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Item 2. Management’s Discussion and Analysis

2023-10-30 compared with 2023-07-31 · 126 added, 117 removed, 296 unchanged (45% 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 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.

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 September 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 and our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023.

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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Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements.

As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from actual results and performance.

result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from actual results and performance.

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

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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 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.

As of September 30, 2023, we owned interests in 71 apartment communities consisting of 12,785 apartment homes.

Property owned, as presented in our Condensed Consolidated Balance Sheets at historical cost, was $2.3 billion at September 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 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.

Overview of the Three Months Ended September 30, 2023

• During the three months ended September 30, 2023, we sold four non-core apartment communities and associated commercial space for an aggregate sales price of $82.5 million and realized a gain on sale of $11.3 million.

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

• For the three months ended September 30, 2023, revenue decreased by $870,000 or 1.3% to $64.6 million, compared to $65.4 million for the three months ended September 30, 2022, due to decreased revenue from dispositions, offset by a 5.7% increase from same-store communities and an increase from non-same-store communities.

• Total expenses remained substantially flat at $58.4 million for the three months ended September 30, 2023 and 2022.

• Net income was $0.41 per diluted share for the three months ended September 30, 2023, compared to net loss of $0.14 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 September 30, 2023 increased by $262,000 to $21.7 million compared to $21.5 million for the three months ended September 30, 2022.

See the description of Core FFO on page 31 and the reconciliation of net income (loss) available to common shareholders to FFO and Core FFO on page 33.

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.

This increase was primarily due to increased NOI from same-store and non-same-store communities and expense savings in property management and general and administrative expenses, 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 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.

We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that excludes gain (loss) on the sale 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.

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We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how a fixed pool of communities are performing year-over-year.

We use this measure to assess whether or not we have been successful in increasing NOI, raising average rental revenue, renewing the leases on existing residents, controlling operating costs, and making prudent capital improvements.

We use this measure to assess whether or not we have been successful in increasing NOI, raising average rental revenue, renewing the leases with existing residents, controlling operating costs, and making prudent capital improvements.

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

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

For the comparison of the nine months ended September 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)

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

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

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

(in thousands, except percentages)

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

Three Months Ended September 30, Nine Months Ended September 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 *

Operating income

$ 17,395 $ 7,031 $ 10,364 147.4 % $ 85,958 $ 6,955 $ 79,003 *

Property management expenses 2,197 2,563 (366) (14.3) % 7,012 7,537 (525) (7.0) %

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General and administrative expenses 3,832 4,519 (687) (15.2) % 15,717 14,240 1,477 10.4 %

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

Gain on sale of real estate and other investments

(11,235) — (11,235) * (71,327) (27) (71,300) *

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

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

Net operating income $ 37,823 $ 38,109 $ (286) (0.8) % $ 116,527 $ 109,450 $ 7,077 6.5 %

(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.

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

(in thousands, except percentages)

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

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

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

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General and administrative expenses (3,832) (4,519) (687) (15.2) % (15,717) (14,240) 1,477 10.4 %

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

Gain on sale of real estate and other investments

11,235 — 11,235 N/A 71,327 27 71,300 *

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

Interest expense (8,556) (7,871) 685 8.7 % (27,516) (23,147) 4,369 18.9 %

Interest and other income (loss)

Interest and other income

330 70 260 * 674 1,116 (442) (39.6) %

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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.

(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,

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

Weighted Average Occupancy (1)

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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 June 30, 2023 June 30, 2022

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

Same-store 12,173 12,173

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Same-store analysis.

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.

Revenue from same-store communities increased 5.7% or $3.1 million in the three months ended September 30, 2023, compared to the same period in the prior year.

The increase was attributable to 5.5% growth in average monthly revenue per occupied home for the three months ended September 30, 2023 and an increase of 0.2% in occupancy as weighted average occupancy increased from 94.5% in the three months ended September 30, 2022 to 94.7% for the three months ended September 30, 2023.

Property operating expenses, including real estate taxes, at same-store communities increased by 6.1% or $1.4 million in the three months ended September 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 $501,000, 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 $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-controllable expenses at same-store communities increased by $872,000, due to real estate taxes and higher insurance premiums and claims.

Same-store NOI increased by $1.7 million to $34.0 million for the three months ended September 30, 2023 compared to $32.3 million in the same period of the prior year.

Revenue from same-store communities increased 8.3% or $13.2 million in the nine months ended September 30, 2023, compared to the same period in the prior year.

The increase was attributable to 7.9% growth in average monthly revenue per occupied home for the nine months ended September 30, 2023 and an increase of 0.4% in occupancy as weighted average occupancy increased from 94.5% in the nine months ended September 30, 2022 to 94.9% for the nine months ended September 30, 2023.

Property operating expenses, including real estate taxes, at same-store communities increased by 6.6% or $4.3 million in the nine months ended September 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 $1.9 million, primarily due to compensation costs.

Non-controllable expenses at same-store communities increased by $2.4 million, primarily due to real estate taxes and higher insurance premiums and claims.

Same-store NOI increased by $8.9 million to $102.3 million for the nine months ended September 30, 2023 compared to $93.4 million in the same period of the prior year.

Non-same-store analysis.

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.

Revenue from non-same-store communities increased by $1.3 million in the three months ended September 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 $663,000.

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.

NOI at non-same-store communities increased by $674,000 to $2.1 million for the three months ended September 30, 2023 compared to $1.4 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 an apartment community at the end of the third quarter of the prior year.

Revenue from non-same-store communities increased by $4.9 million in the nine months ended September 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 $1.8 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.

NOI at non-same-store communities increased by $3.0 million to $6.7 million for the nine months ended September 30, 2023 compared to $3.7 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.

Revenue from other properties decreased by $9,000 while revenue from dispositions decreased by $5.3 million in the three months ended September 30, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at other properties increased by $3,000 while they decreased by $2.6 million for dispositions, compared to the same period in the prior year.

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

NOI at other properties decreased by $12,000 and 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.

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.

We disposed of nine apartment communities in the first quarter of 2023 and an additional four apartment communities and associated commercial space in the third quarter of 2023.

Revenue from other properties increased by $129,000 while revenue from dispositions decreased by $9.8 million in the nine months ended September 30, 2023, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at other properties decreased by $145,000 and $4.7 million for dispositions, compared to the same period in the prior year.

NOI at other properties increased by $274,000 while NOI on dispositions decreased $5.1 million, compared to the same period in the prior year.

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

We disposed of nine apartment communities in the first quarter of 2023 and an additional four apartment communities and associated commercial space in the third quarter of 2023.

Property management expenses .

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.

Property management expense, consisting of property management overhead and property management fees paid to third parties decreased by 14.3% to $2.2 million in the three months ended September 30, 2023, compared to $2.6 million in the same period of the prior year.

The decrease is primarily due to decreased costs for technology initiatives and compensation costs combined with fewer properties due to dispositions.

Property management expense, consisting of property management overhead and property management fees paid to third parties decreased by 7.0% to $7.0 million in the nine months ended September 30, 2023, compared to $7.5 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.

Casualty loss increased to $937,000 in the three months ended September 30, 2023, compared to $276,000 in the same period of the prior year.

The increase is primarily due to extensive damage to a pool at one apartment community.

See Note 2 of the Notes to the Condensed Consolidated Financial Statements in the report for more details.

Casualty loss decreased to $1.2 million in the nine months ended September 30, 2023, compared to $1.3 million 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 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.

Depreciation and amortization increased by 4.1% to $24.7 million in the three months ended September 30, 2023, compared to $23.7 million in the same period of the prior year, primarily attributable to an increase in depreciation on same-store and non-same-store apartment communities driven by the addition of an apartment community at the end of the third quarter of the prior year and value add and acquisition capital projects;

offset by a decrease in depreciation from sold properties.

Depreciation and amortization decreased by 5.6% to $75.1 million in the nine months ended September 30, 2023, compared to $79.5 million in the same period of the prior year, primarily attributable to a decrease in amortization of in-place leases from the prior year and a decrease in depreciation from sold properties, offset by an increase in depreciation on same-store and non-same-store apartment communities driven by 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 along with value add and acquisition capital projects.

General and administrative expenses.

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 (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.

General and administrative expenses decreased by 15.2% to $3.8 million in the three months ended September 30, 2023, compared to $4.5 million in the same period of the prior year, primarily attributable to technology implementation costs from the prior year that did not occur in the current year and a decrease in compensation costs and legal fees.

General and administrative expenses increased by 10.4% to $15.7 million in the nine months ended September 30, 2023, compared to $14.2 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 $371,000 in legal fees related to the loss on litigation settlement, offset by $1.1 million in abandoned pursuit costs and $784,000 in technology implementation costs from the prior year that did not occur in the current year.

Gain on sale of real estate and other investments.

Gain on sale of real estate and other investments increased to a gain of $11.2 million in the three months ended September 30, 2023, compared to no gain in the same period of the prior year.

The increase was primarily due to the sale of four apartment communities and associated commercial space in the current quarter that did not occur in the prior quarter.

Refer to Note 8 in the Notes to the Condensed Consolidated Financial Statements.

Gain on sale of real estate and other investments increased to $71.3 million in the nine months ended September 30, 2023, compared to $27,000 in the same period of the prior year, primarily due to the sale of 13 apartment communities and associated commercial space in the current year that did not occur in the prior year.

Refer to Note 8 in the Notes to the Condensed Consolidated Financial Statements.

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.

Loss on litigation settlement was $2.9 million for the nine months ended September 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 Notes to the Condensed Consolidated Financial Statements.

Interest expense.

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 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.

Interest expense increased by 8.7% to $8.6 million in the three months ended September 30, 2023, compared to $7.9 million in the same period of the prior year, primarily due to higher interest rates.

Interest expense increased by 18.9% to $27.5 million in the nine months ended September 30, 2023, compared to $23.1 million in the same period of the prior year, primarily due to higher interest rates.

Interest and other income.

Interest and other income increased to income of $330,000 in the three months ended September 30, 2023, compared to $70,000 in the same period of the prior year.

The increase was primarily due to interest income on escrow funds and other cash balances 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 $674,000 in the nine months ended September 30, 2023, compared to $1.1 million in the same period of the prior year.

Net income (loss) available to common shareholders.

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.

Net income available to common shareholders increased $8.3 million to a net income of $6.2 million for the three months ended September 30, 2023, compared to a net loss of $2.1 million in the three months ended September 30, 2022.

Net income (loss) available to common shareholders increased $61.6 million to income of $44.7 million for the nine months ended September 30, 2023, compared to a net loss of $16.9 million in the nine months ended September 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 believe that Funds from Operations (“FFO”), which is a non-GAAP financial measure 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 FFO adopted by the National Association of Real Estate Investment Trusts, Inc.

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Core Funds from Operations (“Core FFO”), a non-GAAP measure, is FFO adjusted for non-routine items or items not considered core to business operations.

By further adjusting for items that are not considered part of core business operations, we believe that Core FFO provides investors with additional information to compare core operating and financial performance between periods.

By further adjusting for items that are not considered part of core business operations,

we believe that Core FFO provides investors with additional information to compare core operating and financial performance between periods.

Core FFO should not be considered as an alternative to net income or as any other GAAP measurement of performance, but rather should be considered an additional supplemental measure.

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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 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.

Net income available to common shareholders for the three months ended September 30, 2023, increased to a net income of $6.2 million compared to a net loss of $2.1 million for the same period of the prior year.

FFO applicable to common shares and Units for the three months ended September 30, 2023, decreased to $20.8 million compared to $21.0 million for the comparable period of the prior year, a decrease of 1.3%.

This decrease was primarily due to decreased NOI from dispositions, increased casualty loss and interest expense, offset by increased NOI from same-store communities and non-same-store communities, and decreases in property management and general and administrative expenses.

Net income (loss) available to common shareholders for the nine months ended September 30, 2023, increased to net income of $44.7 million compared to a net loss of $16.9 million for the same period of the prior year.

FFO applicable to common shares and Units for the nine months ended September 30, 2023, decreased to $57.2 million compared to $58.7 million for the comparable period of the prior year, a decrease of 2.5%.

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, loss on litigation settlement, decreased NOI from dispositions, less interest and other income including a mark to market gain on an interest rate swap from the prior year, offset by increased NOI from same-store communities and non-same-store communities and $1.1 million in pursuit costs from the prior year that did not occur in the nine months ended September 30, 2023.

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 June 30, Six Months Ended June 30,

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

2023 2022 2023 2022

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Less depreciation – partially owned entities (20) (18) (58) (46)

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

Gain on sale of real estate and other assets

(11,235) — (71,323) (27)

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Adjustments to Core FFO:

Non-cash casualty (gain) loss

Non-cash casualty loss

854 46 815 234

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

3,201 — 3,201 —

Other miscellaneous items (3)

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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.

(2) Consists of a $2.9 million loss on litigation settlement for a trial judgment entered against the Company and $371,000 in one-time trial costs related to the litigation matter during the nine months ended September 30, 2023.

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

Acquisitions and Dispositions

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.

During the nine months ended September 30, 2023, we disposed of 13 apartment communities and associated commercial space in five transactions located in Minnesota, Nebraska, and North Dakota for an aggregate sales price of $226.8 million.

We had no acquisitions during the nine months ended September 30, 2023.

Distributions Declared

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.

Distributions of $0.73 per common share and Unit were declared during the three months ended September 30, 2023 and 2022 and $2.19 per common share and Unit during the nine months ended September 30, 2023 and 2022.

Distributions of $0.4140625 per Series C preferred share were declared during the three months ended September 30, 2023 and 2022 and $1.2421875 per Series C shares for the nine months ended September 30, 2023 and 2022.

Distributions of $0.9655 per Series D preferred unit were declared during the three months ended September 30, 2023 and 2022 and $2.8965 per Series D preferred unit for the nine months ended September 30, 2023 and 2022.

Distributions of $0.96875 per Series E preferred unit were declared during the three months ended September 30, 2023 and 2022 and 2.90625 per Series E preferred unit for the nine months ended September 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 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 September 30, 2023, we had total liquidity of approximately $285.7 million, which included $256.0 million available on the lines of credit and $29.7 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 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.

As of September 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 September 30, 2023, there was no outstanding balance on this line of credit, therefore the additional borrowing availability was $250.0 million.

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.

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

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

As of September 30, 2023, there was no outstanding balance on this line of credit.

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

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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.

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 September 30, 2023.

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

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

As of June 30, 2023, the term loan was paid in full.

As of September 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 June 30, 2023 and December 31, 2022, the FMCF had a balance of $198.9 million.

As of September 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 $367.7 million and $299.4 million at June 30, 2023 and December 31, 2022, respectively, on 14 and 15 apartment communities, respectively.

Mortgage loan indebtedness, excluding the FMCF, was $343.7 million and $299.4 million at September 30, 2023 and December 31, 2022, respectively, on 13 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 June 30, 2023 and December 31, 2022, the weighted average interest rate on mortgage debt was 4.14% and 3.85%, respectively.

As of September 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.

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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 June 30, 2023, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program.

As of September 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 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 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.

The specific timing and amount of repurchases will vary based on available capital resources or other financial and operational performance, market conditions,

securities law limitations, and other factors.

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

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

(in thousands, except per share amounts)

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

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

Average Price Per Share (1)

2023 — $ — $ —

Six Months Ended June 30,

2022 5 359 $ 65.97

Nine Months Ended September 30,

2023 124 $ 6,718 $ 54.19

2022 5 359 $ 65.97

(1) Amount includes commissions.

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

In addition to cash flow from operations, during the 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;

In addition to cash flow from operations, during the nine months ended September 30, 2023, we generated capital from various activities, including:

• Receiving $223.3 million in net proceeds from the sale of 13 apartment communities and associated commercial space;

• 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:

During the nine months ended September 30, 2023, we used capital for various activities, including:

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

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We also continue to monitor pressures surrounding supply chain challenges.

Supply chain and inflationary pressures are likely to result in increasing operating expenses, specifically, increases in energy costs, salary related costs, and construction materials for repairs and maintenance or value add projects.

A worsening of the current environment could contribute to delays in obtaining construction materials and result in higher than anticipated costs, which could prevent us from obtaining expected returns on value add projects.

We continue to have access to the financial markets;

however, a prolonged disruption of the markets or a decline in credit and financing conditions could negatively affect our ability to access capital necessary to fund our operations or refinance maturing debt in the future.

debt in the future.

Additionally, rising interest rates could negatively impact our borrowing costs for any variable rate borrowings or refinancing activity.

Off-Balance Sheet Arrangements

As of June 30, 2023, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of September 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 six months ended June 30, 2023.

There have been no other significant changes to the critical accounting policies during the nine months ended September 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