CENTERSPACE 10-Q

Item 1. Financial Statements. CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) March 31, 2023 December 31, 2022 ASSETS (Unaudited) (Audited) Real estate investments Property owned $ 2,420,911 $ 2,534,124 Less accumulated depreciation ( 519,167 ) ( 535,401 ) Total real estate investments 1,901,744 1,998,723 Cash and cash equivalents 8,939 10,458 Restricted cash 48,903 1,433 Other assets 19,298 22,687 TOTAL ASSETS $ 1,978,884 $ 2,033,301 LIABILITIES, MEZZANINE EQUITY, AND EQUITY LIABILITIES Accounts payable and accrued expenses $ 56,639 $ 58,812 Revolving lines of credit 143,469 113,500 Notes payable, net of unamortized loan costs of $ 588 and $ 993 , respectively 299,412 399,007 Mortgages payable, net of unamortized loan costs of $ 3,750 and $ 3,615 , respectively 474,999 495,126 TOTAL LIABILITIES $ 974,519 $ 1,066,445 COMMITMENTS AND CONTINGENCIES (NOTE 10) SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $ 100 par value, 166 units issued and outstanding at March 31, 2023 and December 31, 2022, aggregate liquidation preference of $ 16,560 ) $ 16,560 $ 16,560 EQUITY Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $ 25 per share liquidation preference, 3,881 shares issued and outstanding at March 31, 2023 and December 31, 2022, aggregate liquidation preference of $ 97,036 ) 93,530 93,530 Common Shares of Beneficial Interest (Unlimited authorization, no par value, 15,032 shares issued and outstanding at March 31, 2023 and 15,020 shares issued and outstanding at December 31, 2022) 1,176,059 1,177,484 Accumulated distributions in excess of net income ( 508,420 ) ( 539,422 ) Accumulated other comprehensive income (loss) ( 1,917 ) ( 2,055 ) Total shareholders’ equity $ 759,252 $ 729,537 Noncontrolling interests – Operating Partnership and Series E preferred units 227,920 220,132 Noncontrolling interests – consolidated real estate entities 633 627 TOTAL EQUITY $ 987,805 $ 950,296 TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY $ 1,978,884 $ 2,033,301 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data) Three Months Ended March 31, 2023 2022 REVENUE $ 67,897 $ 60,314 EXPENSES Property operating expenses, excluding real estate taxes 21,342 19,014 Real estate taxes 7,581 6,859 Property management expense 2,568 2,253 Casualty (gain) loss 252 598 Depreciation and amortization 25,993 31,001 General and administrative expenses 7,723 4,500 TOTAL EXPENSES $ 65,459 $ 64,225 Gain (loss) on sale of real estate and other investments 60,159 — Operating income (loss) 62,597 ( 3,911 ) Interest expense ( 10,319 ) ( 7,715 ) Interest and other income (loss) 49 1,063 NET INCOME (LOSS) $ 52,327 $ ( 10,563 ) Dividends to Series D preferred unitholders ( 160 ) ( 160 ) Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units ( 8,566 ) 2,157 Net (income) loss attributable to noncontrolling interests – consolidated real estate entities ( 30 ) ( 23 ) Net income (loss) attributable to controlling interests 43,571 ( 8,589 ) Dividends to preferred shareholders ( 1,607 ) ( 1,607 ) NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 41,964 $ ( 10,196 ) NET INCOME (LOSS) PER COMMON SHARE – BASIC $ 2.79 $ ( 0.68 ) NET INCOME (LOSS) PER COMMON SHARE – DILUTED $ 2.76 $ ( 0.68 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) (in thousands) Three Months Ended March 31, 2023 2022 Net income (loss) $ 52,327 $ ( 10,563 ) Other comprehensive income (loss): Unrealized gain (loss) from derivative instrument — 1,581 (Gain) loss on derivative instrument reclassified into earnings 138 304 Total comprehensive income (loss) $ 52,465 $ ( 8,678 ) Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units ( 8,543 ) 2,480 Net (income) loss attributable to noncontrolling interests – consolidated real estate entities ( 30 ) ( 23 ) Comprehensive income (loss) attributable to controlling interests $ 43,892 $ ( 6,221 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (in thousands, except per share data) Three Months Ended March 31, 2022 PREFERRED SHARES NUMBER OF COMMON SHARES COMMON SHARES ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS) NONCONTROLLING INTERESTS TOTAL EQUITY Balance at December 31, 2021 $ 93,530 15,016 $ 1,157,255 $ ( 474,318 ) $ ( 4,435 ) $ 224,248 $ 996,280 Net income (loss) attributable to controlling interests and noncontrolling interests ( 8,589 ) ( 2,134 ) ( 10,723 ) Change in fair value of derivatives and amortization of swap settlements 1,885 1,885 Distributions - common shares and Units ($ 0.73 per share and Unit) ( 11,218 ) ( 728 ) ( 11,946 ) Distributions – Series C preferred shares ($ 0.414063 per Series C share) ( 1,607 ) ( 1,607 ) Distributions - Series E preferred units ($ 0.96875 per unit) ( 1,757 ) ( 1,757 ) Share-based compensation, net of forfeitures 19 719 719 Sale of common shares, net 321 31,684 31,684 Issuance of Units 13,023 9,859 22,882 Redemption of Units for common shares 10 ( 388 ) 388 — Redemption of units for cash ( 2,903 ) ( 2,903 ) Change in redemption value of Series D preferred units 2,919 2,919 Shares withheld for taxes ( 1,274 ) ( 1,274 ) Other — ( 253 ) — ( 253 ) Balance at March 31, 2022 $ 93,530 15,366 $ 1,203,685 $ ( 495,732 ) $ ( 2,550 ) $ 226,973 $ 1,025,906 Three Months Ended March 31, 2023 Balance at December 31, 2022 $ 93,530 15,020 $ 1,177,484 $ ( 539,422 ) $ ( 2,055 ) $ 220,759 $ 950,296 Net income (loss) attributable to controlling interests and noncontrolling interests 43,571 8,596 52,167 Amortization of swap settlements 138 138 Distributions - common shares and Units ($ 0.73 per share and unit) ( 10,962 ) ( 706 ) ( 11,668 ) Distributions – Series C preferred shares ($ 0.4140630 per Series C share) ( 1,607 ) ( 1,607 ) Distributions - Series E preferred units ($ 0.96875 per unit) ( 1,704 ) ( 1,704 ) Share-based compensation, net of forfeitures 12 1,519 1,519 Redemption of Units for common shares 4 ( 697 ) 697 — Redemption of Series E preferred units for common shares 16 ( 935 ) 935 — Shares repurchased — ( 19 ) ( 1,022 ) — ( 1,022 ) Shares withheld for taxes ( 161 ) ( 161 ) Other ( 1 ) ( 129 ) ( 24 ) ( 153 ) Balance at March 31, 2023 $ 93,530 15,032 $ 1,176,059 $ ( 508,420 ) $ ( 1,917 ) $ 228,553 $ 987,805 See accompanying Notes to Condensed Consolidated Financial Statements. 6 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Three Months Ended March 31, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 52,327 $ ( 10,563 ) Adjustments to reconcile net income (loss) to net cash provided by (used by) operating activities: Depreciation and amortization, including amortization of capitalized loan costs 26,650 31,096 (Gain) loss on sale of real estate and other investments ( 60,159 ) — Share-based compensation expense 1,519 719 (Gain) loss on interest rate swap mark-to-market and settlement amortization 138 ( 613 ) Other, net 194 416 Changes in other assets and liabilities: Other assets 1,783 1,316 Accounts payable and accrued expenses ( 648 ) ( 10,773 ) Net cash provided by (used by) operating activities $ 21,804 $ 11,598 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from sale of real estate and other investments 141,587 — Payments for acquisitions of real estate investments — ( 9,545 ) Payments for improvements of real estate investments ( 11,237 ) ( 3,474 ) Other investing activities 834 288 Net cash provided by (used by) investing activities $ 131,184 $ ( 12,731 ) CASH FLOWS FROM FINANCING ACTIVITIES Principal payments on mortgages payable ( 20,734 ) ( 2,154 ) Proceeds from revolving lines of credit 35,969 13,000 Principal payments on revolving lines of credit ( 6,000 ) ( 43,000 ) Principal payments on notes payable ( 100,000 ) — Payment for termination of interest rate swap — ( 3,209 ) Net proceeds from issuance of common shares — 31,684 Repurchase of common shares ( 1,022 ) — Redemption of partnership units — ( 2,903 ) Distributions paid to common shareholders ( 10,917 ) ( 10,812 ) Distributions paid to preferred shareholders ( 1,607 ) ( 1,607 ) Distributions paid to Series D preferred unitholders ( 160 ) ( 160 ) Distributions paid to noncontrolling interests – Operating Partnership and Series E preferred units ( 2,413 ) ( 2,356 ) Other financing activities ( 153 ) ( 253 ) Net cash provided by (used by) financing activities $ ( 107,037 ) $ ( 21,770 ) NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 45,951 ( 22,903 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD 11,891 38,625 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $ 57,842 $ 15,722 SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Accrued capital expenditures $ 3,804 $ 2,596 Operating partnership units converted to shares ( 697 ) ( 388 ) Distributions declared but not paid to common shareholders 11,668 11,946 Series E preferred units converted to common shares ( 935 ) — Retirement of shares withheld for taxes 161 1,274 Real estate assets acquired through assumption of debt — 41,623 Fair value adjustment to debt — 1,224 Real estate assets acquired through exchange of note receivable — 43,276 Note receivable exchanged through real estate acquisition — ( 43,276 ) Real estate assets acquired through issuance of operating partnership units — 22,882 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 6,168 $ 7,182 See accompanying Notes to Condensed Consolidated Financial Statements. 7 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) Balance sheet description March 31, 2023 December 31, 2022 March 31, 2022 Cash and cash equivalents $ 8,939 $ 10,458 $ 13,313 Restricted cash 48,903 1,433 2,409 Total cash, cash equivalents and restricted cash $ 57,842 $ 11,891 $ 15,722 See accompanying Notes to Condensed Consolidated Financial Statements. 8 Table of Contents CENTERSPACE AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) March 31, 2023 NOTE 1 • ORGANIZATION Centerspace, collectively with its consolidated subsidiaries (“Centerspace,” “the Company,” “we,” “us,” or “our”), is a North Dakota real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities. As of March 31, 2023, Centerspace owned interests in 75 apartment communities consisting of 13,497 apartment homes. NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Centerspace conducts a majority of its business activities through a consolidated operating partnership, Centerspace, LP (f/k/a IRET Properties), a North Dakota limited partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying Condensed Consolidated Financial Statements include the Company’s accounts and the accounts of all its subsidiaries in which it maintains a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation. The Condensed Consolidated Financial Statements also reflect the Operating Partnership’s ownership of a joint venture entity in which the Operating Partnership has a general partner or controlling interest. This entity is consolidated into the Company’s operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Centerspace’s interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of financial position, results of operations, and cash flows for the interim periods, have been included. The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim Condensed Consolidated Financial Statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 21, 2023. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS The following table provides a brief description of recent accounting standards updates (“ASU”). Standard Description Date of Adoption Effect on the Financial Statements or Other Significant Matters ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848 This ASU extends the sunset date of Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform to December 31, 2024. This ASU is effective immediately for all companies. The ASU will not have a material impact on the Condensed Consolidated Financial Statements. 9 Table of Contents RECLASSIFICATIONS Certain previously reported amounts in Note 9 have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on net income as reported in the Condensed Consolidated Statement of Operations, total assets, liabilities or equity as reported in the Condensed Consolidated Balance Sheets and total shareholder’s equity. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH Cash and cash equivalents include all cash and highly liquid investments purchased with maturities of three months or less. Cash and cash equivalents consist of our bank deposits and our deposits in a money market mutual fund. As of March 31, 2023 restricted cash consisted primarily of net tax-deferred exchange proceeds remaining from a portion of our dispositions and escrows held by lenders. As of December 31, 2022, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions. We are potentially exposed to credit risk for cash deposited with FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. We have not experienced any losses in such accounts. LEASES As a lessor, Centerspace primarily leases multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases , using a method that represents a straight-line basis over the term of the lease. For the three months ended March 31, 2023 and 2022, rental income represents approximately 98.3 % and 98.1 % of total revenues, respectively, and includes gross market rent less adjustments for gain or loss to lease, concessions, vacancy loss, and bad debt. For the three months ended March 31, 2023 and 2022, other property revenues represent the remaining 1.7 % and 1.9 % of total revenues, respectively, and are primarily driven by other fee income, which is typically recognized when earned, at a point in time. Some of the Company’s apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years . The leases for commercial spaces generally include options to extend the lease for additional terms. Many of the leases contain non-lease components for utility reimbursement from residents and common area maintenance from commercial tenants. Centerspace has elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842. The aggregate amount of future scheduled lease income on commercial operating leases, excluding any variable lease income and non-lease components, as of March 31, 2023, was as follows: (in thousands) 2023 (remainder) $ 2,281 2024 2,999 2025 2,953 2026 2,350 2027 1,265 Thereafter 5,760 Total scheduled lease income - commercial operating leases $ 17,608 REVENUES AND GAINS ON SALE OF REAL ESTATE Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the Company expects to be entitled for those goods and services. Revenue streams that are included in revenues from contracts with customers include other property revenue such as application fees and other miscellaneous items. Centerspace recognizes revenue for these rental related items not included as a component of a lease as earned. The following table presents the disaggregation of revenue streams for the three months ended March 31, 2023 and 2022: 10 Table of Contents (in thousands) Three Months Ended March 31, Revenue Stream Applicable Standard 2023 2022 Fixed lease income - operating leases Leases $ 63,265 $ 56,673 Variable lease income - operating leases Leases 3,500 2,523 Other property revenue Revenue from contracts with customers 1,132 1,118 Total revenue $ 67,897 $ 60,314 In addition to lease income and other property revenue, the Company recognizes gains or losses on the sale of real estate when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. For the three months ended March 31, 2023, we recognized $ 60.2 million as a gain on the sale of real estate and other assets compared to no gain on sale in the same period of the prior year. MARKET CONCENTRATION RISK We are subject to increased exposure from economic and other competitive factors specific to markets where we hold a significant percentage of the carrying value of our real estate portfolio. As of March 31, 2023, we held more than 10% of the carrying value of our real estate portfolio in each of the following markets: Minneapolis, Minnesota and Denver, Colorado. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates long-lived assets, including investments in real estate, for impairment indicators at least quarterly. 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, the Company compares 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 generally recorded for the difference between the estimated fair value and the carrying amount. If the anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, the evaluation of impairment charges may be different and such differences could be material to the 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. Reducing planned property holding periods may increase the likelihood of recording impairment losses. During the three months ended March 31, 2023 and 2022, the Company recorded no impairment charges. NOTES RECEIVABLE The Company has a tax increment financing note receivable (“TIF”) with a principal balance of $ 5.9 million and $ 6.1 million at March 31, 2023 and December 31, 2022, respectively, which appears within other assets in the Condensed Consolidated Balance Sheets at fair value. The note bears an interest rate of 4.5 % with payments due in February and August of each year. Centerspace originated a $ 29.9 million construction loan and a $ 15.3 million mezzanine loan for the development of a multifamily community located in Minneapolis, Minnesota. The construction and mezzanine loans bore and accrued interest at 4.5 % and 11.5 %, respectively. The Company exercised its option to purchase the apartment community in exchange for the loans and cash, during the three months ended March 31, 2022. As of March 31, 2023 and December 31, 2022, the loans had no remaining balance. 11 Table of Contents ADVERTISING COSTS Advertising costs are expensed as incurred and reported on the Condensed Consolidated Statements of Operations within the Property operating expenses, excluding real estate taxes line item. During the three months ended March 31, 2023 and 2022, total advertising expense was $ 702,000 and $ 676,000 , respectively. SEVERANCE AND TRANSITION On March 23, 2023, the Company entered into a Separation and General Release Agreement (the “Separation Agreement”) in connection with the departure of former CEO, Mark Decker, Jr. During the three months ended March 31, 2023, the Company incurred total severance costs of $ 2.2 million for the cash severance and benefits for Mr. Decker, $ 737,000 in share-based compensation expense for the acceleration of certain equity awards, and $ 306,000 in other CEO transition related expenses. Refer to Note 11 for additional information on the share-based compensation expense. VARIABLE INTEREST ENTITIES Centerspace has determined that its Operating Partnership and each of its less-than-wholly owned real estate partnerships are variable interest entities (each, a “VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. The Company is the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on the balance sheet because the Company has a controlling financial interest in the VIEs and has both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because the Operating Partnership is a VIE, all of the Company’s assets and liabilities are held through a VIE. NOTE 3 • EARNINGS PER SHARE Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares of beneficial interest (“common shares”) outstanding during the period. Centerspace has issued restricted stock units (“RSUs”) and incentive stock options (“ISOs”) under the 2015 Incentive Plan, Series D Convertible Preferred Units (“Series D preferred units”), and Series E Convertible Preferred Units (“Series E preferred units”), which could have a dilutive effect on the earnings per share upon the vesting of the RSUs or exercise of the ISOs or upon conversion of the Series D or Series E preferred units (refer to Note 4 for further discussion of the Series D and the Series E preferred units). Other than the issuance of RSUs, ISOs, Series D preferred units, and Series E preferred units, there are no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in Centerspace’s sole discretion, it may issue common shares in exchange for Units on a one -for-one basis. For the three months ended March 31, 2023, performance-based RSUs of 36,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three months ended March 31, 2022, operating partnership units of 965,000 , Series D preferred units of 228,000 , as converted, Series E preferred units of 2.2 million, as converted, time-based RSUs of 14,000 , weighted average stock options of 52,000 , and performance-based RSUs of 33,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the Condensed Consolidated Financial Statements for the three months ended March 31, 2023 and 2022. 12 Table of Contents (in thousands, except per share data) Three Months Ended March 31, 2023 2022 NUMERATOR Net income (loss) attributable to controlling interests $ 43,571 $ ( 8,589 ) Dividends to preferred shareholders ( 1,607 ) ( 1,607 ) Numerator for basic earnings (loss) per share – net income available to common shareholders 41,964 ( 10,196 ) Noncontrolling interests – Operating Partnership and Series E preferred units 8,566 ( 2,157 ) Dividends to preferred unitholders 160 160 Numerator for diluted earnings (loss) per share $ 50,690 $ ( 12,193 ) DENOMINATOR Denominator for basic earnings per share weighted average shares 15,025 15,097 Effect of redeemable operating partnership units 968 — Effect of Series D preferred units 228 — Effect of Series E preferred units 2,118 — Effect of dilutive restricted stock units and stock options 20 — Denominator for diluted earnings per share 18,359 15,097 NET INCOME (LOSS) PER COMMON SHARE – BASIC $ 2.79 $ ( 0.68 ) NET INCOME (LOSS) PER COMMON SHARE – DILUTED $ 2.76 $ ( 0.68 ) NOTE 4 • EQUITY AND MEZZANINE EQUITY Operating Partnership Units. The Operating Partnership had 967,000 and 971,000 outstanding Units at March 31, 2023 and December 31, 2022, respectively. During the three months ended March 31, 2022, we issued 209,000 Units as partial consideration for the acquisition of three apartment communities. Exchange Rights . Centerspace redeemed Units in exchange for common shares in connection with Unitholders exercising their exchange rights during the three months ended March 31, 2023 and 2022 as detailed in the table below. (in thousands) Three Months Ended March 31, Number of Units Net Book Basis 2023 4 $ ( 697 ) 2022 10 $ ( 388 ) Pursuant to the exercise of exchange rights, the Company redeemed Units for cash during the three months ended March 31, 2023 and 2022 as detailed in the table below. (in thousands, except per Unit data) Three Months Ended March 31, Number of Units Aggregate Cost Average Price Per Unit 2023 — $ — $ — 2022 31 $ 2,903 $ 93.14 Series E Preferred Units (Noncontrolling Interests). Centerspace had 1.7 million and 1.8 million Series E preferred units outstanding on March 31, 2023 and December 31, 2022, respectively. Each Series E preferred unit has a par value of $ 100 . 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. The Series E preferred units have an aggregate liquidation preference of $ 174.5 million. The holders of the Series E preferred units do not have voting rights. (in thousands) Number of Series E Number of Total Three Months Ended March 31, Preferred Units Redeemed Common Shares Issued Value 2023 13 16 $ 935 Common Shares and Equity Awards . Common shares outstanding on March 31, 2023 and December 31, 2022, totaled 15.0 million. There were 11,877 and 18,759 shares issued upon the vesting of equity awards under the 2015 Incentive Plan during 13 Table of Contents the three months ended March 31, 2023 and 2022, respectively, with a total grant-date fair value of $ 1.1 million and $ 1.5 million, respectively. These shares vested based on performance and service criteria. Refer to Note 11 for additional details on share-based compensation. Equity Distribution Agreement. Centerspace had an equity distribution agreement in connection with an at-the-market offering (“2021 ATM Program”) through which it may offer and sell common shares having an aggregate sales price of up to $ 250.0 million, in amounts and at times determined by management. Under the 2021 ATM Program, the Company may enter into separate forward sale agreements. 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. The table below provides details on the sale of common shares during the three months ended March 31, 2023 and 2022 under the 2021 ATM Program. 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. (in thousands, except per share amounts) Three Months Ended March 31, Number of Common Shares Net Consideration (1) Average Net Price Per Share 2023 — $ — $ — 2022 321 $ 31,732 $ 98.89 (1) Total consideration is net of $ 338,000 in commissions and issuance costs during the three months ended March 31, 2022. Share Repurchase Program. 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. 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 three months ended March 31, 2023. As of March 31, 2023, the Company had $ 19.9 million remaining authorized for purchase under this program. Refer to Note 12 for repurchases made subsequent to March 31, 2023. (in thousands, except per share amounts) Three Months Ended March 31, Number of Common Shares Aggregate Cost (1) Average Price Per Share (1) 2023 19.464 $ 1,022 $ 52.51 (1) Amount includes commissions. Series C Preferred Shares. Series C preferred shares outstanding were 3.9 million shares at March 31, 2023 and December 31, 2022. The Series C preferred shares are nonvoting and redeemable for cash at $ 25.00 per share at Centerspace’s option after October 2, 2022. Holders of these shares are entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an annual rate of $ 1.65625 per share, which is equal to 6.625 % of the $ 25.00 per share liquidation preference ($ 97.0 million liquidation preference in the aggregate). Series D Preferred Units (Mezzanine Equity). Series D preferred units outstanding were 165,600 preferred units at March 31, 2023 and December 31, 2022. The Series D preferred units have a par value price of $ 100 per preferred unit. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862 % per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issuance price. Each Series D preferred unit is convertible, at the holder’s option, into 1.37931 Units. The Series D preferred units have an aggregate liquidation preference of $ 16.6 million. Changes in the redemption value are charged to common shares on the Condensed Consolidated Balance Sheets from period to period. The holders of the Series D preferred units do not have voting rights. Distributions to Series D unitholders are presented in the Condensed Consolidated Statements of Equity within net income (loss) attributable to controlling interests and noncontrolling interests. 14 Table of Contents NOTE 5 • DEBT The following is a summary of our secured and unsecured debt at March 31, 2023 and December 31, 2022. (in thousands) March 31, 2023 December 31, 2022 Carrying Amount Weighted Average Interest Rate Carrying Amount Weighted Average Interest Rate Weighted Average Maturity in Years at March 31, 2023 Lines of credit (1) $ 143,469 6.39 % $ 113,500 4.12 % 2.00 Term loans — — 100,000 5.57 % — Unsecured senior notes (2)(5) 300,000 3.12 % 300,000 3.12 % 8.01 Unsecured debt 443,469 513,500 6.51 Mortgages payable - Fannie Mae credit facility (5) 198,850 2.78 % 198,850 2.78 % 7.99 Mortgages payable - other (3)(5) 279,340 3.85 % 299,427 3.85 % 5.09 Total debt (4) $ 921,659 3.71 % $ 1,011,777 3.62 % 6.06 (1) The interest rate swap was terminated in February 2022. Refer to Note 6 - Derivative Instruments for additional information. Interest rates on lines of credit are variable. (2) Included within notes payable on the Condensed Consolidated Balance Sheets. (3) Represents apartment communities encumbered by mortgages; 13 at March 31, 2023 and 15 at December 31, 2022. (4) Excludes deferred financing costs and premiums or discounts. (5) Interest rate is fixed. As of March 31, 2023, 50 apartment communities were not encumbered by mortgages and were available to provide credit support for the unsecured borrowings. The Company’s primary unsecured credit facility (“unsecured credit facility”) is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. The line of credit has 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. This unsecured credit facility was amended on September 30, 2021 to extend the maturity date to September 2025 and to provide for 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 the 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. The unsecured credit facility and unsecured senior notes are subject to customary financial covenants and limitations. The Company believes that it was in compliance with all such financial covenants and limitations as of March 31, 2023. Centerspace also has 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, Centerspace amended and expanded its private shelf agreement with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. (collectively, “PGIM”) to increase the aggregate amount available for issuance of unsecured senior promissory notes (“unsecured senior notes”) to $ 225.0 million. In September 2021, the Company entered into a note purchase agreement for the issuance of $ 125.0 million senior unsecured promissory notes, of which $ 25.0 million was issued under the private shelf agreement with PGIM. Under the private shelf agreement with PGIM, the Company has issued $ 200.0 million unsecured senior notes with $ 25.0 million remaining available as of March 31, 2023. The following table shows the notes issued under both private shelf agreements. (in thousands) Amount Maturity Date Interest Rate Series A $ 75,000 September 13, 2029 3.84 % Series B $ 50,000 September 30, 2028 3.69 % Series C $ 50,000 June 6, 2030 2.70 % Series 2021-A $ 35,000 September 17, 2030 2.50 % Series 2021-B $ 50,000 September 17, 2031 2.62 % Series 2021-C $ 25,000 September 17, 2032 2.68 % Series 2021-D $ 15,000 September 17, 2034 2.78 % 15 Table of Contents 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. Centerspace has a $ 198.9 million Fannie Mae Credit Facility Agreement (the “FMCF”). The FMCF is secured by mortgages on 12 apartment communities. The notes are interest-only, with varying maturity dates of 7 , 10 , and 12 years, and a blended, weighted average interest rate of 2.78 %. 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. As of March 31, 2023, Centerspace owned 13 apartment communities that served as collateral for mortgage loans, in addition to the apartment communities secured by the FMCF. All of these mortgage loans were non-recourse to the Company other than for standard carve-out obligations. As of March 31, 2023, the Company believes that there were no material defaults or instances of noncompliance in regards to any of these mortgages payable. The aggregate amount of required future principal payments on all debt as of March 31, 2023, was as follows: (in thousands) 2023 (remainder) $ 25,995 2024 8,981 2025 173,350 2026 50,088 2027 47,088 Thereafter 616,157 Total payments $ 921,659 NOTE 6 • DERIVATIVE INSTRUMENTS Centerspace used interest rate derivatives to stabilize interest expense and to manage its exposure to interest rate fluctuations. To accomplish this objective, the Company primarily used interest rate swap contracts to fix variable interest rate debt. Changes in the fair value of derivatives designated and that qualified as cash flow hedges were recorded in accumulated other comprehensive income (loss) (“OCI”). Amounts recorded in accumulated other comprehensive income (loss) will be reclassified to interest expense in the periods in which interest payments are incurred on variable rate debt. During the next twelve months, the Company estimates an additional $ 995,000 will be reclassified as an increase to interest expense. In February 2022, the Company paid $ 3.2 million to terminate its $ 75.0 million interest rate swap and its $ 70.0 million forward swap. As of March 31, 2023 and December 31, 2022 the Company had no remaining interest rate swaps. Derivatives not designated as hedges were not speculative and were used to manage the Company’s exposure to interest rate movements and other identified risks but did not meet the strict hedge accounting requirements. Changes in fair value of derivatives not designated in hedging relationships were recorded directly to earnings within other income (loss) in the Condensed Consolidated Statements of Operations. During the three months ended March 31, 2022, the Company recorded a gain of $ 582,000 , related to the interest rate swap not designated in a hedging relationship, prior to its termination. The table below presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations as of March 31, 2023 and 2022. (in thousands) Gain (Loss) Recognized in OCI Location of Gain (Loss) Reclassified from Accumulated OCI into Income Gain (Loss) Reclassified from Accumulated OCI into Income (Loss) Three months ended March 31, 2023 2022 2023 2022 Total derivatives in cash flow hedging relationships - Interest rate contracts $ — $ 1,581 Interest expense $ ( 138 ) $ ( 304 ) 16 Table of Contents NOTE 7 • FAIR VALUE MEASUREMENTS Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate line of credit debt that re-prices frequently, fair values are based on carrying values. In determining the fair value of other financial instruments, Centerspace applies FASB ASC 820, “ Fair Value Measurement and Disclosures. ” Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities. Fair Value Measurements on a Recurring Basis (in thousands) Balance Sheet Location Total Level 1 Level 2 Level 3 March 31, 2023 Assets Notes receivable Other assets $ 5,661 — — $ 5,661 December 31, 2022 Assets Notes receivable Other assets $ 5,871 — — $ 5,871 Centerspace utilizes an income approach with Level 3 inputs based on expected future cash flows to value the notes receivable. The inputs include market transactions for similar instruments, management estimates of comparable interest rates (range of 3.75 % to 5.00 %), and instrument specific credit risk (range of 0.5 % to 1.0 %). Changes in the fair value of these receivables from period to period are reported in interest and other income on the Condensed Consolidated Statements of Operations. (in thousands) Fair Value Measurement Other Gains (Losses) Interest Income Total Changes in Fair Value Included in Current-Period Earnings Three months ended March 31, 2023 Notes receivable $ 5,661 $ 5 $ 67 $ 72 Three months ended March 31, 2022 Notes receivable $ 6,068 $ 4 $ 460 $ 464 As of March 31, 2023 and December 31, 2022, Centerspace had investments totaling $ 1.5 million and $ 1.6 million, respectively, in real estate technology venture funds consisting of privately held entities that develop technology related to the real estate industry. These investments appear within other assets on our Condensed Consolidated Balance Sheets. The investments are measured at net asset value (“NAV”) as a practical expedient under ASC 820. As of March 31, 2023, the Company had total unfunded commitments of $ 1.4 million. Fair Value Measurements on a Nonrecurring Basis There were no non-financial assets or liabilities measured at fair value on a nonrecurring basis at March 31, 2023 and December 31, 2022. Financial Assets and Liabilities Not Measured at Fair Value The fair value of unsecured senior notes and mortgages payable are estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates, excluding any prepayment penalties (Level 3). 17 Table of Contents The estimated fair values of the Company’s financial instruments as of March 31, 2023 and December 31, 2022, respectively, are as follows: (in thousands) March 31, 2023 December 31, 2022 Balance Sheet Location Carrying Amount Fair Value Carrying Amount Fair Value FINANCIAL ASSETS Cash and cash equivalents Cash and cash equivalents $ 8,939 $ 8,939 $ 10,458 $ 10,458 Restricted cash Restricted cash $ 48,903 $ 48,903 $ 1,433 $ 1,433 FINANCIAL LIABILITIES Revolving lines of credit Revolving lines of credit $ 143,469 $ 143,469 $ 113,500 $ 113,500 Term loans Notes payable $ — $ — $ 100,000 $ 100,000 Unsecured senior notes Notes payable $ 300,000 $ 245,627 $ 300,000 $ 238,446 Mortgages payable - Fannie Mae Mortgages payable $ 198,850 $ 164,227 $ 198,850 $ 161,297 Mortgages payable - other Mortgages payable $ 279,340 $ 258,799 $ 299,427 $ 274,029 NOTE 8 • ACQUISITIONS AND DISPOSITIONS ACQUISITIONS Centerspace did not acquire new real estate during the three months ended March 31, 2023 compared to acquisitions of $ 116.9 million during the three months ended March 31, 2022. The acquisitions during the three months ended March 31, 2022 are detailed below. Three Months Ended March 31, 2022 Date Acquired (in thousands) Total Acquisition Cost (1) Form of Consideration Investment Allocation Acquisitions Cash Units (2) Other (3) Land Building Intangible Assets (4) Other (5) 191 homes - Martin Blu - Minneapolis, MN January 4, 2022 $ 49,825 $ 3,031 $ 18,885 $ 27,909 $ 3,547 $ 45,212 $ 1,813 $ ( 747 ) 31 homes - Elements - Minneapolis, MN January 4, 2022 9,066 1,290 1,748 6,028 941 7,853 335 ( 63 ) 45 homes - Zest - Minneapolis, MN January 4, 2022 11,364 1,429 2,249 7,686 936 10,261 574 ( 407 ) 130 homes - Noko Apartments - Minneapolis, MN January 26, 2022 46,619 3,343 — 43,276 1,915 42,754 1,950 — Total Acquisitions $ 116,874 $ 9,093 $ 22,882 $ 84,899 $ 7,339 $ 106,080 $ 4,672 $ ( 1,217 ) (1) Excludes transaction costs. (2) Fair value of operating partnership units issued on acquisition. (3) Assumption of seller’s debt upon closing for Martin Blu, Zest, and Elements. Mezzanine and construction loans, financed by Centerspace, exchanged as partial consideration for the acquisition of Noko Apartments. (4) Intangible assets consist of in-place leases valued at the time of acquisition. During the three months ended March 31, 2023 and 2022, Centerspace recognized $ 844,000 and $ 8.3 million, respectively, of amortization expense related to these intangibles, included within depreciation and amortization in the Condensed Consolidated Statement of Operations. (5) Debt discount on assumed mortgage. DISPOSITIONS During the three months ended March 31, 2023, Centerspace disposed of nine apartment communities, in four exchange transactions for an aggregate sales price of $ 144.3 million. Centerspace did not dispose of any real estate during the three months ended March 31, 2022. The dispositions for the three months ended March 31, 2023 are detailed below. 18 Table of Contents Three Months Ended March 31, 2023 (in thousands) Dispositions Date Disposed Sale Price Book Value and Sales Cost Gain/(Loss) 115 homes - Boulder Court - Eagan, MN March 8, 2023 $ 14,605 $ 4,970 $ 9,635 498 homes - 2 Nebraska apartment communities March 14, 2023 $ 48,500 $ 14,975 $ 33,525 892 homes - 5 Minnesota apartment communities March 15, 2023 $ 74,500 $ 55,053 $ 19,447 62 homes - Portage - Minneapolis, MN March 15, 2023 $ 6,650 $ 9,098 $ ( 2,448 ) Total Dispositions $ 144,255 $ 84,096 $ 60,159 NOTE 9 • SEGMENTS Centerspace operates in a single reportable segment which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of the operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. The chief operating decision-makers evaluate each property’s operating results to make decisions about resources to be allocated and to assess performance and do not group the properties based on geography, size, or type for this purpose. The apartment communities have similar long-term economic characteristics and provide similar products and services to residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, the apartment communities are aggregated into a single reportable segment. “All other” includes non-multifamily components of mixed-use properties and apartment communities the Company has disposed or designated as held for sale. During the three months ended March 31, 2023, nine sold apartment communities were reclassified from the multifamily segment to all other for all periods presented. The members of the executive management team are the chief operating decision-makers. This team measures the performance of the reportable segment based on net operating income (“NOI”), a non-GAAP measure, which the Company defines as total real estate revenues less property operating expenses, including real estate taxes. Centerspace believes 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 (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance. The following tables present NOI for the three months ended March 31, 2023 and 2022, respectively, along with reconciliations to net income in the Condensed Consolidated Financial Statements. Segment assets are also reconciled to total assets as reported in the Condensed Consolidated Financial Statements. (in thousands) Three Months Ended March 31, 2023 Multifamily All Other Total Revenue $ 62,498 $ 5,399 $ 67,897 Property operating expenses, including real estate taxes 25,903 3,020 28,923 Net operating income $ 36,595 $ 2,379 $ 38,974 Property management ( 2,568 ) Casualty gain (loss) ( 252 ) Depreciation and amortization ( 25,993 ) General and administrative expenses ( 7,723 ) Gain (loss) on sale of real estate and other investments 60,159 Interest expense ( 10,319 ) Interest and other income 49 Net income (loss) $ 52,327 19 Table of Contents (in thousands) Three Months Ended March 31, 2022 Multifamily All Other Total Revenue $ 54,916 $ 5,398 $ 60,314 Property operating expenses, including real estate taxes 23,080 2,793 25,873 Net operating income $ 31,836 $ 2,605 $ 34,441 Property management ( 2,253 ) Casualty gain (loss) ( 598 ) Depreciation and amortization ( 31,001 ) General and administrative expenses ( 4,500 ) Interest expense ( 7,715 ) Interest and other income 1,063 Net income (loss) $ ( 10,563 ) Segment Assets and Accumulated Depreciation Segment assets are summarized as follows as of March 31, 2023, and December 31, 2022, respectively, along with reconciliations to the Condensed Consolidated Financial Statements: (in thousands) As of March 31, 2023 Multifamily All Other Total Segment assets Property owned $ 2,394,065 $ 26,846 $ 2,420,911 Less accumulated depreciation ( 510,716 ) ( 8,451 ) ( 519,167 ) Total property owned $ 1,883,349 $ 18,395 $ 1,901,744 Cash and cash equivalents 8,939 Restricted cash 48,903 Other assets 19,298 Total Assets $ 1,978,884 (in thousands) As of December 31, 2022 Multifamily All Other Total Segment assets Property owned $ 2,385,351 $ 148,773 $ 2,534,124 Less accumulated depreciation ( 487,129 ) ( 48,272 ) ( 535,401 ) Total property owned $ 1,898,222 $ 100,501 $ 1,998,723 Cash and cash equivalents 10,458 Restricted cash 1,433 Other assets 22,687 Total Assets $ 2,033,301 NOTE 10 • COMMITMENTS AND CONTINGENCIES Litigation. Centerspace is currently the named defendant in a lawsuit where the owner of a neighboring property claims a retaining wall at one of its properties is causing water damage to the neighboring property. The claim is for damage to the property and monetary losses. The Company cannot, with any level of certainty, predict the outcome of the lawsuit or provide an estimate for any potential settlement. Centerspace is involved in various lawsuits arising in the normal course of business and believes that such matters will not have a material adverse effect on the condensed consolidated financial statements. Environmental Matters. Under various federal, state, and local laws, ordinances, and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around, or under the property. While the Company currently has no knowledge of any material violation of environmental laws, ordinances, or regulations at any of the properties, there can be no assurance that areas of contamination will not be identified at any of its properties or that changes in environmental laws, regulations, or cleanup requirements would not result in material costs. Restrictions on Taxable Dispositions. Thirty-two properties, consisting of 6,115 apartment homes, are subject to restrictions on taxable dispositions under agreements entered into with certain of the sellers or contributors of the properties and are effective 20 Table of Contents for varying periods. Centerspace does not believe that the agreements materially affect the conduct of its business or its decisions whether to dispose of restricted properties during the restriction period because it generally holds these and other properties for investment purposes rather than for sale. In addition, where the Company deems it to be in the shareholders’ best interests to dispose of such properties, it generally seeks to structure sales of such properties as tax-deferred transactions under Section 1031 of the Internal Revenue Code. Otherwise, the Company may be required to provide tax indemnification payments to the parties to these agreements. Unfunded Commitments. Centerspace has unfunded commitments of $ 1.4 million in two real estate technology venture funds. Refer to Note 7 - Fair Value Measurements for additional information regarding these investments. NOTE 11 • SHARE-BASED COMPENSATION Share-based awards are provided to officers, non-officer employees, and trustees under the 2015 Incentive Plan approved by shareholders on September 15, 2015, as amended and restated on May 18, 2021 (the “2015 Incentive Plan”) which allows for awards in the form of cash, unrestricted and restricted common shares, stock options, stock appreciation rights, and RSUs up to an aggregate of 775,000 shares over the ten-year period in which the plan is in effect. Under the 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive plan (“LTIP”), which is a forward-looking program that measures long-term performance over the stated performance period. These awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the revised program may vary from year to year. Through March 31, 2023, awards under the 2015 Incentive Plan consisted of restricted and unrestricted common shares, RSUs, and stock options. We account for forfeitures of restricted and unrestricted common shares, RSUs, and stock options when they occur instead of estimating the forfeitures. 2023 LTIP Awards Awards granted to employees on January 1, 2023, consisted of an aggregate of 14,256 time-based RSU awards, 20,497 performance RSUs based on total shareholder return (“TSR”), and 45,955 stock options. The time-based awards vest as to one-third of the shares on each of January 1, 2024, January 1, 2025, and January 1, 2026. The stock options vest as to 25 % on each of January 1, 2024, January 1, 2025, January 1, 2026, and January 1, 2027. The fair value of stock options was $ 11.086 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 2023 Exercise price $ 58.67 Risk-free rate 3.97 % Expected term 6.25 years Expected volatility 28.7 % Dividend yield 4.977 % The TSR performance RSUs are earned based on the Company’s TSR as compared to the FTSE Nareit Equity Index over a forward looking three-year period. The maximum number of performance RSUs eligible to be earned is 40,994 RSUs, which is 200 % of the performance RSUs granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market conditions in addition to service conditions that must be met for the awards to vest. Compensation expense is recognized ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, regardless of whether the market conditions are achieved and the awards ultimately vest. Therefore, previously recorded compensation expense is not adjusted in the event that the market conditions are not achieved. The Company based the expected volatility on a weighted average of the historical volatility of the Company’s daily closing share price and a select peer average volatility, the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the award, and the expected term on the performance period of the award. The assumptions used to value the TSR performance RSUs were an expected volatility of 37.20 %, a risk-free interest rate of 4.22 %, and an expected life of 3 years. The share price at the grant date, January 1, 2023, was $ 58.67 per share. Share-Based Compensation Expense Share-based compensation expense recognized in the condensed consolidated financial statements for all outstanding share-based awards was $ 1.5 million and $ 719,000 for the three months ended March 31, 2023 and 2022, respectively. On March 31, 2023, the Company accelerated the vesting of all unvested time-based RSUs and stock options in connection with the Separation Agreement with Mr. Decker. This resulted in the acceleration of share-based compensation expense for those awards resulting in an additional $ 737,000 in expense during the three months ended March 31, 2023. Any performance- 21 Table of Contents based RSUs were prorated, in accordance with the award agreement, and will vest at the end of performance period based on actual performance. The remaining performance-based RSUs were forfeited. NOTE 12 • SUBSEQUENT EVENTS Through May 1, 2023, Centerspace repurchased 104,503 common shares for total consideration of $ 5.7 million an an average price of $ 54.51 per share. On April 26, 2023, Centerspace closed on a $ 90.0 million secured note payable with an interest rate of 5.04 % and a term of 12 years. Subsequent to March 31, 2023, $ 47.8 million of net tax-deferred exchange proceeds were released from restricted cash.