CENTERSPACE 10-Q

Item 1. Financial Statements. CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (in thousands, except per share data) September 30, 2023 December 31, 2022 ASSETS (Unaudited) Real estate investments Property owned $ 2,326,408 $ 2,534,124 Less accumulated depreciation ( 516,673 ) ( 535,401 ) Total real estate investments 1,809,735 1,998,723 Cash and cash equivalents 29,701 10,458 Restricted cash 22,496 1,433 Other assets 16,349 22,687 TOTAL ASSETS $ 1,878,281 $ 2,033,301 LIABILITIES, MEZZANINE EQUITY, AND EQUITY LIABILITIES Accounts payable and accrued expenses $ 62,674 $ 58,812 Revolving lines of credit — 113,500 Notes payable, net of unamortized loan costs of $ 557 and $ 993 , respectively 299,443 399,007 Mortgages payable, net of unamortized loan costs of $ 3,314 and $ 3,615 , respectively 539,245 495,126 TOTAL LIABILITIES $ 901,362 $ 1,066,445 COMMITMENTS AND CONTINGENCIES (NOTE 10) SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $ 100 par value, 166 units issued and outstanding at September 30, 2023 and December 31, 2022, aggregate liquidation preference of $ 16,560 ) $ 16,560 $ 16,560 EQUITY Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $ 25 per share liquidation preference, 3,881 shares issued and outstanding at September 30, 2023 and December 31, 2022, aggregate liquidation preference of $ 97,036 ) 93,530 93,530 Common Shares of Beneficial Interest (Unlimited authorization, no par value, 15,052 shares issued and outstanding at September 30, 2023 and 15,020 shares issued and outstanding at December 31, 2022) 1,169,025 1,177,484 Accumulated distributions in excess of net income ( 527,586 ) ( 539,422 ) Accumulated other comprehensive loss ( 1,434 ) ( 2,055 ) Total shareholders’ equity $ 733,535 $ 729,537 Noncontrolling interests – Operating Partnership and Series E preferred units 226,205 220,132 Noncontrolling interests – consolidated real estate entities 619 627 TOTAL EQUITY $ 960,359 $ 950,296 TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY $ 1,878,281 $ 2,033,301 See accompanying Notes to Condensed Consolidated Financial Statements. 3 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 REVENUE $ 64,568 $ 65,438 $ 197,241 $ 188,868 EXPENSES Property operating expenses, excluding real estate taxes 19,602 20,290 58,816 58,315 Real estate taxes 7,143 7,039 21,898 21,103 Property management expense 2,197 2,563 7,012 7,537 Casualty loss 937 276 1,242 1,256 Depreciation and amortization 24,697 23,720 75,061 79,489 General and administrative expenses 3,832 4,519 15,717 14,240 TOTAL EXPENSES $ 58,408 $ 58,407 $ 179,746 $ 181,940 Gain on sale of real estate and other investments 11,235 — 71,327 27 Loss on litigation settlement — — ( 2,864 ) — Operating income 17,395 7,031 85,958 6,955 Interest expense ( 8,556 ) ( 7,871 ) ( 27,516 ) ( 23,147 ) Interest and other income 330 70 674 1,116 NET INCOME (LOSS) $ 9,169 $ ( 770 ) $ 59,116 $ ( 15,076 ) Dividends to Series D preferred unitholders ( 160 ) ( 160 ) ( 480 ) ( 480 ) Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units ( 1,204 ) 439 ( 9,058 ) 3,546 Net income attributable to noncontrolling interests – consolidated real estate entities ( 31 ) ( 32 ) ( 96 ) ( 93 ) Net income (loss) attributable to controlling interests 7,774 ( 523 ) 49,482 ( 12,103 ) Dividends to preferred shareholders ( 1,607 ) ( 1,607 ) ( 4,821 ) ( 4,821 ) NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 6,167 $ ( 2,130 ) $ 44,661 $ ( 16,924 ) NET INCOME (LOSS) PER COMMON SHARE – BASIC $ 0.41 $ ( 0.14 ) $ 2.98 $ ( 1.11 ) NET INCOME (LOSS) PER COMMON SHARE – DILUTED $ 0.41 $ ( 0.14 ) $ 2.96 $ ( 1.11 ) See accompanying Notes to Condensed Consolidated Financial Statements. 4 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited) (in thousands) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 Net income (loss) $ 9,169 $ ( 770 ) $ 59,116 $ ( 15,076 ) Other comprehensive income (loss): Unrealized gain from derivative instrument — — — 1,581 Loss on derivative instrument reclassified into earnings 324 204 621 696 Total comprehensive income (loss) $ 9,493 $ ( 566 ) $ 59,737 $ ( 12,799 ) Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units ( 1,151 ) 473 ( 8,954 ) 3,937 Net income attributable to noncontrolling interests – consolidated real estate entities ( 31 ) ( 32 ) ( 96 ) ( 93 ) Comprehensive income (loss) attributable to controlling interests $ 8,311 $ ( 125 ) $ 50,687 $ ( 8,955 ) See accompanying Notes to Condensed Consolidated Financial Statements. 5 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (in thousands, except per share data) Nine Months Ended September 30, 2022 PREFERRED SHARES NUMBER OF COMMON SHARES COMMON SHARES ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME (LOSS) ACCUMULATED OTHER COMPREHENSIVE LOSS NONCONTROLLING INTERESTS TOTAL EQUITY Balance at December 31, 2021 $ 93,530 15,016 $ 1,157,255 $ ( 474,318 ) $ ( 4,435 ) $ 224,248 $ 996,280 Net (loss) attributable to controlling interests and noncontrolling interests ( 12,103 ) ( 3,453 ) ( 15,556 ) Change in fair value of derivatives and amortization of swap settlements 2,277 2,277 Distributions - common shares and Units ($ 2.19 per share and Unit) ( 33,663 ) ( 2,169 ) ( 35,832 ) Distributions - Series C preferred shares ($ 1.2421875 per Series C share) ( 4,821 ) ( 4,821 ) Distributions - Series E preferred units ($ 2.90625 per unit) ( 5,272 ) ( 5,272 ) Share-based compensation, net of forfeitures 25 1,908 1,908 Sale of common shares, net 321 31,499 31,499 Issuance of Units 13,023 9,859 22,882 Redemption of Units for common shares 19 ( 831 ) 831 — Redemption of Units for cash ( 3,837 ) ( 3,837 ) Shares repurchased — ( 5 ) ( 359 ) — ( 359 ) Change in redemption value of Series D preferred units 8,771 8,771 Shares withheld for taxes ( 1,280 ) ( 1,280 ) Other ( 254 ) ( 120 ) ( 374 ) Balance at September 30, 2022 $ 93,530 15,376 $ 1,209,732 $ ( 524,905 ) $ ( 2,158 ) $ 220,087 $ 996,286 Nine Months Ended September 30, 2023 Balance at December 31, 2022 $ 93,530 15,020 $ 1,177,484 $ ( 539,422 ) $ ( 2,055 ) $ 220,759 $ 950,296 Net income attributable to controlling interests and noncontrolling interests 49,482 9,154 58,636 Amortization of swap settlements 621 621 Distributions - common shares and Units ($ 2.19 per share and unit) ( 32,825 ) ( 2,066 ) ( 34,891 ) Distributions - Series C preferred shares ($ 1.2421875 per Series C share) ( 4,821 ) ( 4,821 ) Distributions - Series E preferred units ($ 2.90625 per unit) ( 5,076 ) ( 5,076 ) Share-based compensation, net of forfeitures 19 2,712 2,712 Redemption of Units for common shares 107 ( 1,919 ) 1,919 — Redemption of Series E preferred units for common shares 31 ( 2,296 ) 2,296 — Shares repurchased ( 124 ) ( 6,718 ) ( 6,718 ) Shares withheld for taxes ( 182 ) ( 182 ) Other ( 1 ) ( 56 ) ( 162 ) ( 218 ) Balance at September 30, 2023 $ 93,530 15,052 $ 1,169,025 $ ( 527,586 ) $ ( 1,434 ) $ 226,824 $ 960,359 See accompanying Notes to Condensed Consolidated Financial Statements. 6 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited) (in thousands, except per share data) Three Months Ended September 30, 2022 PREFERRED SHARES NUMBER OF COMMON SHARES COMMON SHARES ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME (LOSS) ACCUMULATED OTHER COMPREHENSIVE LOSS NONCONTROLLING INTERESTS TOTAL EQUITY Balance at June 30, 2022 $ 93,530 15,373 $ 1,207,849 $ ( 511,552 ) $ ( 2,362 ) $ 223,153 $ 1,010,618 Net (loss) attributable to controlling interests and noncontrolling interests ( 523 ) ( 407 ) ( 930 ) Change in fair value of derivatives and amortization of swap settlements 204 204 Distributions - common shares and units ($ 0.73 per share and unit) ( 11,223 ) ( 715 ) ( 11,938 ) Distributions - Series C preferred shares ($ 0.4140625 per Series C share) ( 1,607 ) ( 1,607 ) Distributions - Series E preferred units ($ 0.96875 per unit) ( 1,757 ) ( 1,757 ) Share-based compensation, net of forfeitures — 709 709 Redemption of Units for common shares 8 ( 456 ) 456 — Redemption of Units for cash ( 607 ) ( 607 ) Shares repurchased — ( 5 ) ( 359 ) — ( 359 ) Change in redemption value of Series D preferred units 2,067 2,067 Other ( 78 ) ( 36 ) ( 114 ) Balance at September 30, 2022 $ 93,530 15,376 $ 1,209,732 $ ( 524,905 ) $ ( 2,158 ) $ 220,087 $ 996,286 Three Months Ended September 30, 2023 Balance at June 30, 2023 $ 93,530 14,949 $ 1,169,501 $ ( 522,796 ) $ ( 1,758 ) $ 226,931 $ 965,408 Net income attributable to controlling interests and noncontrolling interests 7,774 1,235 9,009 Amortization of swap settlements 324 324 Distributions - common shares and units ($ 0.73 per share and unit) ( 10,957 ) ( 658 ) ( 11,615 ) Distributions - Series C preferred shares ($ 0.4140625 per Series C share) ( 1,607 ) ( 1,607 ) Distributions - Series E preferred units ($ 0.96875 per unit) ( 1,682 ) ( 1,682 ) Share-based compensation, net of forfeitures — 602 602 Redemption of Units for common shares 97 ( 898 ) 898 — Redemption of Series E preferred units for common shares 6 ( 176 ) 176 — Other ( 4 ) ( 76 ) ( 80 ) Balance at September 30, 2023 $ 93,530 15,052 $ 1,169,025 $ ( 527,586 ) $ ( 1,434 ) $ 226,824 $ 960,359 See accompanying Notes to Condensed Consolidated Financial Statements. 7 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (in thousands) Nine Months Ended September 30, 2023 2022 CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 59,116 $ ( 15,076 ) Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation and amortization, including amortization of capitalized loan costs 76,265 80,104 Gain on sale of real estate and other investments ( 71,323 ) — Loss on litigation settlement 2,864 — Share-based compensation expense 2,712 1,908 (Gain) loss on interest rate swap mark-to-market and settlement amortization 621 ( 221 ) Other, net 802 660 Changes in other assets and liabilities: Other assets 3,834 4,158 Accounts payable and accrued expenses 2,529 ( 2,560 ) Net cash provided by operating activities $ 77,420 $ 68,973 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from repayment of mortgage loans and notes receivable 430 353 Net proceeds from sale of real estate and other investments 223,259 — Payments for acquisitions of real estate investments — ( 104,666 ) Payments for improvements of real estate investments ( 39,404 ) ( 33,625 ) Other investing activities 1,086 798 Net cash provided by (used by) investing activities $ 185,371 $ ( 137,140 ) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from mortgages payable 90,000 — Principal payments on mortgages payable ( 46,770 ) ( 27,426 ) Proceeds from revolving lines of credit 75,907 150,000 Principal payments on revolving lines of credit ( 189,407 ) ( 54,500 ) Principal payments on notes payable ( 100,000 ) — Payment for termination of interest rate swap — ( 3,209 ) Net proceeds from issuance of common shares — 31,499 Repurchase of common shares ( 6,718 ) ( 359 ) Redemption of partnership units ( 38 ) ( 3,837 ) Distributions paid to common shareholders ( 32,785 ) ( 33,252 ) Distributions paid to preferred shareholders ( 4,821 ) ( 4,821 ) Distributions paid to Series D preferred unitholders ( 480 ) ( 480 ) Distributions paid to noncontrolling interests – Operating Partnership and Series E preferred units ( 7,194 ) ( 7,325 ) Other financing activities ( 179 ) ( 374 ) Net cash provided by (used by) financing activities $ ( 222,485 ) $ 45,916 NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH 40,306 ( 22,251 ) CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD 11,891 38,625 CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD $ 52,197 $ 16,374 SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Accrued capital expenditures $ 4,369 $ 2,458 Operating partnership units converted to shares ( 1,919 ) ( 831 ) Distributions declared but not paid to common shareholders 11,615 11,938 Series E preferred units converted to common shares ( 2,296 ) — Retirement of shares withheld for taxes 182 1,280 Loss on litigation settlement 2,864 — Involuntary conversion of assets ( 1,986 ) — Real estate assets acquired through assumption of debt — 41,623 Fair value adjustment to debt — 1,224 Real estate assets acquired through exchange of note receivable — 43,276 Note receivable exchanged through real estate acquisition — ( 43,276 ) Real estate assets acquired through issuance of operating partnership units — 22,882 SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid for interest $ 26,190 $ 21,856 See accompanying Notes to Condensed Consolidated Financial Statements. 8 Table of Contents CENTERSPACE AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued) (in thousands) Balance sheet description September 30, 2023 December 31, 2022 September 30, 2022 Cash and cash equivalents $ 29,701 $ 10,458 $ 14,957 Restricted cash 22,496 1,433 1,417 Total cash, cash equivalents and restricted cash $ 52,197 $ 11,891 $ 16,374 See accompanying Notes to Condensed Consolidated Financial Statements. 9 Table of Contents CENTERSPACE AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited) September 30, 2023 NOTE 1 • ORGANIZATION Centerspace, collectively with its consolidated subsidiaries (“Centerspace,” “the Company,” “we,” “us,” or “our”), is a North Dakota real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities. As of September 30, 2023, Centerspace owned interests in 71 apartment communities consisting of 12,785 apartment homes. NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Centerspace conducts a majority of its business activities through a consolidated operating partnership, Centerspace, LP, a North Dakota limited partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying Condensed Consolidated Financial Statements include the Company’s accounts and the accounts of all its subsidiaries in which it maintains a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation. The Condensed Consolidated Financial Statements also reflect the Operating Partnership’s ownership of a joint venture entity in which the Operating Partnership has a general partner or controlling interest. This entity is consolidated into the Company’s operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Centerspace’s interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of financial position, results of operations, and cash flows for the interim periods, have been included. The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim Condensed Consolidated Financial Statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 21, 2023. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECENT ACCOUNTING PRONOUNCEMENTS The following table provides a brief description of Financial Accounting Standards Board (“FASB”) recent accounting standards updates (“ASU”). Standard Description Date of Adoption Effect on the Financial Statements or Other Significant Matters ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848 This ASU extends the sunset date of Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform to December 31, 2024. This ASU is effective immediately for all companies. The ASU will not have a material impact on the Condensed Consolidated Financial Statements. 10 Table of Contents CASH, CASH EQUIVALENTS, AND RESTRICTED CASH Cash and cash equivalents include all cash and highly liquid investments purchased with maturities of three months or less. Cash and cash equivalents consist of our bank deposits and our deposits in a money market mutual fund. As of September 30, 2023 restricted cash consisted primarily of net tax-deferred exchange proceeds remaining from a portion of our dispositions, real estate deposits, and escrows held by lenders. As of December 31, 2022, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions. We are potentially exposed to credit risk for cash deposited with FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. Although recent bank failures have increased the risk of loss in such accounts, we have not experienced any losses in such accounts. LEASES As a lessor, Centerspace primarily leases multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with FASB Accounting Standards Codification (“ASC”) ASC 842, Leases , using a method that represents a straight-line basis over the term of the lease. For the three months ended September 30, 2023 and 2022, rental income represented approximately 98.1 % and 97.4 % of total revenues, respectively, and included gross market rent less adjustments for gain or loss to lease, concessions, vacancy loss, and bad debt. For the three months ended September 30, 2023 and 2022, other property revenues represented the remaining 1.9 % and 2.6 % of total revenues, respectively, and were primarily driven by other fee income, which is typically recognized when earned, at a point in time. For the nine months ended September 30, 2023 and 2022, rental income represented approximately 98.2 % and 97.8 % of total revenues, respectively. For the nine months ended September 30, 2023 and 2022, other property revenues represented the remaining 1.8 % and 2.2 % of total revenues, respectively. Some of the Company’s apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years . The leases for commercial spaces generally include options to extend the lease for additional terms. Many of the leases contain non-lease components for utility reimbursement from residents and common area maintenance from commercial tenants. Centerspace has elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842. The aggregate amount of future scheduled lease income on commercial operating leases, excluding any variable lease income and non-lease components, as of September 30, 2023, was as follows: (in thousands) 2023 (remainder) $ 539 2024 2,130 2025 2,076 2026 1,908 2027 1,444 Thereafter 6,170 Total scheduled lease income - commercial operating leases $ 14,267 REVENUES AND GAINS ON SALE OF REAL ESTATE Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the Company expects to be entitled for those goods and services. Revenue streams that are included in revenues from contracts with customers include other property revenue such as application fees and other miscellaneous items. Centerspace recognizes revenue for these rental related items not included as a component of a lease as earned. The following table presents the disaggregation of revenue streams for the three and nine months ended September 30, 2023 and 2022: 11 Table of Contents (in thousands) Three Months Ended September 30, Nine Months Ended September 30, Revenue Stream Applicable Standard 2023 2022 2023 2022 Fixed lease income - operating leases Leases $ 60,324 $ 60,851 $ 184,256 $ 176,911 Variable lease income - operating leases Leases 3,006 2,905 9,523 7,728 Other property revenue Revenue from contracts with customers 1,238 1,682 3,462 4,229 Total revenue $ 64,568 $ 65,438 $ 197,241 $ 188,868 In addition to lease income and other property revenue, the Company recognizes gains or losses on the sale of real estate when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. For the three months ended September 30, 2023, the Company recognized $ 11.2 million as a gain on the sale of real estate and other investments. For the three months ended September 30, 2022, the Company did not recognize any gain on the sale of real estate and other investments. For the nine months ended September 30, 2023 and 2022, the Company recognized $ 71.3 million and $ 27,000 , respectively, as a gain on the sale of real estate and other investments. MARKET CONCENTRATION RISK We are subject to increased exposure from economic and other competitive factors specific to markets where we hold a significant percentage of the carrying value of our real estate portfolio. As of September 30, 2023, we held more than 10% of the carrying value of our real estate portfolio in each of the following markets: Minneapolis, Minnesota and Denver, Colorado. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates long-lived assets, including investments in real estate, for impairment indicators at least quarterly. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns. If indicators exist, the Company compares the expected future undiscounted cash flows for the property against the carrying amount of that property. If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is generally recorded for the difference between the estimated fair value and the carrying amount. If the anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, the evaluation of impairment charges may be different and such differences could be material to the consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. Reducing planned property holding periods may increase the likelihood of recording impairment losses. During the three and nine months ended September 30, 2023 and 2022, the Company recorded no impairment charges. NOTES RECEIVABLE The Company has a tax increment financing note receivable (“TIF”) with a principal balance of $ 5.7 million and $ 6.1 million at September 30, 2023 and December 31, 2022, respectively, which appears within other assets in the Condensed Consolidated Balance Sheets at fair value. The note bears an interest rate of 4.5 % with payments due in February and August of each year. Centerspace originated a $ 29.9 million construction loan and a $ 15.3 million mezzanine loan for the development of a multifamily community located in Minneapolis, Minnesota. The construction and mezzanine loans bore and accrued interest at 4.5 % and 11.5 %, respectively. The Company exercised its option to purchase the apartment community in exchange for the loans and cash, during the nine months ended September 30, 2022. As of September 30, 2023 and December 31, 2022, the loans had no remaining balance. ADVERTISING COSTS Advertising costs are expensed as incurred and reported on the Condensed Consolidated Statements of Operations within the Property operating expenses, excluding real estate taxes line item. During the three months ended September 30, 2023 and 2022, total advertising expense was $ 878,000 and $ 795,000 , respectively. During the nine months ended September 30, 2023 and 2022, total advertising expense was $ 2.3 million and $ 2.4 million, respectively. 12 Table of Contents SEVERANCE AND TRANSITION On March 23, 2023, the Company entered into a Separation and General Release Agreement (the “Separation Agreement”) in connection with the departure of former CEO, Mark Decker, Jr. During the nine months ended September 30, 2023, the Company incurred total severance costs of $ 2.2 million for the cash severance and benefits for Mr. Decker, $ 737,000 in share-based compensation expense for the acceleration of certain equity awards, and $ 306,000 in other CEO transition related expenses. Refer to Note 11 for additional information on the share-based compensation expense. INVOLUNTARY CONVERSION OF ASSETS In April 2023, a portion of an apartment community was destroyed by fire. The Company recorded a write-down of the apartment community asset, in accordance with ASC 610-30 on involuntary conversion of non-monetary assets, totaling $ 1.0 million with an offsetting insurance receivable recorded within other assets on the Condensed Consolidated Balance Sheets. As of September 30, 2023, the estimated insurance claim was $ 1.3 million. Any amounts received in excess of the write-down will be recognized when received. During the three months ended September 30, 2023, Centerspace recorded a $ 695,000 write-down to an apartment community asset as a result of extensive damage to the pool. Any insurance funds received will be recognized when received in accordance with ASC 610-30. LITIGATION SETTLEMENT During the nine months ended, September 30, 2023, the Company recorded a loss on litigation settlement of $ 2.9 million due to a trial judgment entered against Centerspace on May 8, 2023 for property damage, resulting in monetary losses. Centerspace was the named defendant in a lawsuit where the owner of a neighboring property claimed a retaining wall at one of the Company’s properties was causing water damage to the neighboring property. Subsequent to September 30, 2023, the judgement was ordered and the Company paid the settlement of $ 2.9 million. The Company cannot, with any level of certainty, predict or estimate if there will be additional costs incurred as a result of the lawsuit. VARIABLE INTEREST ENTITIES Centerspace has determined that its Operating Partnership and each of its less-than-wholly owned real estate partnerships are variable interest entities (each, a “VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. The Company is the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on the balance sheet because the Company has a controlling financial interest in the VIEs and has both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because the Operating Partnership is a VIE, all of the Company’s assets and liabilities are held through a VIE. NOTE 3 • EARNINGS PER SHARE Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares of beneficial interest (“common shares”) outstanding during the period. Centerspace has issued restricted stock units (“RSUs”) and incentive stock options (“ISOs”) under the 2015 Incentive Plan, Series D Convertible Preferred Units (“Series D preferred units”), and Series E Convertible Preferred Units (“Series E preferred units”), which could have a dilutive effect on the earnings per share upon the vesting of the RSUs or exercise of the ISOs or upon conversion of the Series D or Series E preferred units (refer to Note 4 for further discussion of the Series D and the Series E preferred units). Other than the issuance of RSUs, ISOs, Series D preferred units, and Series E preferred units, there are no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in Centerspace’s sole discretion, it may issue common shares in exchange for Units on a one -for-one basis. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2023 and 2022. 13 Table of Contents (in thousands, except per share data) Three Months Ended September 30, Nine Months Ended September 30, 2023 2022 2023 2022 NUMERATOR Net income (loss) attributable to controlling interests $ 7,774 $ ( 523 ) $ 49,482 $ ( 12,103 ) Dividends to preferred shareholders ( 1,607 ) ( 1,607 ) ( 4,821 ) ( 4,821 ) Numerator for basic earnings (loss) per share – net income (loss) available to common shareholders 6,167 ( 2,130 ) 44,661 ( 16,924 ) Noncontrolling interests – Operating Partnership and Series E preferred units (1) 1,204 ( 439 ) 6,233 ( 3,546 ) Dividends to preferred unitholders (2) — 160 480 480 Numerator for diluted earnings (loss) per share $ 7,371 $ ( 2,409 ) $ 51,374 $ ( 19,990 ) DENOMINATOR Denominator for basic earnings per share weighted average shares 14,989 15,373 14,988 15,280 Effect of redeemable operating partnership units (1) 908 — — — Effect of Series D preferred units (2) — — 228 — Effect of Series E preferred units 2,093 — 2,105 — Effect of dilutive restricted stock units and stock options 28 — 23 — Denominator for diluted earnings per share 18,018 15,373 17,344 15,280 NET INCOME (LOSS) PER COMMON SHARE – BASIC $ 0.41 $ ( 0.14 ) $ 2.98 $ ( 1.11 ) NET INCOME (LOSS) PER COMMON SHARE – DILUTED $ 0.41 $ ( 0.14 ) $ 2.96 $ ( 1.11 ) (1) For the nine months ended September 30, 2023, the impact of Units was excluded from the calculation of calculation of net income (loss) per common share - diluted as they were anti-dilutive. (2) For the three months ended September 30, 2023, dividends to preferred unitholders and the effect of Series D preferred units are excluded in the calculation of net income (loss) per common share - diluted as they were anti-dilutive. For the three months ended September 30, 2023, Series D preferred units of 228,000 , as converted and performance-based RSUs of 26,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the three months ended September 30, 2022, operating partnership units of 984,000 , Series D preferred units of 228,000 , as converted, Series E preferred units of 2.2 million, as converted, time-based RSUs of 7,000 , weighted average stock options of 23,000 , and performance-based RSUs of 30,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2023, operating partnership units of 943,000 and performance-based RSUs of 26,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive. For the nine months ended September 30, 2022, operating partnership units of 980,000 , Series D preferred units of 228,000 , as converted, Series E preferred units of 2.2 million, as converted, time-based RSUs of 10,000 , weighted average stock options of 38,000 , and performance-based RSUs of 33,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive. NOTE 4 • EQUITY AND MEZZANINE EQUITY Operating Partnership Units. The Operating Partnership had 864,000 and 971,000 outstanding Units at September 30, 2023 and December 31, 2022, respectively. During the nine months ended September 30, 2022, we issued 209,000 Units as partial consideration for the acquisition of three apartment communities. Exchange Rights . Centerspace redeemed Units in exchange for common shares in connection with Unitholders exercising their exchange rights during the three and nine months ended September 30, 2023 and 2022 as detailed in the table below. 14 Table of Contents (in thousands) Three Months Ended September 30, Number of Units Net Book Basis 2023 97 $ 898 2022 8 $ 456 Nine Months Ended September 30, 2023 107 $ 1,919 2022 19 $ 831 Pursuant to the exercise of exchange rights, the Company redeemed Units for cash during the three and nine months ended September 30, 2023 and 2022 as detailed in the table below. (in thousands, except per Unit data) Three Months Ended September 30, Number of Units Aggregate Cost Average Price Per Unit 2023 — $ 28 $ 63.37 2022 7 $ 607 $ 81.18 Nine Months Ended September 30, 2023 1 $ 38 $ 61.40 2022 42 $ 3,837 $ 90.93 Series E Preferred Units (Noncontrolling Interests). Centerspace had 1.7 million and 1.8 million Series E preferred units outstanding on September 30, 2023 and December 31, 2022, respectively. Each Series E preferred unit has a par value of $ 100 . The Series E preferred unit holders receive a preferred distribution at the rate of 3.875 % per year. Each Series E preferred unit is convertible, at the holder’s option, into 1.2048 Units. The Series E preferred units have an aggregate liquidation preference of $ 173.3 million. The holders of the Series E preferred units do not have voting rights. (in thousands) Number of Series E Number of Total Three Months Ended September 30, Preferred Units Redeemed Common Shares Issued Value 2023 5 6 $ 176 Nine Months Ended September 30, 2023 25 31 $ 2,296 Common Shares and Equity Awards . Common shares outstanding on September 30, 2023 and December 31, 2022, totaled 15.1 million and 15.0 million, respectively. There were 64 and 19,014 shares issued upon the vesting of equity awards under the 2015 Incentive Plan during the three and nine months ended September 30, 2023, respectively, with a total grant-date fair value of $ 5,000 and $ 1.7 million, respectively. There were 199 and 24,296 shares issued upon the vesting of equity awards under the 2015 Incentive Plan during the three and nine months ended September 30, 2022, respectively, with a total grant-date fair value of $ 18,000 and $ 637,000 , respectively. These shares vested based on performance and service criteria. Refer to Note 11 for additional details on share-based compensation. Equity Distribution Agreement. Centerspace has an equity distribution agreement in connection with an at-the-market offering (“2021 ATM Program”) through which it may offer and sell common shares having an aggregate sales price of up to $ 250.0 million, in amounts and at times determined by management. Under the 2021 ATM Program, the Company may enter into separate forward sale agreements. The proceeds from the sale of common shares under the 2021 ATM Program may be used for general corporate purposes, including the funding of acquisitions, construction or mezzanine loans, community renovations, and the repayment of indebtedness. The table below provides details on the sale of common shares during the nine months ended September 30, 2023 and 2022 under the 2021 ATM Program. There were no sales of common shares under the 2021 ATM Program during the three months ended September 30, 2023 and 2022. 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. (in thousands, except per share amounts) Nine Months Ended September 30, Number of Common Shares Net Consideration (1) Average Net Price Per Share 2023 — $ — $ — 2022 321 $ 31,732 $ 98.89 (1) Consideration is net of $ 338 in commissions and issuance costs during the nine months ended September 30, 2022. 15 Table of Contents Share Repurchase Program. On March 10, 2022, the Board of Trustees approved a new share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to an aggregate of $ 50.0 million of the Company’s outstanding common shares. Under the Share Repurchase Program, the Company is authorized to repurchase common shares through open market purchases, privately-negotiated transactions, block trades or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources or other financial and operational performance, market conditions, securities law limitations, and other factors. The table below provides details on the shares repurchased during the three and nine months ended September 30, 2023 and 2022. 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 September 30, Number of Common Shares Aggregate Cost (1) Average Price Per Share (1) 2023 — $ — $ — 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. Series C Preferred Shares. Series C preferred shares outstanding were 3.9 million shares at September 30, 2023 and December 31, 2022. The Series C preferred shares are nonvoting and redeemable for cash at $ 25.00 per share at Centerspace’s option after October 2, 2022. Holders of these shares are entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an annual rate of $ 1.65625 per share, which is equal to 6.625 % of the $ 25.00 per share liquidation preference ($ 97.0 million liquidation preference in the aggregate). Series D Preferred Units (Mezzanine Equity). Series D preferred units outstanding were 165,600 preferred units at September 30, 2023 and December 31, 2022. The Series D preferred units have a par value price of $ 100 per preferred unit. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862 % per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issuance price. Each Series D preferred unit is convertible, at the holder’s option, into 1.37931 Units. The Series D preferred units have an aggregate liquidation preference of $ 16.6 million. Changes in the redemption value are charged to common shares on the Condensed Consolidated Balance Sheets from period to period. The holders of the Series D preferred units do not have voting rights. Distributions to Series D unitholders are presented in the Condensed Consolidated Statements of Equity within net income (loss) attributable to controlling interests and noncontrolling interests. NOTE 5 • DEBT The following is a summary of our secured and unsecured debt at September 30, 2023 and December 31, 2022. (in thousands) September 30, 2023 December 31, 2022 Carrying Amount Weighted Average Interest Rate Carrying Amount Weighted Average Interest Rate Weighted Average Maturity in Years at September 30, 2023 Lines of credit (1) $ — — $ 113,500 4.12 % — Term loans — — 100,000 5.57 % — Unsecured senior notes (2)(5) 300,000 3.12 % 300,000 3.12 % 6.88 Unsecured debt 300,000 513,500 6.88 Mortgages payable - Fannie Mae credit facility (5) 198,850 2.78 % 198,850 2.78 % 7.81 Mortgages payable - other (3)(5) 343,709 4.14 % 299,427 3.85 % 6.53 Total debt (4) $ 842,559 3.46 % $ 1,011,777 3.62 % 6.96 (1) The interest rate swap was terminated in February 2022. Refer to Note 6 - Derivative Instruments for additional information. Interest rates on lines of credit are variable. (2) Included within notes payable on the Condensed Consolidated Balance Sheets. (3) Represents apartment communities encumbered by mortgages; 13 at September 30, 2023 and 15 at December 31, 2022. (4) Excludes deferred financing costs and premiums or discounts. (5) Interest rate is fixed. 16 Table of Contents As of September 30, 2023, 46 apartment communities were not encumbered by mortgages and were available to provide credit support for the unsecured borrowings. The Company’s primary unsecured credit facility (“unsecured credit facility” or “Facility”) is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. The line of credit has total commitments and borrowing capacity of $ 250.0 million, based on the value of unencumbered properties. As of September 30, 2023, there was no outstanding balance on this line of credit, therefore the additional borrowing availability was $ 250.0 million. This unsecured credit facility was amended on September 30, 2021 to extend the maturity date to September 2025 and to provide for an accordion option to increase borrowing capacity up to $ 400.0 million. On May 31, 2023, the 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 Facility. Loans under the 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 were 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. The unsecured credit facility and unsecured senior notes are subject to customary financial covenants and limitations. The Company believes that it was in compliance with all such financial covenants and limitations as of September 30, 2023. Centerspace also has a $ 6.0 million operating line of credit. 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. 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 September 30, 2023. The following table shows the notes issued under both private shelf agreements. (in thousands) Amount Maturity Date Interest Rate Series A $ 75,000 September 13, 2029 3.84 % Series B $ 50,000 September 30, 2028 3.69 % Series C $ 50,000 June 6, 2030 2.70 % Series 2021-A $ 35,000 September 17, 2030 2.50 % Series 2021-B $ 50,000 September 17, 2031 2.62 % Series 2021-C $ 25,000 September 17, 2032 2.68 % Series 2021-D $ 15,000 September 17, 2034 2.78 % 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 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 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. Centerspace has a $ 198.9 million Fannie Mae Credit Facility Agreement (the “FMCF”). The FMCF is secured by mortgages on 12 apartment communities. The notes are interest-only, with varying maturity dates of 7 , 10 , and 12 years, and a blended, weighted average interest rate of 2.78 %. As of 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. As of September 30, 2023, Centerspace owned 13 apartment communities that served as collateral for mortgage loans, in addition to the apartment communities secured by the FMCF. All of these mortgage loans were non-recourse to the Company other than for standard carve-out obligations. As of September 30, 2023, the Company believes that there were no material defaults or instances of noncompliance in regards to any of these mortgages payable. 17 Table of Contents 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. The aggregate amount of required future principal payments on all debt as of September 30, 2023, was as follows: (in thousands) 2023 (remainder) $ 1,486 2024 6,369 2025 35,277 2026 51,590 2027 48,666 Thereafter 699,171 Total payments $ 842,559 NOTE 6 • DERIVATIVE INSTRUMENTS Centerspace used interest rate derivatives to stabilize interest expense and to manage its exposure to interest rate fluctuations. To accomplish this objective, the Company primarily used interest rate swap contracts to fix variable interest rate debt. Changes in the fair value of derivatives designated and that qualified as cash flow hedges were recorded in accumulated other comprehensive income (loss) (“OCI”). Amounts recorded in accumulated other comprehensive income (loss) will be reclassified to interest expense in the periods in which interest payments are incurred on variable rate debt. During the next twelve months, the Company estimates an additional $ 857,000 will be reclassified as an increase to interest expense. In February 2022, the Company paid $ 3.2 million to terminate its $ 75.0 million interest rate swap and its $ 70.0 million forward swap. As of September 30, 2023 and December 31, 2022 the Company had no remaining interest rate swaps. Derivatives not designated as hedges were not speculative and were used to manage the Company’s exposure to interest rate movements and other identified risks but did not meet the strict hedge accounting requirements. Changes in fair value of derivatives not designated in hedging relationships were recorded directly to earnings within interest and other income (loss) in the Condensed Consolidated Statements of Operations. During the nine months ended September 30, 2022, the Company recorded a gain of $ 582,000 , related to the interest rate swap not designated in a hedging relationship, prior to its termination. The table below presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations as of September 30, 2023 and 2022. (in thousands) Gain Recognized in OCI Location of Gain (Loss) Reclassified from Accumulated OCI into Income Loss Reclassified from Accumulated OCI into Income (Loss) Three months ended September 30, 2023 2022 2023 2022 Total derivatives in cash flow hedging relationships - Interest rate contracts $ — $ — Interest expense $ ( 324 ) $ ( 204 ) Nine months ended September 30, Total derivatives in cash flow hedging relationships - Interest rate contracts $ — $ 1,581 Interest expense $ ( 621 ) $ ( 696 ) NOTE 7 • FAIR VALUE MEASUREMENTS Cash and cash equivalents, restricted cash, other assets, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate line of credit debt that re-prices frequently, fair values are based on carrying values. In determining the fair value of other financial instruments, Centerspace applies FASB ASC 820, “ Fair Value Measurement and Disclosures. ” Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities. 18 Table of Contents Fair Value Measurements on a Recurring Basis (in thousands) Balance Sheet Location Total Level 1 Level 2 Level 3 September 30, 2023 Assets Notes receivable Other assets $ 5,455 — — $ 5,455 December 31, 2022 Assets Notes receivable Other assets $ 5,871 — — $ 5,871 Centerspace utilizes an income approach with Level 3 inputs based on expected future cash flows to value the notes receivable. The inputs include market transactions for similar instruments, management estimates of comparable interest rates (range of 3.75 % to 5.50 %), and instrument specific credit risk of 0.5 %. Changes in the fair value of these receivables from period to period are reported in interest and other income on the Condensed Consolidated Statements of Operations. (in thousands) Fair Value Measurement Other Gains Interest Income Total Changes in Fair Value Included in Current-Period Earnings Nine months ended September 30, 2023 Notes receivable $ 5,455 $ 14 $ 197 $ 211 Nine months ended September 30, 2022 Notes receivable $ 5,865 $ 11 $ 600 $ 611 As of September 30, 2023 and December 31, 2022, Centerspace had investments totaling $ 1.8 million and $ 1.6 million, respectively, in real estate technology venture funds consisting of privately held entities that develop technology related to the real estate industry. These investments appear within other assets on our Condensed Consolidated Balance Sheets. The investments are measured at net asset value (“NAV”) as a practical expedient under ASC 820. As of September 30, 2023, the Company had total unfunded commitments of $ 1.2 million. Fair Value Measurements on a Nonrecurring Basis There were no non-financial assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2023 and December 31, 2022. Financial Assets and Liabilities Not Measured at Fair Value The fair value of unsecured senior notes and mortgages payable are estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates, excluding any prepayment penalties (Level 3). The estimated fair values of the Company’s financial instruments as of September 30, 2023 and December 31, 2022, respectively, are as follows: (in thousands) September 30, 2023 December 31, 2022 Balance Sheet Location Carrying Amount Fair Value Carrying Amount Fair Value FINANCIAL ASSETS Cash and cash equivalents Cash and cash equivalents $ 29,701 $ 29,701 $ 10,458 $ 10,458 Restricted cash Restricted cash $ 22,496 $ 22,496 $ 1,433 $ 1,433 FINANCIAL LIABILITIES Revolving lines of credit Revolving lines of credit $ — $ — $ 113,500 $ 113,500 Term loans Notes payable $ — $ — $ 100,000 $ 100,000 Unsecured senior notes Notes payable $ 300,000 $ 234,675 $ 300,000 $ 238,446 Mortgages payable - Fannie Mae Mortgages payable $ 198,850 $ 157,180 $ 198,850 $ 161,297 Mortgages payable - other Mortgages payable $ 343,709 $ 306,678 $ 299,427 $ 274,029 19 Table of Contents NOTE 8 • ACQUISITIONS AND DISPOSITIONS ACQUISITIONS Centerspace did not acquire new real estate during the three months ended September 30, 2023 compared to acquisitions of $ 95.0 million during the three months ended September 30, 2022. Centerspace did not acquire new real estate during the nine months ended September 30, 2023 compared to acquisitions of $ 211.9 million during the nine months ended September 30, 2022. The acquisitions during the nine months ended September 30, 2022 are detailed below. Nine Months Ended September 30, 2022 Date Acquired (in thousands) Total Acquisition Cost (1) Form of Consideration Investment Allocation Acquisitions Cash Units (2) Other (3) Land Building Intangible Assets (4) Other (5) 191 homes - Martin Blu - Minneapolis, MN January 4, 2022 $ 49,825 $ 3,031 $ 18,885 $ 27,909 $ 3,547 $ 45,212 $ 1,813 $ ( 747 ) 31 homes - Elements - Minneapolis, MN January 4, 2022 9,066 1,290 1,748 6,028 941 7,853 335 ( 63 ) 45 homes - Zest - Minneapolis, MN January 4, 2022 11,364 1,429 2,249 7,686 936 10,261 574 ( 407 ) 130 homes - Noko Apartments - Minneapolis, MN January 26, 2022 46,619 3,343 — 43,276 1,915 42,754 1,950 — 215 homes - Lyra Apartments - Centennial, CO September 30, 2022 95,000 95,000 — — 6,473 86,149 2,378 — Total Acquisitions $ 211,874 $ 104,093 $ 22,882 $ 84,899 $ 13,812 $ 192,229 $ 7,050 $ ( 1,217 ) (1) Excludes transaction costs. (2) Fair value of operating partnership units issued on acquisition. (3) Assumption of seller’s debt upon closing for Martin Blu, Zest, and Elements. Mezzanine and construction loans, financed by Centerspace, exchanged as partial consideration for the acquisition of Noko Apartments. (4) Intangible assets consist of in-place leases valued at the time of acquisition. During the nine months ended September 30, 2023 and 2022, Centerspace recognized $ 941,000 and $ 11.1 million, respectively, of amortization expense related to intangibles, included within depreciation and amortization in the Condensed Consolidated Statement of Operations. (5) Debt discount on assumed mortgage. DISPOSITIONS During the three months ended September 30, 2023, Centerspace disposed of four apartment communities and associated commercial space, in one transaction for an aggregate sales price of $ 82.5 million. Centerspace did not dispose of any real estate during the three months ended September 30, 2022. During the nine months ended September 30, 2023, Centerspace disposed of 13 apartment communities and associated commercial space, in five transactions for an aggregate sales price of $ 226.8 million. Centerspace did not dispose of any real estate during the nine months ended September 30, 2022. The dispositions for the nine months ended September 30, 2023 are detailed below. Nine Months Ended September 30, 2023 (in thousands) Dispositions Date Disposed Sale Price Net Book Value and Transaction Cost Gain/(Loss) 115 homes - Boulder Court - Eagan, MN March 8, 2023 $ 14,605 $ 4,970 $ 9,635 498 homes - 2 Nebraska apartment communities March 14, 2023 $ 48,500 $ 14,975 $ 33,525 892 homes - 5 Minnesota apartment communities March 15, 2023 $ 74,500 $ 55,053 $ 19,447 62 homes - Portage - Minneapolis, MN March 15, 2023 $ 6,650 $ 9,098 $ ( 2,448 ) 712 homes - 4 North Dakota apartment communities September 14, 2023 $ 82,500 $ 71,218 $ 11,282 Total Dispositions $ 226,755 $ 155,314 $ 71,441 20 Table of Contents NOTE 9 • SEGMENTS Centerspace operates in a single reportable segment which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of the operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. The chief operating decision-makers evaluate each property’s operating results to make decisions about resources to be allocated and to assess performance and do not group the properties based on geography, size, or type for this purpose. The apartment communities have similar long-term economic characteristics and provide similar products and services to residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, the apartment communities are aggregated into a single reportable segment. “All other” includes non-multifamily components of mixed-use properties and apartment communities the Company has disposed or designated as held for sale. During the nine months ended September 30, 2023, 13 sold apartment communities were reclassified from the multifamily segment to all other for all periods presented. The members of the executive management team are the chief operating decision-makers. This team measures the performance of the reportable segment based on net operating income (“NOI”), a non-GAAP measure, which the Company defines as total real estate revenues less property operating expenses, including real estate taxes. Centerspace believes that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that excludes gain (loss) on the same of real estate and other assets, depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance. The following tables present NOI for the three and nine months ended September 30, 2023 and 2022, respectively, along with reconciliations to net income in the Condensed Consolidated Financial Statements. Segment assets are also reconciled to total assets as reported in the Condensed Consolidated Financial Statements. (in thousands) Three Months Ended September 30, 2023 Multifamily All Other Total Revenue $ 61,505 $ 3,063 $ 64,568 Property operating expenses, including real estate taxes 25,375 1,370 26,745 Net operating income $ 36,130 $ 1,693 $ 37,823 Property management ( 2,197 ) Casualty loss ( 937 ) Depreciation and amortization ( 24,697 ) General and administrative expenses ( 3,832 ) Gain on sale of real estate and other investments 11,235 Interest expense ( 8,556 ) Interest and other income 330 Net income $ 9,169 (in thousands) Three Months Ended September 30, 2022 Multifamily All Other Total Revenue $ 57,057 $ 8,381 $ 65,438 Property operating expenses, including real estate taxes 23,339 3,990 27,329 Net operating income $ 33,718 $ 4,391 $ 38,109 Property management ( 2,563 ) Casualty loss ( 276 ) Depreciation and amortization ( 23,720 ) General and administrative expenses ( 4,519 ) Interest expense ( 7,871 ) Interest and other income 70 Net loss $ ( 770 ) 21 Table of Contents (in thousands) Nine Months Ended September 30, 2023 Multifamily All Other Total Revenue $ 182,893 $ 14,348 $ 197,241 Property operating expenses, including real estate taxes 73,917 6,797 80,714 Net operating income $ 108,976 $ 7,551 $ 116,527 Property management ( 7,012 ) Casualty loss ( 1,242 ) Depreciation and amortization ( 75,061 ) General and administrative expenses ( 15,717 ) Gain on sale of real estate and other investments 71,327 Loss on litigation settlement ( 2,864 ) Interest expense ( 27,516 ) Interest and other income 674 Net income $ 59,116 (in thousands) Nine Months Ended September 30, 2022 Multifamily All Other Total Revenue $ 164,823 $ 24,045 $ 188,868 Property operating expenses, including real estate taxes 67,747 11,671 79,418 Net operating income $ 97,076 $ 12,374 $ 109,450 Property management ( 7,537 ) Casualty loss ( 1,256 ) Depreciation and amortization ( 79,489 ) General and administrative expenses ( 14,240 ) Gain on sale of real estate and other investments 27 Interest expense ( 23,147 ) Interest and other income 1,116 Net loss $ ( 15,076 ) Segment Assets and Accumulated Depreciation Segment assets are summarized as follows as of September 30, 2023, and December 31, 2022, respectively, along with reconciliations to the Condensed Consolidated Financial Statements: (in thousands) As of September 30, 2023 Multifamily All Other Total Segment assets Property owned $ 2,308,818 $ 17,590 $ 2,326,408 Less accumulated depreciation ( 512,688 ) ( 3,985 ) ( 516,673 ) Total property owned $ 1,796,130 $ 13,605 $ 1,809,735 Cash and cash equivalents 29,701 Restricted cash 22,496 Other assets 16,349 Total Assets $ 1,878,281 (in thousands) As of December 31, 2022 Multifamily All Other Total Segment assets Property owned $ 2,274,202 $ 259,922 $ 2,534,124 Less accumulated depreciation ( 443,828 ) ( 91,573 ) ( 535,401 ) Total property owned $ 1,830,374 $ 168,349 $ 1,998,723 Cash and cash equivalents 10,458 Restricted cash 1,433 Other assets 22,687 Total Assets $ 2,033,301 22 Table of Contents NOTE 10 • COMMITMENTS AND CONTINGENCIES Litigation. Centerspace was the named defendant in a lawsuit where the owner of a neighboring property claims a retaining wall at one of its properties is causing water damage to the neighboring property. The claim was for damage to the property and monetary losses. The Company recorded a loss on litigation settlement of $ 2.9 million due to a trial judgment against Centerspace for property damage and monetary losses. Subsequent to September 30, 2023, the judgement was ordered and the Company paid the settlement of $ 2.9 million. The Company cannot, with any level of certainty, predict or estimate if there will be additional costs incurred as a result of the lawsuit. Centerspace is involved in various lawsuits arising in the normal course of business and believes that such matters will not have a material adverse effect on the condensed consolidated financial statements. Environmental Matters. Under various federal, state, and local laws, ordinances, and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around, or under the property. While the Company currently has no knowledge of any material violation of environmental laws, ordinances, or regulations at any of the properties, there can be no assurance that areas of contamination will not be identified at any of its properties or that changes in environmental laws, regulations, or cleanup requirements would not result in material costs. Restrictions on Taxable Dispositions. Twenty-eight properties, consisting of 4,935 apartment homes, are subject to restrictions on taxable dispositions under agreements entered into with certain of the sellers or contributors of the properties and are effective for varying periods. Centerspace does not believe that the agreements materially affect the conduct of its business or its decisions whether to dispose of restricted properties during the restriction period because it generally holds these and other properties for investment purposes rather than for sale. In addition, where the Company deems it to be in the shareholders’ best interests to dispose of such properties, it generally seeks to structure sales of such properties as tax-deferred transactions under Section 1031 of the Internal Revenue Code. Otherwise, the Company may be required to provide tax indemnification payments to the parties to these agreements. Unfunded Commitments. Centerspace has unfunded commitments of $ 1.2 million in two real estate technology venture funds. Refer to Note 7 - Fair Value Measurements for additional information regarding these investments. NOTE 11 • SHARE-BASED COMPENSATION Share-based awards are provided to officers, non-officer employees, and trustees under the 2015 Incentive Plan approved by shareholders on September 15, 2015, as amended and restated on May 18, 2021 (the “2015 Incentive Plan”) which allows for awards in the form of cash, unrestricted and restricted common shares, stock options, stock appreciation rights, and RSUs up to an aggregate of 775,000 shares over the ten-year period in which the plan is in effect. Under the 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive plan (“LTIP”), which is a forward-looking program that measures long-term performance over the stated performance period. These awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the revised program may vary from year to year. Through September 30, 2023, awards under the 2015 Incentive Plan consisted of restricted and unrestricted common shares, RSUs, and stock options. We account for forfeitures of restricted and unrestricted common shares, RSUs, and stock options when they occur instead of estimating the forfeitures. 2023 LTIP Awards Awards granted to employees on January 1, 2023, consisted of an aggregate of 14,256 time-based RSU awards, 20,497 performance RSUs based on total shareholder return (“TSR”), and 45,955 stock options. The time-based awards vest as to one-third of the shares on each of January 1, 2024, January 1, 2025, and January 1, 2026. The stock options vest as to 25 % on each of January 1, 2024, January 1, 2025, January 1, 2026, and January 1, 2027. The fair value of stock options was $ 11.086 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions: 2023 Exercise price $ 58.67 Risk-free rate 3.97 % Expected term 6.25 years Expected volatility 28.7 % Dividend yield 4.977 % 23 Table of Contents The performance RSUs are earned based on the Company’s TSR as compared to the FTSE Nareit Equity Index over a forward looking three-year period. The maximum number of performance RSUs eligible to be earned is 40,994 RSUs, which is 200 % of the performance RSUs granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market conditions in addition to service conditions that must be met for the awards to vest. Compensation expense is recognized ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, regardless of whether the market conditions are achieved and the awards ultimately vest. Therefore, previously recorded compensation expense is not adjusted in the event that the market conditions are not achieved. The Company based the expected volatility on a weighted average of the historical volatility of the Company’s daily closing share price and a select peer average volatility, the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the award, and the expected term on the performance period of the award. The assumptions used to value the TSR performance RSUs were an expected volatility of 37.20 %, a risk-free interest rate of 4.22 %, and an expected life of 3 years. The share price at the grant date, January 1, 2023, was $ 58.67 per share. On March 31, 2023, in connection with her appointment to President and Chief Executive Officer, Anne Olson received a one-time stock award of 5,492 RSUs, which will vest in full on March 31, 2026. On March 31, 2023, in connection with the change in executive management, Bhairav Patel, CFO, received a one-time stock award of 2,746 RSUs. One-third of the RSUs will vest on March 31, 2025 and the remaining two-thirds will vest on March 31, 2026. Awards granted to trustees on May 16, 2023 consist of 9,200 time-based RSUs, which vest on May 16, 2024. These awards are classified as equity awards. Share-Based Compensation Expense Share-based compensation expense recognized in the condensed consolidated financial statements for all outstanding share-based awards was $ 602,000 and $ 709,000 for the three months ended September 30, 2023 and 2022, respectively, and $ 2.7 million and $ 1.9 million for the nine months ended September 30, 2023 and 2022, respectively. On March 31, 2023, the Company accelerated the vesting of all unvested time-based RSUs and stock options in connection with the Separation Agreement with Mr. Decker. This resulted in the acceleration of share-based compensation expense for those awards resulting in an additional $ 737,000 in expense during the nine months ended September 30, 2023. Any performance-based RSUs were prorated, in accordance with the award agreement, and will vest at the end of performance period based on actual performance. The remaining performance-based RSUs were forfeited. Mr. Decker exercised stock options, prior to their expiration on June 30, 2023, in a cashless exercise with a net 425 shares issued. NOTE 12 • SUBSEQUENT EVENTS On October 11, 2023, the Company acquired Lake Vista Apartment Homes in Loveland, Colorado, for an aggregate purchase price of $ 94.5 million, which was financed through the assumption of $ 52.7 million in mortgage debt and cash.