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Item 2. Management’s Discussion and Analysis

2023-05-01 compared with 2022-10-31 · 145 added, 148 removed, 201 unchanged (59% of the section changed)

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

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included in this report on Form 10-Q for the quarter ended September 30, 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.

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended March 31, 2023 (the “Report”), the audited financial statements for the year ended December 31, 2022, which are included in our Annual Report on Form 10-K filed with the SEC on February 21, 2023, and the risk factors in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 31, 2022.

This discussion and analysis, and other sections of this Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to the expectations for future periods.

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The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

• inflation and price volatility in the global economy;

• uncertain global macro-economic and political 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;

• timely access to material and labor required to renovate and maintain 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, our ability 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;

• 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;

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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 and maintain 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.;

• reliance on a single asset class (multifamily) and certain geographic areas (Midwest and Mountain West regions) of the U.S.;

• inability to expand operations into new or existing markets successfully;

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

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

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

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• level and volatility of interest or capitalization rates or capital market conditions;

• uninsured losses due to insurance deductibles, uninsured claims or casualties or losses in excess of applicable coverage;

• 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 continue to satisfy complex tax 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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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 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 September 30, 2022, we owned interests in 84 apartment communities consisting of 15,064 apartment homes.

Property owned, as presented in our Condensed Consolidated Balance Sheets at historical cost, was $2.5 billion at September 30, 2022, compared to $2.3 billion at December 31, 2021.

As of March 31, 2023, we owned interests in 75 apartment communities consisting of 13,497 apartment homes.

Property owned, as presented in our Condensed Consolidated Balance Sheets at historical cost, was $2.4 billion at March 31, 2023, compared to $2.5 billion at December 31, 2022.

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

While the COVID-19 pandemic has affected our business since March 2020, the extent of the impact has generally decreased.

We continue to monitor the status of COVID-19 and actively manage 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 .

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.

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

Overview of the Three Months Ended September 30, 2022

• On September 30, 2022, we acquired Lyra Apartments, located in Centennial, Colorado, for $95.0 million.

• For the three months ended September 30, 2022, revenue increased by $15.0 million or 29.8% to $65.4 million, compared to $50.4 million for the three months ended September 30, 2021, due to an 11.1% increase from same-store communities and the addition of 24 non-same-store communities.

• Total expenses increased by $9.1 million to $58.4 million for the three months ended September 30, 2022, compared to $49.3 million for the three months ended September 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 September 30, 2022 increased by $11.7 million to $21.0 million compared to $9.3 million for the three months ended September 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 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, property management, and general and administrative expenses, and decreased interest income.

Overview of the Three Months Ended March 31, 2023

• During the three months ended March 31, 2023, we sold nine non-core apartment communities for an aggregate sales price of $144.3 million and a realized gain on sale of $60.2 million.

See Note 8 of the Notes to the Condensed Consolidated Financial Statements in the report for more details.

In connection with the dispositions, we paid down our $100.0 million term loan.

• For the three months ended March 31, 2023, revenue increased by $7.6 million or 12.6% to $67.9 million, compared to $60.3 million for the three months ended March 31, 2022, due to a 10.5% increase from same-store communities and an increase from non-same-store communities.

• Total expenses increased by $1.2 million to $65.5 million for the three months ended March 31, 2023, compared to $64.2 million for the three months ended March 31, 2022 due to increased property operating expenses, real estate taxes, and general and administrative expenses, offset by lower depreciation and amortization.

• Net income was $2.76 per diluted share for the three months ended March 31, 2023, compared to net loss of $0.68 per diluted share for the same period of 2022.

• Non-GAAP Core Funds from Operations (“Core FFO”) applicable to common shares and Units for the three months ended March 31, 2023 increased by $1.6 million to $19.5 million compared to $17.9 million for the three months ended March 31, 2022.

See the description of Core FFO on page 26 and the reconciliation of net income available to common shareholders to FFO and Core FFO on page 27.

This increase was primarily due to increased NOI from same-store and non-same-store communities, offset by increased interest expense and decreased interest and other income.

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

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.

GAAP and Non-GAAP Financial Measures

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) 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 expenses.

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.

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 the performance of 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 three months ended March 31, 2023 and 2022, five 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.

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

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

(in thousands, except percentages)

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

2022 2021 $ Change % Change 2022 2021 $ Change % Change

Three Months Ended March 31,

2023 2022 $ Change % Change

Operating income (loss) $ 62,597 $ (3,911) $ 66,508 (1,700.5) %

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General and administrative expenses 7,723 4,500 3,223 71.6 %

Gain (loss) on sale of real estate and other investments — — — — (27) (26,840) 26,813 (99.9) %

(Gain) loss on sale of real estate and other investments (60,159) — (60,159) N/A

Net operating income $ 38,974 $ 34,441 $ 4,533 13.2 %

* Not a meaningful percentage

Consolidated Results of Operations

The following consolidated results of operations cover the three and nine months ended September 30, 2022 and 2021.

The following consolidated results of operations, including GAAP and non-GAAP metrics, cover the three months ended March 31, 2023 and 2022.

(in thousands, except percentages)

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

2022 2021 $ Change % Change 2022 2021 $ Change % Change

Three Months Ended March 31,

2023 2022 $ Change % Change

Same-store (1)

$ 58,859 $ 53,249 $ 5,610 10.5 %

Non-same-store (1)

Other 1,034 848 186 21.9 % 2,866 2,180 686 31.5 %

3,639 1,667 1,972 118.3 %

1,002 916 86 9.4 %

Dispositions (1)

4,397 4,482 (85) (1.9) %

Total 67,897 60,314 7,583 12.6 %

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Same-store (1)

24,593 22,370 2,223 9.9 %

Non-same-store (1)

Other 317 287 30 10.5 % 876 808 68 8.4 %

1,310 710 600 84.5 %

151 329 (178) (54.1) %

Dispositions (1)

2,869 2,464 405 16.4%

Total 28,923 25,873 3,050 11.8 %

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Same-store (1)

34,266 30,879 3,387 11.0 %

Non-same-store (1)

Other 717 561 156 27.8 % 1,990 1,372 618 45.0 %

2,329 957 1,372 143.4 %

851 587 264 45.0 %

Dispositions (1)

1,528 2,018 (490) (24.3) %

Total $ 38,974 $ 34,441 $ 4,533 13.2 %

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General and administrative expenses (7,723) (4,500) 3,223 71.6 %

Gain (loss) on sale of real estate and other investments — — — — 27 26,840 (26,813) (99.9) %

Gain (loss) on sale of real estate and other investments 60,159 — (60,159) N/A

Interest expense (10,319) (7,715) 2,604 33.8 %

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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 41,964 $ (10,196) $ 52,160 (511.6) %

* Not a meaningful percentage

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

(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 above.

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.

Three Months Ended March 31,

Weighted Average Occupancy (1)

2022 2021 2022 2021

Same-store 94.8 % 94.1 %

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(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.

Scheduled rental revenue represents the value of all apartment homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents.

When calculating actual rents for occupied apartment 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.

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

Number of Apartment Homes September 30, 2022 September 30, 2021

Number of Apartment Homes March 31, 2023 March 31, 2022

Same-store 12,885 12,885

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Total 13,497 13,282

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

because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expenses.

We have provided certain information on a same-store and non-same-store basis.

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.

For the comparison of the nine months ended September 30, 2022 and 2021, 24 apartment communities were non-same-store.

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

Revenue increased by 29.8% to $65.4 million for the three months ended September 30, 2022, compared to $50.4 million in the three months ended September 30, 2021.

Revenue from non-same-store communities increased by $10.3 million and revenue from other properties increased by $186,000, offset by a decrease of $477,000 from dispositions.

Revenue from same-store communities increased 11.1% or $5.0 million in the three months ended September 30, 2022, compared to the same period in the prior year.

The increase was attributable to 10.8% growth in average monthly revenue per occupied home for the three months ended September 30, 2022 and an increase of 0.2% in occupancy as weighted average occupancy increased from 94.3% in the three months ended September 30, 2021 to 94.5% for the three months ended September 30, 2022.

Revenue increased by 31.4% to $188.9 million for the nine months ended September 30, 2022, compared to $143.7 million in the nine months ended September 30, 2021.

Revenue from non-same-store communities increased by $33.9 million and revenue from other properties increased by $686,000, offset by a decrease of $3.3 million from dispositions.

Revenue from same-store communities increased 10.4% or $13.8 million in the nine months ended September 30, 2022, compared to the same period in the prior year.

The increase was attributable to 10.7% growth in average monthly revenue per occupied home for the nine months ended September 30, 2022, offset by a decrease of 0.2% in occupancy as weighted average occupancy decreased from 94.6% in the nine months ended September 30, 2021 to 94.4% for the nine months ended September 30, 2022.

Property operating expenses, including real estate taxes .

Property operating expenses, including real estate taxes, increased by 34.3% to $27.3 million in the three months ended September 30, 2022, compared to $20.4 million in the same period of the prior year.

Property operating expenses, including real estate taxes at non-same-store communities increased by $5.0 million, whereas the same-store communities increased by 10.6% or $2.0 million in the three months ended September 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 $200,000, primarily due to insurance costs.

Property operating expenses, including real estate taxes, increased by 36.1% to $79.4 million in the nine months ended September 30, 2022, compared to $58.4 million in the same period of the prior year.

An increase of $16.9 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 $5.7 million in the nine months ended September 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 $5.0 million, primarily due to increased utilities, repairs and maintenance costs, and on-site compensation.

Non-controllable expenses at same-store communities increased by $694,000, primarily due to insurance costs.

Same-store analysis.

Revenue from same-store communities increased 10.5% or $5.6 million in the three months ended March 31, 2023, compared to the same period in the prior year.

The increase was attributable to 9.6% growth in average monthly revenue per occupied home for the three months ended March 31, 2023 and an increase of 0.7% in occupancy as weighted average occupancy increased from 94.1% in the three months ended March 31, 2022 to 94.8% for the three months ended March 31, 2023.

Property operating expenses, including real estate taxes, at same-store communities increased by 9.9% or $2.2 million in the three months ended March 31, 2023, compared to the same period in the prior year.

At same-store communities, controllable expenses (which exclude insurance and real estate taxes) increased by $1.2 million, primarily due to repairs and maintenance, which includes turnover and snow removal costs, and compensation.

Non-controllable expenses at same-store communities increased by $1.0 million, primarily due to real estate taxes and an increase in insurance premiums and claims.

Same-store NOI increased by $3.4 million to $34.3 million for the three months ended March 31, 2023 compared to $30.9 million in the same period of the prior year.

Non-same-store analysis.

Revenue from non-same-store communities increased by $2.0 million in the three months ended March 31, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at non-same-store communities increased by $600,000.

NOI at non-same-store communities increased by $1.4 million to $2.3 million for the three months ended March 31, 2023 compared to $957,000 in the same period of the prior year.

The increase in revenue, property operating expenses, and NOI from non-same-store communities is primarily due to the addition of four apartment communities during the three months ended March 31, 2022 and one apartment community at the end of the third quarter of 2022.

Other and dispositions analysis.

Revenue from other properties increased by $86,000 while revenue from dispositions decreased by $85,000 in the three months ended March 31, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at other properties decreased by $178,000 while they increased by $405,000 for dispositions, compared to the same period in the prior year.

NOI at other properties increased by $264,000 while NOI on dispositions decreased $490,000, compared to the same period in the prior year.

Property management expenses .

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 16.3% to $2.6 million in the three months ended September 30, 2022, compared to $2.2 million in the same period of the prior year.

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 14.0% to $2.6 million in the three months ended March 31, 2023, compared to $2.3 million in the same period of the prior year.

The increase is primarily due to $352,000 in compensation costs due to filling open positions, additional staffing, and higher pay rates, offset by a decrease related to technology initiatives.

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 24.5% to $7.5 million in the nine months ended September 30, 2022, compared to $6.1 million in the same period of the prior year.

The increase is primarily due to $1.1 million in compensation costs due to filling open positions, additional staffing, and higher pay rates and $176,000 related to technology initiatives.

Casualty gain (loss).

Casualty gain (loss) increased to a loss of $276,000 in the three months ended September 30, 2022, compared to a gain of $10,000 in the same period of the prior year.

The increase is due to favorable loss experience in the prior year.

Casualty gain (loss) increased to a loss of $1.3 million in the nine months ended September 30, 2022, compared to a loss of $64,000 in the same period of the prior year.

The increase is due to favorable loss experience in the prior year.

Casualty gain (loss) decreased to a loss of $252,000 in the three months ended March 31, 2023, compared to a gain of $598,000 in the same period of the prior year.

The decrease is due to larger casualty loss activity in the prior year.

Depreciation and amortization.

Depreciation and amortization increased by 5.7% to $23.7 million in the three months ended September 30, 2022, compared to $22.4 million in the same period of the prior year, attributable to an increase of $1.7 million from non-same-store properties, offset by decreases from same-store and sold properties.

Depreciation and amortization increased by 28.7% to $79.5 million in the nine months ended September 30, 2022, compared to $61.7 million in the same period of the prior year, attributable to an increase of $20.4 million from non-same-store properties, offset by decreases from same-store and sold properties.

Depreciation and amortization decreased by 16.2% to $26.0 million in the three months ended March 31, 2023, compared to $31.0 million in the same period of the prior year, primarily attributable to a decrease in amortization of in-place leases in the prior year, offset by an increase in depreciation on same-store apartment communities.

General and administrative expenses.

General and administrative expenses increased by 5.6% to $4.5 million in the three months ended September 30, 2022, compared to $4.3 million in the same period of the prior year, primarily attributable to increases in professional and consulting fees and salary related expense, offset by a decrease in technology initiatives.

General and administrative expenses increased by 18.8% to $14.2 million in the nine months ended September 30, 2022, compared to $12.0 million in the same period of the prior year, primarily attributable to $1.2 million from abandoned pursuit costs, $950,000 in compensation costs and $430,000 in professional and consulting fees, offset by decreases related to technology initiatives.

General and administrative expenses increased by 71.6% to $7.7 million in the three months ended March 31, 2023, compared to $4.5 million in the same period of the prior year, primarily attributable to $3.2 million in executive severance and transition costs related to the CEO departure.

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

Gain on sale of real estate and other investments decreased to $27,000 in the nine months ended September 30, 2022, compared to $26.8 million in the same period of the prior year, primarily due to the sale of apartment communities in the prior year that did not occur in the current year.

Gain on sale of real estate and other investments increased to $60.2 million in the three months ended March 31, 2023, compared to no gain or loss in the same period of the prior year, primarily due to the sale of nine apartment communities in the current year that did not occur in the prior year.

Interest expense.

Interest expense increased by 7.8% to $7.9 million in the three months ended September 30, 2022, compared to $7.3 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.

Interest expense increased by 7.1% to $23.1 million in the nine months ended September 30, 2022, compared to $21.6 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.

Interest expense increased by 33.8% to $10.3 million in the three months ended March 31, 2023, compared to $7.7 million in the same period of the prior year, primarily due to maintaining larger debt balances with 2022 acquisition activity compared to the same period of the prior year, combined with rising interest rates.

Interest and other income (loss).

Interest and other income increased to income of $70,000 in the three months ended September 30, 2022, compared to a loss of $5.1 million in the same period of the prior year.

The increase was primarily due to a $5.4 million loss related to the termination of interest rate swaps in the prior year.

Interest and other income increased to income of $1.1 million in the nine months ended September 30, 2022, compared to a loss of $4.0 million in the same period of 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.

Interest and other income decreased to income of $49,000 in the three months ended March 31, 2023, compared to income of $1.1 million 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 and a prior year 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 improved $9.0 million to a loss of $2.1 million for the three months ended September 30, 2022, compared to $11.1 million in the three months ended September 30, 2021.

Net income (loss) available to common shareholders decreased to a loss of $16.9 million for the nine months ended September 30, 2022, compared to net income of $2.4 million in the nine months ended September 30, 2021.

Net income available to common shareholders increased $52.2 million to income of $42.0 million for the three months ended March 31, 2023, compared to a net loss of $10.2 million in the three months ended March 31, 2022.

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.

We use the definition of Funds from Operations FFO adopted by the National Association of Real Estate Investment Trusts, Inc.

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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 investments, and assists management and investors in comparing those operating results between periods.

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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 September 30, 2022, increased to $21.0 million compared to $9.3 million for the comparable period of the prior year, an increase of 125.9%.

FFO applicable to common shares and Units for the nine months ended September 30, 2022, increased to $58.7 million compared to $35.9 million for the comparable period of the prior year, an increase of 63.3%.

This increase was 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 casualty loss, interest, property management, and general and administrative expenses, and decreased NOI from dispositions.

Net income available to common shareholders for the three months ended March 31, 2023, increased to $42.0 million compared to a net loss of $10.2 million for the same period of the prior year.

FFO applicable to common shares and Units for the three

months ended March 31, 2023, decreased to $16.3 million compared to $18.5 million for the comparable period of the prior year, a decrease of 12.3%.

This decrease was primarily due to $3.2 million in severance and transition expenses related to the departure of Mark Decker, former CEO, increased interest expense, and less interest and other income including a mark to market gain on an interest rate swap, offset by increased NOI from same-store communities and non-same-store communities.

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

(in thousands, except per share and unit amounts)

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

2022 2021 2022 2021

Three Months Ended March 31,

Net income (loss) available to common shareholders $ 41,964 $ (10,196)

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Non-cash casualty (gain) loss 13 25

Loss on extinguishment of debt — 530 5 533

Technology implementation costs (1)

234 625 784 1,485

Commercial lease termination proceeds — (450) — (450)

Interest rate swap termination, amortization, and mark-to-market 138 (613)

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Pursuit costs 5 —

Severance and transition related costs 3,199 —

Other miscellaneous items (2)

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

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

Acquisitions and Dispositions

On September 30, 2022, we acquired Lyra Apartments, located in Centennial, Colorado for an aggregate purchase price of $95.0 million.

We had no dispositions during the nine months ended September 30, 2022.

During the three months ended March 31, 2023, we disposed of nine apartment communities, in four exchange transactions, located in Minnesota and Nebraska for an aggregate sales price of $144.3 million.

We had no acquisitions during the three months ended March 31, 2023.

Distributions Declared

Distributions of $0.73 and $2.19 per common share and Unit were declared during the three and nine months ended September 30, 2022, respectively.

Distributions of $0.72 and $2.12 per common share and Unit were declared during the three

and nine months ended September 30, 2021, respectively.

Distributions of $0.4140625 and $1.2421875 per Series C preferred share were declared during the three and nine months ended September 30, 2022 and 2021, respectively.

Distributions of $0.9655 and $2.8965 per Series D preferred unit were declared during the three and nine months ended September 30, 2022 and 2021, respectively.

Distributions of $0.96875 and $2.90625 per Series E preferred unit were declared during the three and nine months ended September 30, 2022, respectively.

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

Distributions of $0.73 per common share and Unit were declared during the three months ended March 31, 2023 and 2022.

Distributions of $0.4140625 per Series C preferred share were declared during the three months ended March 31, 2023 and 2022.

Distributions of $0.9655 per Series D preferred unit were declared during the three months ended March 31, 2023 and 2022.

Distributions of $0.96875 per Series E preferred unit were declared during the three months ended March 31, 2023 and 2022.

Liquidity and Capital Resources

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

Other sources include availability under the unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under the shelf registration statement, including offerings of common shares under the 2021 at-the-market offering (“2021 ATM Program”), and long-term unsecured debt and secured mortgages.

Other sources include availability under the unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under the shelf registration statement, including offerings of common shares under a 2021 at-the-market offering (“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, interest rate increases, the ability to access capital and credit markets, the effects of the COVID-19 pandemic, including its potential impact on our ability to access the capital and credit markets on reasonable terms (or at all), the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

As of September 30, 2022, we had total liquidity of approximately $99.5 million, which included $84.5 million available on the lines of credit and $15.0 million of cash and cash equivalents.

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, interest rate increases, the ability to access capital and credit markets, the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

As of March 31, 2023, we had total liquidity of approximately $121.4 million, which included $112.5 million available on the lines of credit and $8.9 million of cash and cash equivalents.

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

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

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

As of September 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 September 30, 2022, the additional borrowing availability was $78.5 million beyond the $171.5 million drawn.

As of March 31, 2023, 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 March 31, 2023, the additional borrowing availability was $110.5 million beyond the $139.5 million drawn.

At December 31, 2022, the line of credit borrowing capacity was $250.0 million based on the value of unencumbered properties, of which $113.5 million was drawn on the line.

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

The interest rates on the line of credit is based, at the Company’s option, on either the lender’s base rate plus a margin, ranging from 25-80 basis points, or the London Interbank Offered Rate (“LIBOR”), plus a margin that ranges from 125-180 basis points based on the consolidated leverage ratio, as defined under the Third Amended and Restated Credit Agreement.

The terms of this unsecured credit facility allow for the transition to an alternate benchmark interest rate, including the secured overnight financing rate (“SOFR”), to replace any outstanding LIBOR borrowings at the time LIBOR is no longer published.

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

As of March 31, 2023, the outstanding balance on this line of credit was $4.0 million.

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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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.

In November 2022, the Company 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 the consolidated leverage ratio.

The Term Loan had a 364-day term with an option for an additional 364-day term.

As of March 31, 2023, the term loan was paid in full.

As of December 31, 2022, the term loan had a balance of $100.0 million.

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

The FMCF is currently secured by mortgages on 12 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 September 30, 2022 and December 31, 2021, the FMCF had a balance of $198.9 million.

As of March 31, 2023 and December 31, 2022, 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 $301.0 million and $284.9 million at September 30, 2022 and December 31, 2021, respectively.

Mortgage loan indebtedness, excluding the FMCF, was $279.3 million and $299.4 million at March 31, 2023 and December 31, 2022, respectively.

All of our mortgage debt is collateralized by apartment communities and is non-recourse at fixed rates of interest, with staggered maturities.

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

As of September 30, 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.

We have an equity distribution agreement in connection with 2021 ATM Program through which we may offer and sell common shares having an aggregate gross 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 nine months ended September 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 September 30, 2022, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program.

As of March 31, 2023 and December 31, 2022, the weighted average interest rate on mortgage debt was 3.85%.

We have an equity distribution agreement in connection with the 2021 ATM Program through which we may offer and sell common shares having an aggregate gross 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, construction or mezzanine loans, community renovations, and the repayment of indebtedness.

As of March 31, 2023, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program.

Further information can be found in Note 4 - Equity and Mezzanine Equity in the Condensed Consolidated notes.

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.

On March 10, 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.

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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 three and nine months ended September 30, 2022.

As of September 30, 2022, the Company had $49.6 million remaining authorized for purchase under this program.

The table below provides details on the shares repurchased during the three months ended March 31, 2023.

As of March 31, 2023, the Company had $19.9 million remaining authorized for purchase under this program.

(in thousands, except per share amounts)

Number of Common Shares Total Consideration (1)

Average Net Price Per Share (1)

Three and Nine Months Ended September 30, 2022

Three Months Ended March 31, Number of Common Shares Aggregate Cost (1)

Average Price Per Share (1)

2023 19.464 $ 1,022 $ 52.51

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

In addition to cash flow from operations, during the nine months ended September 30, 2022, we generated capital from various activities, including:

• Receiving $31.5 million in net proceeds from the issuance of 321,000 common shares under the 2021 ATM Program;

In addition to cash flow from operations, during the three months ended March 31, 2023, we generated capital from various activities, including:

• Receiving $141.6 million in net proceeds from the sale of nine apartment communities;

• Receiving $30.0 million in net proceeds from the line of credit.

During the nine months ended September 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;

• Acquiring Lyra Apartments, a 215 home apartment community located in Centennial, Colorado for $95.0 million;

During the three months ended March 31, 2023, we used capital for various activities, including:

• Repaying $100.0 million on a variable rate term loan;

• Repaying $20.7 million of mortgage principal;

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

• Repurchased 42,000 operating partnership units for $3.8 million;

• Paying distributions on common shares, Series E preferred units, Units, and Series E preferred shares of $14.9 million;

• Repurchasing 19,464 common shares for $1.0 million;

• Funding capital improvements for apartment communities of approximately $11.2 million.

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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.

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Off-Balance Sheet Arrangements

As of September 30, 2022, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of March 31, 2023, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

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A summary of critical accounting policies is included in our Form 10-K for the year ended December 31, 2022, filed with the SEC on February 21, 2023 under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements in this report for additional information.

There have been no other significant changes to the our critical accounting policies during the nine months ended September 30, 2022.

There have been no other significant changes to the critical accounting policies during the three months ended March 31, 2023.

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

What changed 10-Q

Item 2. Management’s Discussion and Analysis