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Item 2. Management’s Discussion and Analysis

2023-07-31 compared with 2023-05-01 · 164 added, 97 removed, 249 unchanged (51% 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 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.

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 June 30, 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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• 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;

• pandemics or epidemics, including the COVID-19 pandemic, and any effects on our business, financial condition, and results of operation;

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

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• cyber liability or potential liability for breaches of privacy or information security systems;

• recent developments in artificial intelligence, including software used to price rent in apartment communities;

• inability to address catastrophic weather, natural events, and climate change;

• inability to comply with laws and regulations applicable to the business and any related investigations or litigation;

• inability to comply with laws and regulations, including those related to the environment, applicable to the business and any related investigations or litigation;

• other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.

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Except as otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements to reflect events, circumstances, or changes in expectations after the date on which this Report is filed.

Readers also should review the risks and uncertainties detailed from time to time in filings with the SEC, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2022.

Executive Summary

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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 our residents.

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.

As of June 30, 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 June 30, 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.

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

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.

Overview of the Three Months Ended June 30, 2023

• For the three months ended June 30, 2023, revenue increased by $1.7 million or 2.6% to $64.8 million, compared to $63.1 million for the three months ended June 30, 2022, due to a 8.5% increase from same-store communities and an increase from non-same-store communities, offset by decreased revenue from dispositions.

• Total expenses decreased by $3.4 million to $55.9 million for the three months ended June 30, 2023, compared to $59.3 million for the three months ended June 30, 2022 due to decreased property operating expenses, real estate taxes, property management expenses, depreciation and amortization, and general and administrative expenses.

• Net loss was $0.23 per diluted share for the three months ended June 30, 2023, compared to net loss of $0.30 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 June 30, 2023 increased by $2.3 million to $23.3 million compared to $21.0 million for the three months ended June 30, 2022.

See the description of Core FFO on page 30 and the reconciliation of net income (loss) available to common shareholders to FFO and Core FFO on page 31.

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

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

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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.

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 and 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 sales of real estate and other investments, 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%.

Same-store apartment communities are owned or in service for substantially all 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.

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

For the comparison of the 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.

For the comparison of the six months ended June 30, 2023 and 2022, five apartment communities were non-same-store.

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

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

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(in thousands, except percentages)

Three Months Ended March 31,

2023 2022 $ Change % Change

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 $ Change % Change 2023 2022 $ Change % Change

Operating income (loss) $ 5,966 $ 3,835 $ 2,131 55.6 % $ 68,563 $ (76) $ 68,639 *

Property management expenses 2,247 2,721 (474) (17.4) % 4,815 4,974 (159) (3.2) %

Casualty (gain) loss 252 598 (346) (57.9) %

Casualty loss

53 382 (329) (86.1) % 305 980 (675) (68.9) %

Depreciation and amortization 24,371 24,768 (397) (1.6) % 50,364 55,769 (5,405) (9.7) %

General and administrative expenses 4,162 5,221 (1,059) (20.3) % 11,885 9,721 2,164 22.3 %

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

(Gain) loss on sale of real estate and other investments (1)

67 (27) 94 * (60,092) (27) (60,065) *

Loss on litigation settlement 2,864 — 2,864 N/A 2,864 — 2,864 N/A

Net operating income $ 39,730 $ 36,900 $ 2,830 7.7 % $ 78,704 $ 71,341 $ 7,363 10.3 %

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

(1) Current quarter activity relates to dispositions that occurred in prior periods.

* Not a meaningful percentage.

The following consolidated results of operations, including GAAP and non-GAAP metrics, cover the three and six months ended June 30, 2023 and 2022.

(in thousands, except percentages)

Three Months Ended March 31,

2023 2022 $ Change % Change

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 $ Change % Change 2023 2022 $ Change % Change

Same-store (1)

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3,629 2,050 1,579 77.0 % 7,266 3,717 3,549 95.5 %

Other properties (1)

983 915 68 7.4 % 1,985 1,831 154 8.4 %

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1,348 769 579 75.3 % 2,657 1,480 1,177 79.5 %

Other properties (1)

254 230 24 10.4 % 404 560 (156) (27.9) %

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2,281 1,281 1,000 78.1 % 4,609 2,237 2,372 106.0 %

Other properties (1)

729 685 44 6.4 % 1,581 1,271 310 24.4 %

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Property management expenses (2,247) (2,721) (474) (17.4) % (4,815) (4,974) (159) (3.2) %

Casualty gain (loss) (252) (598) (346) (57.9) %

Casualty loss

(53) (382) (329) (86.1) % (305) (980) (675) (68.9) %

Depreciation and amortization (24,371) (24,768) (397) (1.6) % (50,364) (55,769) (5,405) (9.7) %

General and administrative expenses (4,162) (5,221) (1,059) (20.3) % (11,885) (9,721) 2,164 22.3 %

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

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

(67) 27 (94) * 60,092 27 60,065 *

Loss on litigation settlement (2,864) — (2,864) N/A (2,864) — (2,864) N/A

Interest expense (8,641) (7,561) 1,080 14.3 % (18,960) (15,276) 3,684 24.1 %

Interest and other income (loss)

295 (17) 312 * 344 1,046 (702) (67.1) %

NET INCOME (LOSS)

$ (2,380) $ (3,743) $ 1,363 (36.4) % $ 49,947 $ (14,306) $ 64,253 (449.1) %

Dividends to Series D preferred unitholders (160) (160) — — (320) (320) — —

Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities (30) (23) (7) 30.4 %

712 950 (238) (25.1) % (7,854) 3,107 (10,961) (352.8) %

Net income attributable to noncontrolling interests – consolidated real estate entities

(35) (38) 3 (7.9) % (65) (61) (4) 6.6 %

Net income (loss) attributable to controlling interests

(1,863) (2,991) 1,128 (37.7) % 41,708 (11,580) 53,288 (460.2) %

Dividends to preferred shareholders (1,607) (1,607) — — (3,214) (3,214) — —

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS

$ (3,470) $ (4,598) $ 1,128 (24.5) % $ 38,494 $ (14,794) $ 53,288 (360.2) %

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

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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,

(2) Current quarter activity relates to dispositions that occurred in a prior period.

* Not a meaningful percentage.

Three Months Ended June 30, Six Months Ended June 30,

Weighted Average Occupancy (1)

2023 2022 2023 2022

Same-store 95.2 % 95.0 % 95.0 % 94.5 %

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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 March 31, 2023 March 31, 2022

Number of Apartment Homes June 30, 2023 June 30, 2022

Same-store 12,885 12,885

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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.

Revenue from same-store communities increased 8.5% or $4.7 million in the three months ended June 30, 2023, compared to the same period in the prior year.

The increase was attributable to 8.3% growth in average monthly revenue per occupied home for the three months ended June 30, 2023 and an increase of 0.2% in occupancy as weighted average occupancy increased from 95.0% in the three months ended June 30, 2022 to 95.2% for the three months ended June 30, 2023.

Property operating expenses, including real estate taxes, at same-store communities increased by 3.3% or $753,000 in the three months ended June 30, 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 $196,000, primarily due to compensation costs and offset by decreases in repairs and maintenance and utilities.

Non-controllable expenses at same-store communities increased by $557,000, due to real estate taxes and an increase in insurance premiums and claims.

Same-store NOI increased by $4.0 million to $36.7 million for the three months ended June 30, 2023 compared to $32.8 million in the same period of the prior year.

Revenue from same-store communities increased 9.5% or $10.3 million in the six months ended June 30, 2023, compared to the same period in the prior year.

The increase was attributable to 8.9% growth in average monthly revenue per occupied home for the six months ended June 30, 2023 and an increase of 0.5% in occupancy as weighted average occupancy increased from 94.5% in the six months ended June 30, 2022 to 95.0% for the six months ended June 30, 2023.

Property operating expenses, including real estate taxes, at same-store communities increased by 6.6% or $3.0 million in the six months ended June 30, 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 $1.4 million, primarily due to compensation costs and repairs and maintenance.

Non-controllable expenses at same-store communities increased by $1.6 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.

Same-store NOI increased by $7.4 million to $71.0 million for the six months ended June 30, 2023 compared to $63.6 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.

Revenue from non-same-store communities increased by $1.6 million in the three months ended June 30, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at non-same-store communities increased by $579,000.

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.

NOI at non-same-store communities increased by $1.0 million to $2.3 million for the three months ended June 30, 2023 compared to $1.3 million 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 apartment community at the end of the third quarter of the prior year.

Revenue from non-same-store communities increased by $3.5 million in the six months ended June 30, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at non-same-store communities increased by $1.2 million.

NOI at non-same-store communities increased by $2.4 million to $4.6 million for the six months ended June 30, 2023 compared to $2.2 million 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 in the first quarter of the prior year and one apartment community at the end of the third quarter of the prior year.

Other properties and dispositions analysis.

Revenue from other properties increased by $68,000 while revenue from dispositions decreased by $4.7 million in the three months ended June 30, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at other properties increased by $24,000 while they decreased by $2.5 million for dispositions, compared to the same period in the prior year.

NOI at other properties increased by $44,000 while NOI

on dispositions decreased $2.2 million, compared to the same period in the prior year.

We disposed of nine apartment communities in the first quarter of 2023.

Revenue from other properties increased by $154,000 while revenue from dispositions decreased by $4.8 million in the six months ended June 30, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at other properties decreased by $156,000 and $2.1 million for dispositions, compared to the same period in the prior year.

NOI at other properties increased by $310,000 while NOI on dispositions decreased $2.7 million, compared to the same period in the prior year.

We disposed of nine apartment communities in the first quarter of 2023.

Property management expenses .

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.

Casualty gain (loss).

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.

Property management expense, consisting of property management overhead and property management fees paid to third parties decreased by 17.4% to $2.2 million in the three months ended June 30, 2023, compared to $2.7 million in the same period of the prior year.

The decrease is primarily due to decreased costs for technology initiatives.

Property management expense, consisting of property management overhead and property management fees paid to third parties decreased by 3.2% to $4.8 million in the six months ended June 30, 2023, compared to $5.0 million in the same period of the prior year.

The decrease is primarily due to decreased contract labor and technology initiatives, offset by increased compensation.

Casualty loss.

Casualty loss decreased to $53,000 in the three months ended June 30, 2023, compared to $382,000 in the same period of the prior year.

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

Casualty loss decreased to $305,000 in the six months ended June 30, 2023, compared to $980,000 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 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.

Depreciation and amortization decreased by 1.6% to $24.4 million in the three months ended June 30, 2023, compared to $24.8 million in the same period of the prior year, primarily attributable to a decrease in amortization of in-place leases from the prior year, offset by an increase in depreciation on same-store and non-same-store apartment communities.

Depreciation and amortization decreased by 9.7% to $50.4 million in the six months ended June 30, 2023, compared to $55.8 million in the same period of the prior year, primarily attributable to a decrease in amortization of in-place leases from the prior year, offset by an increase in depreciation on same-store and non-same-store apartment communities.

General and administrative expenses.

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.

General and administrative expenses decreased by 20.3% to $4.2 million in the three months ended June 30, 2023, compared to $5.2 million in the same period of the prior year, primarily attributable to $1.1 million in abandoned pursuit costs and $437,000 in technology implementation costs from the prior year that did not occur in the current year, offset by an increase of $367,000 in legal fees related to the loss on litigation settlement.

General and administrative expenses increased by 22.3% to $11.9 million in the six months ended June 30, 2023, compared to $9.7 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 and $367,000 in legal fees related to the loss on litigation settlement, and offset by $1.1 million in abandoned pursuit costs and $540,000 in technology implementation costs from the prior year that did not occur in the current year.

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

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.

Gain (loss) on sale of real estate and other investments decreased to a loss of $67,000 in the three months ended June 30, 2023, compared to a $27,000 gain in the same period of the prior year.

Gain on sale of real estate and other investments increased to $60.1 million in the six months ended June 30, 2023, compared to $27,000 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.

Loss on Litigation Settlement.

Loss on litigation settlement was $2.9 million for the three and six months ended June 30, 2023 due to a trial judgment against Centerspace for property damage and monetary losses to a neighboring property.

Refer to Note 2 in the condensed consolidated financial statements.

Interest expense.

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 expense increased by 14.3% to $8.6 million in the three months ended June 30, 2023, compared to $7.6 million in the same period of the prior year, primarily due to higher interest rates.

Interest expense increased by 24.1% to $19.0 million in the six months ended June 30, 2023, compared to $15.3 million in the same period of the prior year, primarily due to maintaining larger debt balances compared to the same period of the prior year, combined with higher interest rates.

Interest and other income (loss).

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.

Interest and other income increased to income of $295,000 in the three months ended June 30, 2023, compared to a loss of $17,000 in the same period of the prior year.

The increase was primarily due to interest income on escrow funds and a gain on investments in the current quarter compared to a loss on investments in the same period of the prior year.

Interest and other income decreased to income of $344,000 in the six months ended June 30, 2023, compared to income of $1.0 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, offset by interest income on escrow funds and a gain on investments in the current year.

Net income (loss) available to common shareholders.

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.

Net loss available to common shareholders increased $1.1 million to a net loss of $3.5 million for the three months ended June 30, 2023, compared to a net loss of $4.6 million in the three months ended June 30, 2022.

Net income (loss) available to common shareholders increased $53.3 million to income of $38.5 million for the six months ended June 30, 2023, compared to a net loss of $14.8 million in the six months ended June 30, 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 and amortization.

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

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

Nareit defines FFO as net income or loss calculated in accordance with GAAP, excluding:

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• 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.

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

Due to limitations of the Nareit FFO definition, we have made certain interpretations in applying this definition.

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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.

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

Net loss available to common shareholders for the three months ended June 30, 2023, increased to a net loss of $3.5 million compared to a net loss of $4.6 million for the same period of the prior year.

FFO applicable to common shares and Units for the

three months ended June 30, 2023, increased to $20.2 million compared to $19.1 million for the comparable period of the prior year, an increase of 5.6%.

This increase was primarily due to increased NOI from same-store communities and non-same-store communities, a decrease in casualty loss and property management expenses, and $1.1 million in pursuit costs from the prior year that did not occur in the current year, offset by increased interest expense, and decreased NOI from dispositions.

Net income (loss) available to common shareholders for the six months ended June 30, 2023, increased to net income of $38.5 million compared to a net loss of $14.8 million for the same period of the prior year.

FFO applicable to common shares and Units for the six months ended June 30, 2023, decreased to $36.4 million compared to $37.6 million for the comparable period of the prior year, a decrease of 3.2%.

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, decreased NOI from dispositions, 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, lower casualty loss, and $1.1 million in pursuit costs from the prior year that did not occur in the current year.

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

(in thousands, except per share and unit amounts)

Three Months Ended March 31,

Three Months Ended June 30, Six Months Ended June 30,

2023 2022 2023 2022

Net income (loss) available to common shareholders

$ (3,470) $ (4,598) $ 38,494 $ (14,794)

Noncontrolling interests – Operating Partnership and Series E preferred units (712) (950) 7,854 (3,107)

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Less depreciation – partially owned entities (19) (7) (38) (28)

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

(Gain) loss on sale of real estate and other assets

71 (27) (60,088) (27)

FFO applicable to common shares and Units $ 20,152 $ 19,085 $ 36,406 $ 37,611

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Non-cash casualty (gain) loss

(52) 163 (39) 188

Loss on extinguishment of debt — 5 — 5

Technology implementation costs (1)

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Severance and transition related costs (19) — 3,180 —

Loss on litigation settlement and one-time trial costs (2)

3,201 — 3,201 —

Other miscellaneous items (3)

(22) 100 27 96

Core FFO applicable to common shares and Units $ 23,303 $ 21,016 $ 42,845 $ 38,938

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

(2) Consists of a $2.9 million loss on litigation settlement for a trial judgment entered against the Company and $340,000 in one-time trial costs related to the litigation matter.

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

Acquisitions and Dispositions

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.

During the six months ended June 30, 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 six months ended June 30, 2023.

Distributions Declared

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.

Distributions of $0.73 per common share and Unit were declared during the three months ended June 30, 2023 and 2022 and $1.46 per common share and Unit during the six months ended June 30, 2023 and 2022.

Distributions of $0.4140625 per Series C preferred share were declared during the three months ended June 30, 2023 and 2022 and $0.828125 per Series C shares for the six months ended June 30, 2023 and 2022.

Distributions of $0.9655 per Series D preferred unit were declared during the three months ended June 30, 2023 and 2022 and $1.931 per Series D preferred unit for the six months ended June 30, 2023 and 2022.

Distributions of $0.96875 per Series E preferred unit were declared during the three months ended June 30, 2023 and 2022 and 1.9375 per Series E preferred unit for the six months ended June 30, 2023 and 2022.

Liquidity and Capital Resources

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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 June 30, 2023, we had total liquidity of approximately $246.7 million, which included $237.0 million available on the lines of credit and $9.7 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.

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.

As of June 30, 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 June 30, 2023, the additional borrowing availability was $232.0 million beyond the $18.0 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.

On May 31, 2023, this unsecured credit facility was further amended to replace the London Interbank Offered Rate (“LIBOR”) with the Secured Overnight Financing Rate (“SOFR”) as the benchmark alternative reference rate under the credit facility.

Loans under the credit facility outstanding as of the effective date of the Amendment that accrue interest at a rate determined by reference to LIBOR will continue to accrue interest at a rate determined by reference to LIBOR for the interest period applicable to such loans.

The line of credit has an interest rate equal to daily SOFR plus a margin of 135 basis points and a spread adjustment of 10 basis points.

The interest rates on the line of credit are based, at the Company’s option, on either the lender’s base rate plus a margin, ranging from 25-80 basis points, or daily or term SOFR, plus a margin that ranges from 125-180 basis points based on the consolidated leverage ratio, as defined under the First Amendment to Third Amended and Restated Credit Agreement.

Prior to the amendment, 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 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.

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.

As of June 30, 2023, the outstanding balance on this line of credit was $1.0 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.

(collectively, “PGIM”) to increase the aggregate amount available for issuance of unsecured senior promissory notes to $225.0 million.

In September 2021, we entered into a note purchase agreement for the issuance of $125.0 million of senior unsecured promissory notes, of which $25.0 million was under the private shelf agreement with PGIM.

Under the private shelf agreement with PGIM, we have issued $200.0 million unsecured senior notes with $25.0 million remaining available.

This operating line matures on September 30, 2024, with pricing based on SOFR.

Centerspace has a private shelf agreement with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc.

(collectively, “PGIM”) with an aggregate amount of $225.0 million of unsecured senior promissory notes (“unsecured senior notes”) available for issuance.

The Company also has a separate 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 June 30, 2023.

The following table shows the notes issued under both private shelf agreements.

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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 interest rate on the Term Loan was based on SOFR, plus a margin that ranged 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 June 30, 2023, the term loan was paid in full.

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

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

As of March 31, 2023 and December 31, 2022, the FMCF had a balance of $198.9 million.

As of June 30, 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 $279.3 million and $299.4 million at March 31, 2023 and December 31, 2022, respectively.

Mortgage loan indebtedness, excluding the FMCF, was $367.7 million and $299.4 million at June 30, 2023 and December 31, 2022, respectively, on 14 and 15 apartment communities, 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 March 31, 2023 and December 31, 2022, the weighted average interest rate on mortgage debt was 3.85%.

As of June 30, 2023 and December 31, 2022, the weighted average interest rate on mortgage debt was 4.14% and 3.85%, respectively.

On April 26, 2023, Centerspace closed on a $90.0 million secured note payable, which is included in the mortgages payable discussion above, with an interest rate of 5.04% and a term of 12 years.

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.

As of June 30, 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.

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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 months ended March 31, 2023.

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

The table below provides details on the shares repurchased during the three and six months ended June 30, 2023.

As of June 30, 2023, the Company had $14.2 million remaining authorized for purchase under this program.

(in thousands, except per share amounts)

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

Three Months Ended June 30, Number of Common Shares Aggregate Cost (1)

Average Price Per Share (1)

2023 105 $ 5,696 $ 54.51

Six Months Ended June 30,

2023 124 $ 6,718 $ 54.19

(1) Amount includes commissions.

1 unchanged sentence

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 three months ended March 31, 2023, we generated capital from various activities, including:

In addition to cash flow from operations, during the six months ended June 30, 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 three months ended March 31, 2023, we used capital for various activities, including:

• Receiving $90.0 million in proceeds from a new mortgage on Parkhouse.

During the six months ended June 30, 2023, we used capital for various activities, including:

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

• Net repayments of $94.5 million on the line of credit;

• Repaying $22.8 million of mortgage principal;

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

• Paying distributions on common shares, Series E preferred units, Units, and Series C preferred shares of $29.9 million;

• Repurchasing 123,967 common shares for $6.7 million;

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Off-Balance Sheet Arrangements

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.

As of June 30, 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 critical accounting policies during the three months ended March 31, 2023.

There have been no other significant changes to the critical accounting policies during the six months ended June 30, 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