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Item 2. Management’s Discussion and Analysis

2024-04-29 compared with 2023-10-30 · 129 added, 192 removed, 230 unchanged (58% 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 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.

financial statements for the year ended December 31, 2023, which are included in our Annual Report on Form 10-K filed with the SEC on February 20, 2024, and the risk factors in Item 1A, “Risk Factors,” of our Annual Report on Form 10-K for the year ended December 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 (the “Securities Act”) , and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to the expectations for future periods.

Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future.

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

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.

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.

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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• timely access to material and labor required to renovate and maintain apartment communities;

• adverse changes in our markets, including future demand for apartment homes in those markets, barriers of entry into new markets, limitations on the ability to increase rental rates, inability to identify and consummate attractive acquisitions and dispositions on favorable terms, our ability to reinvest sales proceeds successfully, and inability to accommodate any significant decline in the market value of real estate serving as collateral for mortgage obligations;

• adverse changes in our markets, including future demand for apartment homes in those markets, barriers of entry into new markets, limitations on the ability to increase rental rates, our inability to identify and consummate attractive acquisitions and dispositions on favorable terms, our ability to reinvest sales proceeds successfully, and inability to accommodate any significant decline in the market value of real estate serving as collateral for debt and mortgage obligations;

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

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

and other countries, on inflation, trade, and general economic conditions;

• the impact of the conflicts between Russia and Ukraine, as well as Israel, Gaza, and Iran, on inflation, trade, and general economic conditions;

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

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• inability to pay, or need to reduce, dividends on common shares;

• inability to raise additional equity capital, if needed;

• financing risks, including the potential inability to meet existing covenants in existing credit facilities or to obtain new debt or equity financing on favorable terms, or at all;

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

Readers also should review the risks and uncertainties detailed from time to time in filings with the SEC, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2022 and contained in our Quarterly Report on Form 10-Q for the fiscal quarter ended March 31, 2023.

Executive Summary

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We primarily focus on investing in markets characterized by stable and growing economies, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for apartment homes and retention of our residents.

As of 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.

As of March 31, 2024, we owned interests in 70 apartment communities consisting of 12,883 apartment homes.

Property owned, as presented in our Condensed Consolidated Balance Sheets at historical cost, was $2.4 billion at March 31, 2024 and $2.4 billion at December 31, 2023.

Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes.

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

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

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.

Overview of the Three Months Ended March 31, 2024

• During the three months ended March 31, 2024, we sold two non-core apartment communities for an aggregate sales price of $19.0 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.

• For the three months ended March 31, 2024, revenue decreased by $3.4 million or 5.0% to $64.5 million, compared to $67.9 million for the three months ended March 31, 2023, due to decreased revenue from dispositions, offset by a 3.5% increase from same-store communities and an increase from non-same-store communities.

• Same-store revenues increased by 3.5% for the three months ended March 31, 2024, compared to the same period of the prior year, driving a 7.5% increase in same-store NOI compared to the same period of the prior year.

• Total expenses decreased by $5.6 million or 8.6% to $59.9 million for the three months ended March 31, 2024, compared to $65.5 million for the three months ended March 31, 2023.

• Net loss was $0.37 per diluted share for the three months ended March 31, 2024, compared to net income of $2.76 per diluted share for the same period of the prior year.

• Non-GAAP Core Funds from Operations (“Core FFO”) applicable to common shares and Units for the three months ended March 31, 2024 increased by $2.5 million or 12.8% to $22.0 million compared to $19.5 million for the three months ended March 31, 2023.

See the description of Core FFO on page 25 and the reconciliation of net income (loss) available to common shareholders to FFO and Core FFO on page 26.

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.

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

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

• We repurchased 87,722 common shares for total consideration of $4.7 million and an average price of $53.62 per share.

Results of Operations

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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 below.

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.

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, impairment, 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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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 nine months ended September 30, 2023 and 2022, five apartment communities were non-same-store.

For the comparison of the three months ended March 31, 2024 and 2023, one apartment community was 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.

During the three months ended March 31, 2024 and 2023, we disposed of two and nine apartment communities, respectively, consisting of 205 and 1,567 apartment homes, respectively.

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

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(in thousands, except percentages)

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

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

Three Months Ended March 31,

2024 2023 $ Change % Change

Operating income

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General and administrative expenses 4,623 7,723 (3,100) (40.1) %

Gain on sale of real estate and other investments

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

577 (60,159) 60,736 (101.0) %

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

Net operating income $ 39,437 $ 38,974 $ 463 1.2 %

* Not a meaningful percentage.

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

The following consolidated results of operations, including GAAP and non-GAAP metrics, cover the three months ended March 31, 2024 and 2023.

(in thousands, except percentages)

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

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

Three Months Ended March 31,

2024 2023 $ Change % Change

Same-store $ 61,536 $ 59,439 $ 2,097 3.5 %

$ 57,949 $ 54,838 $ 3,111 5.7 % $ 172,071 $ 158,886 $ 13,185 8.3 %

Non-same-store (1)

3,556 2,219 1,337 60.3 % 10,822 5,937 4,885 82.3 %

Non-same-store 1,803 — 1,803 N/A

Other properties 638 675 (37) (5.5) %

676 685 (9) (1.3) % 2,014 1,885 129 6.8 %

Dispositions 529 7,783 (7,254) (93.2) %

2,387 7,696 (5,309) (69.0) % 12,334 22,160 (9,826) (44.3) %

Total 64,506 67,897 (3,391) (5.0) %

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Same-store 23,995 24,526 (531) (2.2) %

23,906 22,533 1,373 6.1 % 69,791 65,461 4,330 6.6 %

Non-same-store (1)

1,469 806 663 82.3 % 4,126 2,286 1,840 80.5 %

Non-same-store 566 — 566 N/A

Other properties 182 87 95 109.2 %

270 267 3 1.1 % 546 691 (145) (21.0) %

Dispositions 326 4,310 (3,984) (92.4) %

1,100 3,723 (2,623) (70.5) % 6,251 10,980 (4,729) (43.1) %

Total 25,069 28,923 (3,854) (13.3) %

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Same-store 37,541 34,913 2,628 7.5 %

34,043 32,305 1,738 5.4 % 102,280 93,425 8,855 9.5 %

Non-same-store (1)

2,087 1,413 674 47.7 % 6,696 3,651 3,045 83.4 %

Non-same-store 1,237 — 1,237 N/A

Other properties 456 588 (132) (22.4) %

406 418 (12) (2.9) % 1,468 1,194 274 22.9 %

Dispositions 203 3,473 (3,270) (94.2) %

1,287 3,973 (2,686) (67.6) % 6,083 11,180 (5,097) (45.6) %

Total $ 39,437 $ 38,974 $ 463 1.2 %

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General and administrative expenses (4,623) (7,723) (3,100) (40.1) %

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

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

(577) 60,159 (60,736) (101.0) %

Interest expense (9,207) (10,319) (1,112) (10.8) %

Interest and other income

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

NET INCOME (LOSS)

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* Not a meaningful percentage.

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

Three Months Ended March 31,

Weighted Average Occupancy (1)

2023 2022 2023 2022

Same-store 94.6 % 94.9 %

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Centerspace believes that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate.

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

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

Number of Apartment Homes as of March 31, 2024 as of March 31, 2023

Same-store 12,580 12,580

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Same-store analysis.

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 $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.

Revenue from same-store communities increased 3.5% or $2.1 million in the three months ended March 31, 2024, compared to the same period in the prior year.

The increase was attributable to 3.9% growth in average monthly revenue per occupied home for the three months ended March 31, 2024 offset by a decrease of 0.3% in occupancy as weighted average occupancy decreased from 94.9% in the three months ended March 31, 2023 to 94.6% for the three months ended March 31, 2024.

Property operating expenses, including real estate taxes, at same-store communities decreased by 2.2% or $531,000 in the three months ended March 31, 2024, compared to the same period in the prior year.

At same-store communities, controllable expenses (which exclude insurance and real estate taxes) decreased by $181,000, primarily due to lower utilities costs and offset by increases in compensation costs and administrative and marketing costs.

Non-controllable expenses at same-store communities decreased by $350,000, due to successful real estate tax appeals and offset by higher insurance premiums.

Same-store NOI increased by $2.6 million to $37.5 million for the three months ended March 31, 2024 compared to $34.9 million in the same period of the prior year.

Non-same-store analysis.

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.

Revenue from non-same-store communities increased by $1.8 million in the three months ended March 31, 2024, compared to the same period in the prior year.

Property operating expenses, including real estate taxes at non-same-store communities increased by $566,000.

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 $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.

NOI at non-same-store communities increased by $1.2 million for the three months ended March 31, 2024 compared to the same period of the prior year.

The increase in revenue, property operating expenses, and NOI from non-same-store communities is due to the addition of an apartment community during the fourth quarter of the prior year.

Other properties and dispositions analysis.

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

Revenue from dispositions decreased by $7.3 million while revenue from other properties decreased by $37,000 in the three months ended March 31, 2024, compared to the same period in the prior year.

Property operating expenses, including real estate taxes, at other properties increased by $95,000 while such expenses decreased by $4.0 million for dispositions, compared to the same period in the prior year.

NOI at other properties decreased by $132,000 and NOI on dispositions decreased $3.3 million, compared to the same period in the prior year.

We disposed of nine apartment communities in the first quarter of 2023, an additional four apartment communities and associated commercial space in the third quarter of 2023, and two apartment communities in the first quarter of 2024.

Property management expenses .

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.

Property management expense, consisting of property management overhead and property management fees paid to third parties decreased by 9.3% to $2.3 million in the three months ended March 31, 2024, compared to $2.6 million in the same period of the prior year.

The decrease is primarily due to fewer properties and a lower number of apartment homes due to dispositions.

Casualty loss.

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.

Casualty loss increased to $820,000 in the three months ended March 31, 2024, compared to $252,000 in the same period of the prior year.

The increase is primarily due to increased claim activity that was not in the same period of the prior year combined with revised loss estimates from previous casualty events.

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 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;

Depreciation and amortization increased by 3.9% to $27.0 million in the three months ended March 31, 2024, compared to $26.0 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 in the fourth quarter of the prior year with in-place lease amortization along with 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 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 nine months ended September 30, 2023 due to a trial judgment against Centerspace for property damage and monetary losses to a neighboring property.

General and administrative expenses decreased by 40.1% to $4.6 million in the three months ended March 31, 2024, compared to $7.7 million in the same period of the prior year, primarily attributable to $3.2 million in severance and related costs from the CEO transition in the prior year that did not occur in the first quarter of 2024.

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 $577,000 in the three months ended March 31, 2024, compared to a gain of $60.2 million in the same period of the prior year.

The decrease was primarily due to the sale of two apartment communities in the current period for a loss compared to the sale of nine apartment communities for a gain in the prior year.

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

Interest expense.

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 expense decreased by 10.8% to $9.2 million in the three months ended March 31, 2024, compared to $10.3 million in the same period of the prior year, primarily due to a higher rate term loan held during the prior year that was paid off prior to its original maturity date.

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.

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 other cash balances and a gain on investments in the current year.

Interest and other income increased to $340,000 in the three months ended March 31, 2024, compared to $49,000 in the same period of the prior year.

The increase was primarily due to interest income on a note receivable in the first quarter of 2024 that did not exist in the same period of the prior year combined with a gain on investments in the first quarter of 2024 compared to a loss on investments in the same period of the prior year.

Net income (loss)available to common shareholders.

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.

Net loss available to common shareholders decreased $5.5 million for the three months ended March 31, 2024, compared to a net income of $42.0 million in the three months ended March 31, 2023.

Funds from Operations and Core Funds from Operations .

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

FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all of the our needs, including our ability to service indebtedness or make distributions to shareholders.

FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all cash flow needs, including our ability to service indebtedness or make distributions to shareholders.

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.

Core FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all cash needs, including the ability to service indebtedness or make distributions to shareholders.

Core FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all cash flow needs, including the ability to service indebtedness or make distributions to shareholders.

Core FFO is a non-GAAP and non-standardized financial measure that may be calculated differently by other REITs and that should not be considered a substitute for operating results determined in accordance with GAAP.

Net income available to common shareholders for the three months ended 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.

Net loss available to common shareholders for the three months ended March 31, 2024, decreased to a net loss of $5.5 million compared to a net income of $42.0 million for the same period of the prior year.

FFO applicable to common shares and Units for the three months ended March 31, 2024, increased to $20.9 million compared to $16.3 million for the comparable period of the prior year, an increase of 28.5%.

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

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 September 30, Nine Months Ended September 30,

2023 2022 2023 2022

Three Months Ended March 31,

Funds from operations:

Net income (loss) available to common shareholders

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Less depreciation – partially owned entities (24) (19)

Gain on sale of real estate and other assets

(11,235) — (71,323) (27)

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

FFO applicable to common shares and Units $ 20,889 $ 16,254

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Non-cash casualty loss

854 46 815 234

Loss on extinguishment of debt — — — 5

Technology implementation costs (1)

Interest rate swap termination, amortization, and mark-to-market 324 204 621 (204)

Interest rate swap amortization 197 138

Amortization of assumed debt 263 (116)

Pursuit costs — 38 5 1,165

Severance and transition related costs — 3,199

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

Loss on litigation settlement and associated trial costs (1)

Other miscellaneous items (2)

(129) 17 (102) 113

Core FFO applicable to common shares and Units $ 22,046 $ 19,542

FFO applicable to common shares and Units $ 20,889 $ 16,254

Dividends to preferred unitholders 160 160 480 480

Dividends to Series D preferred unitholders 160 160

FFO applicable to common shares and Units - diluted $ 21,049 $ 16,414

Core FFO applicable to common shares and Units $ 22,046 $ 19,542

Dividends to preferred unitholders 160 160 480 480

Dividends to Series D preferred unitholders 160 160

Core FFO applicable to common shares and Units - diluted $ 22,206 $ 19,702

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Net income (loss) per common share - diluted (3)

$ (0.37) $ 2.76

FFO per share and Unit - diluted $ 1.16 $ 0.89

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Weighted average shares - basic 14,922 15,025

Effect of redeemable operating partnership Units 908 984 943 980

Effect of Series D preferred units 228 228 228 228

Effect of Series E preferred units 2,093 2,186 2,105 2,186

Effect of dilutive restricted stock units and stock options 28 30 23 48

Weighted average shares and Units - diluted 18,246 18,801 18,287 18,722

(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 $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.

Effect of redeemable operating partnership Units for FFO and Core FFO

Effect of Series D preferred units for FFO and Core FFO

Effect of Series E preferred units for FFO and Core FFO

Effect of dilutive restricted stock units and stock options for FFO and Core FFO

Weighted average shares and Units for FFO and Core FFO - diluted 18,102 18,359

(1) Consists of $37,000 in one-time trial costs related to the litigation matter during the three months ended March 31, 2024.

(2) Consists of (gain) loss on investments and pursuit costs.

(3) Refer to Note 3 of the Notes to the Condensed Consolidated Financial Statements for additional details on net income (loss) per share.

Acquisitions and Dispositions

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.

During the three months ended March 31, 2024, we disposed of two apartment communities located in Minnesota in two transactions for an aggregate sales price of $19.0 million.

We had no acquisitions during the three months ended March 31, 2024.

Distributions Declared

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.

Distributions of $0.75 and $0.73 per common share and Unit were declared during the three months ended March 31, 2024 and 2023, respectively.

Distributions of $0.4140625 per Series C preferred share were declared during the three months ended March 31, 2024 and 2023.

Distributions of $0.9655 per Series D preferred unit were declared during the three months ended

March 31, 2024 and 2023.

Distributions of $0.96875 per Series E preferred unit were declared during the three months ended March 31, 2024 and 2023.

Liquidity and Capital Resources

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

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

Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to communities, distributions to the holders of preferred shares, common shares, Series D and Series E preferred units, and Units, value-add redevelopment, common and preferred share buybacks and Unit redemptions, and acquisitions of additional communities.

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

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 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 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.

As of March 31, 2024, we had total liquidity of approximately $228.3 million, which included $215.6 million available on the lines of credit based on the value of unencumbered properties and $12.7 million of cash and cash equivalents.

As of December 31, 2023, we had total liquidity of approximately $234.6 million, which included $226.0 million available on the lines of credit based on the value of unencumbered properties and $8.6 million of cash and cash equivalents.

As of March 31, 2024, we had a multibank, revolving line of credit with total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties.

As of March 31, 2024, there was $40.0 million outstanding on this line of credit and additional borrowing availability was $210.0 million.

At December 31, 2023, the line of credit borrowing capacity was $250.0 million based on the value of unencumbered properties, of which $30.0 million was drawn on the line.

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

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

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

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

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

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

The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.

This credit facility matures in September 2025, with an option to extend maturity for up to two additional six-month periods and has an accordion option to increase borrowing capacity up to $400.0 million.

The interest rates on the line of credit are based on the consolidated leverage ratio, at the Company’s option, on either the lender’s base rate plus a margin, ranging from 25-80 basis points, or the daily or term Secured Overnight Financing Rate (“SOFR”), plus a margin that ranges from 125-180 basis points, with the consolidated leverage ratio described under the Third Amended and Restated Credit Agreement, as amended.

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

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

As of March 31, 2024, there was $357,000 outstanding on this line of credit.

As of December 31, 2023, there was no balance outstanding 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.

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

(collectively, “PGIM”) under which we have issued $200.0 million in unsecured senior promissory notes (“unsecured senior notes”).

We also have 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.

The following table shows the notes issued under both agreements as of March 31, 2024 and December 31, 2023.

(in thousands)

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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.

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

1 unchanged sentence

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

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

As of March 31, 2024 and December 31, 2023, 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 $343.7 million and $299.4 million at September 30, 2023 and December 31, 2022, respectively, on 13 and 15 apartment communities, respectively.

Mortgage loan indebtedness, excluding the FMCF, was $389.9 million and $391.1 million at March 31, 2024 and December 31, 2023, respectively, on 14 apartment communities.

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

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

As of September 30, 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.

As of March 31, 2024 and December 31, 2023, the weighted average interest rate on mortgage debt was 4.05%.

Further information can be found in Note 5 - Debt in the Condensed Consolidated notes.

We have an equity distribution agreement in connection with the 2021 ATM Program through which we may offer and sell common shares having an aggregate gross sales price of up to $250.0 million, in amounts and at times determined by management.

The proceeds from the sale of common shares under the 2021 ATM program may be used for general corporate purposes, including the funding of acquisitions, construction or mezzanine loans, community renovations, and the repayment of indebtedness.

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

As of March 31, 2024, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program.

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

On 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.

We have a share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to an aggregate of $50.0 million of the our 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.

As of September 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 months ended March 31, 2024 and 2023.

As of March 31, 2024, the Company had $4.7 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)

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

Average Price Per Share (1)

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2023 19 1,022 $ 52.51

Nine Months Ended September 30,

2023 124 $ 6,718 $ 54.19

2022 5 359 $ 65.97

(1) Amount includes commissions.

Changes in Cash, Cash Equivalents, and Restricted Cash

As of March 31, 2024, we had cash and cash equivalents of $12.7 million and restricted cash consisting of $1.1 million of escrows held by lenders for real estate taxes, insurance, and capital additions.

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

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

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

• Net repayments of $113.5 million on the line of credit;

In addition to cash flow from operations, during the three months ended March 31, 2024, we generated capital from various activities, including:

• Receiving $18.3 million in net proceeds from the sale of two apartment communities;

• Receiving $10.4 million in net draws on the line of credit;

• Receiving $1.6 million in net insurance proceeds primarily due to one large casualty event that was settled during the quarter.

During the three months ended March 31, 2024, we used capital for various activities, including:

• Funding of mezzanine loan of $7.3 million;

• Repaying $1.5 million of mortgage principal;

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There have been no material changes to our contractual obligations and other commitments since that report was filed.

Inflation and Supply Chain

Inflation, Supply Chain, and Capital Markets

Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability, subject to market conditions, to increase rents upon the commencement of new leases or renewal of existing leases to manage the impact of inflation on our business.

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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 capital projects.

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

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

Off-Balance Sheet Arrangements

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.

As of March 31, 2024, 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, 2023, filed with the SEC on February 20, 2024 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 nine months ended September 30, 2023.

There have been no other significant changes to the critical accounting policies during the three months ended March 31, 2024.

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