares — 297 (297) 100.0 %

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (20,537) $ (6,457) $ (14,080) 218.1 %

(1) This is a Non-GAAP financial measure which is a component of NOI (non-GAAP), as defined above.

Refer to the reconciliation of Operating Income (Loss) to Net Operating Income on page 28.

Non-GAAP financial measures should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance.

Year Ended December 31,

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Total 15,065 14,441

Net operating income.

NOI is a non-GAAP financial measure which we define as total real estate revenues less property operating expenses, including real estate taxes, which is reconciled to operating income (loss) in the table above.

We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense.

NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.

Throughout this Report, we have provided certain information on a same-store and non-same-store basis.

Management believes that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are performing year-over-year.

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

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

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

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

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

Same-store analysis.

Revenue from same-store communities increased by 10.0% or $18.0 million in the year ended December 31, 2022, compared to the same period in the prior year.

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

Property operating expenses, including real estate taxes.

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

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

Approximately 9.8% of the increase was due to higher average monthly revenue per occupied home and 0.2% from an increase in occupancy as weighted average occupancy

increased from 94.3% to 94.5% for the years ended December 31, 2021 and 2022, respectively.

Property operating expenses at same-store communities increased by 11.6% or $8.4 million in the year ended December 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

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

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

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

Net operating income.

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

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

At same-store communities, controllable expenses (which exclude insurance and real estate taxes), increased by $6.7 million, primarily due to $2.1 million in rising utilities costs, $1.7 million in compensation costs, and $2.4 million in repairs and maintenance and turnover costs.

Non-controllable expenses at same-store communities increased by $1.7 million primarily due to insurance premiums and deductibles on claims.

Same-store NOI increased by $9.6 million to $117.0 million for the year ended December 31, 2022 compared to $107.3 million in the same period in the prior year.

Non-same-store analysis.

Revenue non-same-store apartment communities increased by $39.3 million in the year ended December 31, 2022, compared to the same period in the prior year.

Property operating expenses from non-same-store apartment communities increased by $20.0 million.

Net operating income from non-same-store communities increased by $19.4 million.

The increase in revenue, property operating expenses, and NOI from non-same-store communities is primarily due to the addition of apartment communities in the latter part of 2021 and throughout 2022.

Other and dispositions analysis.

Revenue from other, which encompasses our commercial and mixed use activity, increased by 33.0% or $935,000 while revenue from dispositions decreased by $3.3 million.

Property operating expenses from other increased by 7.4% or $83,000 while property operating expenses from disposition decreased by $1.6 million due to sold properties.

Increases in revenue and property operating expenses from other is primarily due to the addition of apartment communities with commercial space.

Property management expense.

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 13.1% to $9.9 million in the year ended December 31, 2022, compared to $8.8 million in the year ended December 31, 2021.

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

The increase was primarily due to compensation costs due to the filling of open positions and additional staffing to support the acquisition of communities in the latter half of the prior year and the current year.

Casualty gain (loss).

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

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

Casualty loss increased to $1.6 million in the year ended December 31, 2022, compared to $344,000 in the year ended December 31, 2021.

The increase was primarily due to increased claims activity over the prior year period and more apartment communities over the comparable period.

Depreciation and amortization.

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

Depreciation and amortization increased by 14.2% to $105.3 million in the year ended December 31, 2022, compared to $92.2 million in the year ended December 31, 2021, attributable to an increase of $15.7 million from non-same-store properties primarily due to an increase in the number of apartment communities being depreciated, offset by decreases of $1.5 million and $1.4 million at same-store communities and sold properties, respectively.

General and administrative expenses.

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

General and administrative expenses increased by 8.0% to $17.5 million in the year ended December 31, 2022, compared to $16.2 million in the year ended December 31, 2021, primarily attributable to $1.3 million in pursuit costs and increased compensation costs, offset by a decrease in technology implementation costs.

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

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

In the years ended December 31, 2022 and 2021, we recorded gains on sale of real estate and other investments of $41,000 and $27.5 million, respectively.

Operating income.

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Interest expense.

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

Loss on extinguishment of debt.

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

Interest expense increased 12.6% to $32.8 million in the year ended December 31, 2022, compared to $29.1 million in the year ended December 31, 2021, primarily due to maintaining larger debt balances compared to the same period of the prior year with the acquisition activity, including the addition of a $100.0 million term loan in November, combined with rising interest rates.

Interest and other income (loss).

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

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

Interest and other income (loss) increased to income of $1.2 million in the year ended December 31, 2022, compared to a loss of $2.9 million in the prior year.

The increase was primarily due to a $5.4 million loss related to the termination of interest rate swaps that occurred in the prior year, offset by a $560,000 gain on the mark-to-market adjustment for an interest rate swap prior to termination.

Funds from Operations and Core Funds From Operations

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• 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;

• similar adjustments for partially owned consolidated real estate entities.

The exclusion in Nareit’s definition of FFO of impairment write-downs and gains and losses from the sale of real estate assets helps to identify the operating results of the long-term assets that form the base of our investments, and assists management and investors in comparing those operating results between periods.

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Net loss available to common shareholders for the year ended December 31, 2022 decreased to $20.5 million compared to a net loss of $6.5 million for the year ended December 31, 2021.

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

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

FFO applicable to common shares and Units for the year ended December 31, 2022, increased to $79.9 million compared to $54.9 million for the year ended December 31, 2021, a change of 45.5%, primarily due to increased NOI from same-store and non-same-store communities and a $5.4 million loss related to the termination of interest rate swaps in the same period of the prior year that did not occur in the current year, offset by increased interest expense, general and administrative expenses, property management, and casualty losses, and decreased NOI from dispositions.

For a comparison of FFO applicable to common shares and Units for the years ended December 31, 2021 and 2020, refer to our Annual Report on Form 10-K filed with the SEC on February 28, 2022.

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

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

(in thousands, except per share and unit amounts)

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Net income (loss) available to common shareholders $ (20,537) $ (6,457)

Noncontrolling interests – Operating Partnership (2,806) (212)

Noncontrolling interests – Operating Partnership and Series E preferred units (4,299) (2,806)

Depreciation and amortization 105,257 92,165

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Adjustments to Core FFO:

Casualty loss (recovery) $ — $ 749

Non-cash casualty loss (recovery) $ 254 $ —

Loss on extinguishment of debt 5 535

Rebranding costs — 402

Technology implementation costs (1)

(Gain) loss on marketable securities — 3,378

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

Commercial lease termination proceeds — (450)

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Amortization of assumed debt (464) (53)

Pursuit costs 1,302 39

Other miscellaneous items (2)

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Core FFO per share and Unit - diluted $ 4.43 $ 3.99

Weighted average shares - basic 15,216 13,803

Effect of redeemable operating partnership units 978 899

Effect of Series D preferred units 228 228

Effect of Series E preferred units 2,185 729

Effect of dilutive restricted stock units and stock options 38 45

Weighted average shares and Units - diluted 18,645 15,704

(1) Costs are related to a two-year implementation.

(2) Consists of (gain) loss on investments.

Liquidity and Capital Resources

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

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

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

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

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

generally and the credit markets in particular.

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

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

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

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

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

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

As of December 31, 2022, we had total liquidity of approximately $153.0 million, which included $142.5 million available on our lines of credit based on the value of unencumbered properties and $10.5 million of cash and cash equivalents.

As of December 31, 2021, we had total liquidity of approximately $204.8 million, which included $173.5 million available on our lines of credit based on the value of properties contained in our unencumbered asset pool (“UAP”) and $31.3 million of cash and cash equivalents.

As of December 31, 2022, we had a multibank, revolving line of credit with total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties.

As of December 31, 2022, the additional borrowing availability was $136.5 million beyond the $113.5 million drawn.

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

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

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

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

The line of credit bears interest either at the lender’s base rate plus a margin ranging from 25 to 80 basis points, or LIBOR, plus a margin

ranging from 125 to 180 basis points based on our consolidated leverage.

We may transition the reference rate on this line of credit from LIBOR to SOFR or another alternative reference rate.

We cannot predict the impact that this transition may have on the interest we pay.The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.

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

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

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

This operating line matures on August 31, 2024, with pricing based on SOFR.

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.

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(in thousands)

Amount Maturity Date Interest Rate

Amount Maturity Date Fixed Interest Rate

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

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

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

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

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

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

In November 2022, we entered into a $100.0 million term loan agreement (“Term Loan”) with PNC Bank, National Association as administrative agent.

The interest rate on the Term Loan is based on SOFR, plus a margin that ranges from 120 to 175 basis points based on our consolidated leverage ratio.

The Term Loan has a 364-day term but may be extended, at our option and subject to certain conditions, for one additional 364-day term.

We have a $198.9 million Fannie Mae Credit Facility Agreement (“FMCF”).

The FMCF is currently secured by mortgages on 16 apartment communities.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Refer to Item 7A in this Report for additional information on our market and interest rate risk.

We have an at-the-market offering program (“2021 ATM program”) through which we may offer and sell common shares having an aggregate sales price of up to $250.0 million, in amounts and at times that we determine.

The proceeds from the sale of common shares under the 2021 ATM program are intended to be used for general corporate purposes, which may include the funding of acquisitions, construction or mezzanine loans, community renovations, and the repayment of indebtedness.

During the year ended December 31, 2022, we issued 321,000 common shares under the 2021 ATM programs at an average price of $98.89 per share, net of commissions.

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

Total consideration, net of commissions and issuance costs, was approximately $31.4 million.

As of December 31, 2022, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM program.

Refer to Note 4 of our Consolidated Financial Statements contained in this Report.

On March 10, 2022, the Board of Trustees approved a share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to an aggregate of $50 million of our outstanding common shares.

Under the Share Repurchase Program, we are 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 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.

The table below provides details on the shares repurchased during the year ended December 31, 2022.

As of December 31, 2022, we had $21.0 million remaining authorized for purchase under this program.

(in thousands, except per share amounts)

Number of Common Shares Aggregate Cost (1)

Average Price Per Share (1)

Year ended December 31, 2022 432 $ 29,059 $ 67.23

(1) Amount includes commissions.

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

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

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

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 $175.8 million.

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

The holders of the Series E preferred units do not have voting rights.

As of December 31, 2022 and 2021, we had 3.9 million Series C preferred shares outstanding.

Changes in Cash, Cash Equivalents, and Restricted Cash

As of December 31, 2022, we had cash and cash equivalents of $10.5 million and restricted cash consisting of $1.4 million of escrows held by lenders for real estate taxes, insurance, and capital additions.

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

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

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

In addition to cash flows from operations, during the year ended December 31, 2022, we generated capital from various activities, including:

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

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

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

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

• Receipt of $99.5 million, net of fees, from the issuance of a term loan;

• Receipt of $37.5 million in net proceeds from our lines of credit;

• Receipt of $31.4 million, net of fees, from the issuance of 321,000 common shares under our 2021 ATM program.

During the year ended December 31, 2022, we used capital for various activities, including:

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

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

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

• Funding mezzanine and construction loans of $18.6 million;

• Acquisition of five apartment communities in Minneapolis, Minnesota and Centennial, Colorado for $104.7 million in cash, including transaction costs, 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 approximately $29.0 million of mortgage principal;

• Paying off $145.0 million in term loans;

• Repurchase of 432,000 common shares for $29.1 million, net of issuance costs;

• Repurchase of 46,000 Units for $4.1 million

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

• Paying $76.9 million on our lines of credit;

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

• Paying distributions on common shares, Series E preferred units, Units, and Series C preferred shares of $60.7 million;

• Funding capital improvements for apartment communities of approximately $56.6 million.

Contractual Obligations and Other Commitments

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

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

The primary line of credit had a $113.5 million balance outstanding at December 31, 2022 and matures in September 2025.

Our unsecured senior notes have an aggregate balance of $300.0 million at December 31, 2022 with varying maturities from September 2028 through September 2034.

Our term loan had a balance of $100.0 million at December 31, 2022, matures in November 2023, and may be extended, at our option and subject to certain conditions, for one additional 364-day term.

(in thousands)

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Total 1 Year 1-3 Years 3-5 Years 5 Years

Mortgages payable (principal and interest) $ 590,992 $ 43,056 $ 77,269 $ 105,374 $ 365,293

Lines of credit (principal and interest) (1)

$ 126,879 $ 4,689 $ 122,190 — —

Notes payable (principal and interest) $ 476,840 $ 115,016 $ 18,980 $ 18,954 $ 323,890

Mortgages payable (principal and interest) $ 601,193 $ 62,337 $ 68,488 $ 119,669 $ 350,699

Total $ 1,204,912 $ 182,042 $ 209,658 $ 138,623 $ 674,589

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As of December 31, 2022, we had no significant off-balance-sheet arrangements.

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

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.

High inflation 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.

Supply chain and inflationary pressures are likely to result in increased 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.

We continue to have access to the financial markets;

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.

Critical Accounting Estimates

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Acquisition of Investments in Real Estate.

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

whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases and resident relationships) and assumed liabilities, and allocate the purchase price based on these assessments.

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

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The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns.

If indicators exist, we compare the expected future undiscounted cash flows for the property against the carrying amount of that property.

If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount.

If indicators exist, we compare the estimated future undiscounted cash flows for the property against the carrying amount of that property.

If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is generally recorded for the difference between the estimated fair value and the carrying amount.

If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements.

The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.

The evaluation of estimated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results.

Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.

Held for Sale.

We classify properties as held for sale when they meet the GAAP criteria, which include:

(a) management commits to and initiates a plan to sell the asset;

(b) the sale is probable and expected to be completed within one year under terms that are usual and customary for sales of such assets;

and (c) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn.

Held for sale properties are reported at the lower of their carrying amount or estimated fair value less costs to sell.

Recent Accounting Pronouncements

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis