Item 2. Management’s Discussion and Analysis
Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations
The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included in this Quarterly Report on Form 10-Q for the quarter ended June 30, 2024 (the “Report”), the audited 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. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “assumes,” “may,” “projects,” “outlook,” “future,” and variations of those words and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial condition, or plans expressed or implied by the forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from actual results and performance.
The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:
• inflation and price volatility in the global economy;
• uncertain global macro-economic and political conditions;
• deteriorating economic conditions, including rising unemployment rates, energy costs, and inflation, in the markets where we own apartment communities or in which we may invest in the future;
• rental conditions in our markets, including occupancy levels and rental rates, potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, include rent control laws, or other factors;
• 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, our inability to identify and consummate attractive
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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 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.;
• inability to expand operations into new or existing markets successfully;
• failure of new acquisitions to achieve anticipated results or be efficiently integrated;
• inability to complete lease-up of projects on schedule and on budget;
• inability to sell our non-core properties on terms that are acceptable;
• failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and/or tax protection payments;
• inability to fund capital expenditures out of cash flow;
• 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;
• level and volatility of interest or capitalization rates or capital market conditions;
• uninsured losses due to insurance deductibles, uninsured claims or casualties or losses in excess of applicable coverage;
• loss contingencies and the availability and cost of casualty insurance for losses;
• inability to continue to satisfy complex tax rules in order to maintain status as a REIT for federal income tax purposes, inability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax purposes, and the risk of changes in laws affecting REITs;
• inability to attract and retain qualified personnel;
• cyber liability or potential liability for breaches of privacy or information security systems;
• recent developments in artificial intelligence, including software used to price rent in apartment communities;
• inability to address catastrophic weather, natural events, and climate change;
• inability to comply with laws and regulations, including those related to the environment, applicable to the business and any related investigations or litigation; and
• other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.
New factors may also arise from time to time that could have an adverse effect on our business and results of operations. 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, 2023.
Executive Summary
We are a real estate investment trust, or REIT, that owns, manages, acquires, redevelops, and develops apartment communities. We primarily focus on investing in markets characterized by stable and growing economies, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for apartment homes and retention of our residents. As of June 30, 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 June 30, 2024 and 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. We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for our business and shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.
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Overview of the Three Months Ended June 30, 2024
• For the three months ended June 30, 2024, revenue increased by $267,000 or 0.4% to $65.0 million, compared to $64.8 million for the three months ended June 30, 2023, due to increased revenue from same-store and non-same-store communities, offset by decreased revenue from dispositions.
• Same-store revenues increased by 3.4% for the three months ended June 30, 2024, compared to the same period of the prior year, driving a 2.4% increase in same-store NOI compared to the same period of the prior year.
• We issued approximately 110,000 common shares for gross consideration of $7.7 million, or $7.6 million, net of commissions, and an average gross price of $69.82 per share under our at-the-market offering program (the “ATM Program”).
• Net loss was $0.19 per diluted share for the three months ended June 30, 2024, compared to net loss of $0.23 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 June 30, 2024 decreased by $502,000 or 2.2% to $22.8 million compared to $23.3 million for the three months ended June 30, 2023. See the description of Core FFO on pages 30 and 31 and the reconciliation of net income (loss) available to common shareholders to FFO and Core FFO on page 32. This decrease was primarily due to decreased NOI from dispositions and increased casualty loss and interest expense, offset by increased NOI from same-store and non-same-store communities. The drivers of these changes are discussed in more detail in the “Results of Operations” section below.
Results of Operations
GAAP and Non-GAAP Financial Measures
Net operating income (“NOI”) is a non-GAAP financial measure, which we define as total real estate revenues less property operating expenses, including real estate taxes and is reconciled to operating income below. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by sales of real estate and other investments, impairment, depreciation, amortization, financing costs, property management expenses, casualty losses, loss on litigation settlement, and general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance.
We have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for substantially all of the periods being compared, and, in the case of newly-constructed properties, have achieved a target level of physical occupancy of 90%. On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate the performance of existing apartment communities and their contribution to net income (loss). We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how a fixed pool of communities are performing year-over-year. We use this measure to assess whether or not we have been successful in increasing NOI, raising average rental revenue, renewing the leases with existing residents, controlling operating costs, and making prudent capital improvements. The discussion below focuses on the main factors affecting real estate revenue and expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store apartment communities are generally due to the addition of those properties to the real estate portfolio, and accordingly provide less useful information for evaluating ongoing operational performance of the real estate portfolio.
For the comparison of the six months ended June 30, 2024 and 2023, one apartment community was non-same-store. Sold communities are included in “Dispositions,” for all periods presented, while “Other properties” includes non-multifamily properties and the non-multifamily components of mixed-use properties. During the six months ended June 30, 2024 and 2023, we disposed of two and nine apartment communities, respectively, consisting of 205 and 1,567 apartment homes, respectively.
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Reconciliation of Operating Income to Net Operating Income (non-GAAP)
The following table provides a reconciliation of operating income to NOI (non-GAAP), which is defined above.
(in thousands, except percentages)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 $ Change % Change 2024 2023 $ Change % Change
Operating income
$ 7,192 $ 5,966 $ 1,226 20.5 % $ 11,267 $ 68,563 $ (57,296) (83.6) %
Adjustments:
Property management expenses 2,222 2,247 (25) (1.1) % 4,552 4,815 (263) (5.5) %
Casualty loss
510 53 457 * 1,330 305 1,025 *
Depreciation and amortization 25,714 24,371 1,343 5.5 % 52,726 50,364 2,362 4.7 %
General and administrative expenses 4,216 4,162 54 1.3 % 8,839 11,885 (3,046) (25.6) %
(Gain) loss on sale of real estate and other investments
— 67 (67) (100.0) % 577 (60,092) 60,669 (101.0) %
Loss on litigation settlement — 2,864 (2,864) (100.0) % — 2,864 (2,864) (100.0) %
Net operating income $ 39,854 $ 39,730 $ 124 0.3 % $ 79,291 $ 78,704 $ 587 0.7 %
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The following consolidated results of operations, including GAAP and non-GAAP metrics, cover the three and six months ended June 30, 2024 and 2023.
(in thousands, except percentages)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 $ Change % Change 2024 2023 $ Change % Change
Revenue
Same-store $ 62,599 $ 60,531 $ 2,068 3.4 % $ 124,135 $ 119,971 $ 4,164 3.5 %
Non-same-store 1,867 — 1,867 N/A 3,671 — 3,671 N/A
Other properties 577 663 (86) (13.0) % 1,214 1,338 (124) (9.3) %
Dispositions — 3,582 (3,582) (100.0) % 529 11,364 (10,835) (95.3) %
Total 65,043 64,776 267 0.4 % 129,549 132,673 (3,124) (2.4) %
Property operating expenses, including real estate taxes
Same-store 24,416 23,228 1,188 5.1 % 48,411 47,753 658 1.4 %
Non-same-store 537 — 537 N/A 1,102 — 1,102 N/A
Other properties 236 189 47 24.9 % 418 276 142 51.4 %
Dispositions — 1,629 (1,629) (100.0) % 327 5,940 (5,613) (94.5) %
Total 25,189 25,046 143 0.6 % 50,258 53,969 (3,711) (6.9) %
Net operating income (1)
Same-store 38,183 37,303 880 2.4 % 75,724 72,218 3,506 4.9 %
Non-same-store 1,330 — 1,330 N/A 2,569 — 2,569 N/A
Other properties 341 474 (133) (28.1) % 796 1,062 (266) (25.0) %
Dispositions — 1,953 (1,953) (100.0) % 202 5,424 (5,222) (96.3) %
Total $ 39,854 $ 39,730 $ 124 0.3 % $ 79,291 $ 78,704 $ 587 0.7 %
Property management expenses (2,222) (2,247) (25) (1.1) % (4,552) (4,815) (263) (5.5) %
Casualty loss
(510) (53) 457 * (1,330) (305) 1,025 *
Depreciation and amortization (25,714) (24,371) 1,343 5.5 % (52,726) (50,364) 2,362 4.7 %
General and administrative expenses (4,216) (4,162) 54 1.3 % (8,839) (11,885) (3,046) (25.6) %
Gain (loss) on sale of real estate and other investments
— (67) 67 (100.0) % (577) 60,092 (60,669) 101.0 %
Loss on litigation settlement — (2,864) 2,864 — — (2,864) 2,864 (100.0) %
Interest expense (9,332) (8,641) 691 8.0 % (18,539) (18,960) (421) (2.2) %
Interest and other income
477 295 182 (61.7) % 817 344 473 137.5 %
NET INCOME (LOSS)
$ (1,663) $ (2,380) $ 717 (30.1) % $ (6,455) $ 49,947 $ (56,402) (112.9) %
Dividends to Series D preferred unitholders (160) (160) — — (320) (320) — —
Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units
561 712 (151) 21.2 % 1,640 (7,854) 9,494 (120.9) %
Net income attributable to noncontrolling interests – consolidated real estate entities
(34) (35) 1 (2.9) % (66) (65) (1) 1.5 %
Net income (loss) attributable to controlling interests
(1,296) (1,863) 567 (30.4) % (5,201) 41,708 (46,909) (112.5) %
Dividends to preferred shareholders (1,607) (1,607) — — (3,214) (3,214) — —
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
$ (2,903) $ (3,470) $ 567 (16.3) % $ (8,415) $ 38,494 $ (46,909) (121.9) %
(1) This is a Non-GAAP financial measure which is a component of NOI (non-GAAP), as defined above. Refer to the reconciliation of Operating Income to Net Operating Income above. Non-GAAP financial measures should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance.
* Not a meaningful percentage.
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Three Months Ended June 30, Six Months Ended June 30,
Weighted Average Occupancy (1)
2024 2023 2024 2023
Same-store 95.3 % 95.2 % 94.9 % 95.0 %
Non-same-store 96.7 % — 96.7 % —
Total 95.3 % 95.2 % 95.0 % 95.0 %
(1) Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental revenue. Scheduled rental revenue represents the value of all apartment homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant apartment homes valued at estimated market rents. When calculating actual rents for occupied apartment homes and market rents for vacant homes, delinquencies and concessions are not taken into account. Market rates are determined using the currently offered effective rates on new leases at the community and are used as the starting point in determination of the market rates of vacant apartment homes. 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 and other real estate companies.
Number of Apartment Homes as of June 30, 2024 as of June 30, 2023
Same-store 12,580 12,580
Non-same-store 303 —
Dispositions
— 917
Total 12,883 13,497
Same-store analysis. Revenue from same-store communities increased 3.4% or $2.1 million in the three months ended June 30, 2024, compared to the same period in the prior year. The increase was attributable to 3.3% growth in average monthly revenue per occupied home for the three months ended June 30, 2024 and an increase of 0.1% in occupancy as weighted average occupancy increased from 95.2% in the three months ended June 30, 2023 to 95.3% for the three months ended June 30, 2024. Property operating expenses, including real estate taxes, at same-store communities increased by 5.1% or $1.2 million in the three months ended June 30, 2024, compared to the same period in the prior year. At same-store communities, controllable expenses (which exclude insurance and real estate taxes) increased by $767,000, primarily due to increases in repairs and maintenance costs and administrative and marketing costs. Non-controllable expenses at same-store communities increased by $421,000, due to higher insurance premiums and real estate taxes. Same-store NOI increased by $880,000 to $38.2 million for the three months ended June 30, 2024 compared to $37.3 million in the same period of the prior year.
Revenue from same-store communities increased 3.5% or $4.2 million in the six months ended June 30, 2024, compared to the same period in the prior year. The increase was attributable to 3.6% growth in average monthly revenue per occupied home for the six months ended June 30, 2024 offset by a decrease of 0.1% in occupancy as weighted average occupancy decreased from 95.0% in the six months ended June 30, 2023 to 94.9% for the six months ended June 30, 2024. Property operating expenses, including real estate taxes, at same-store communities increased by 1.4% or $658,000 in the six months ended June 30, 2024, compared to the same period in the prior year. At same-store communities, controllable expenses (which exclude insurance and real estate taxes) increased by $587,000, primarily due to increased compensation costs, repair and maintenance, and administrative and marketing expense, offset by lower utilities costs. Non-controllable expenses at same-store communities increased by $71,000, due to increased insurance premiums, offset by lower real estate taxes from successful real estate tax appeals. Same-store NOI increased by $3.5 million to $75.7 million for the six months ended June 30, 2024 compared to $72.2 million in the same period of the prior year.
Non-same-store analysis. Revenue from non-same-store communities increased by $1.9 million in the three months ended June 30, 2024, compared to the same period in the prior year. Property operating expenses, including real estate taxes at non-same-store communities increased by $537,000. NOI at non-same-store communities increased by $1.3 million for the three months ended June 30, 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.
Revenue from non-same-store communities increased by $3.7 million in the six months ended June 30, 2024, compared to the same period in the prior year. Property operating expenses, including real estate taxes at non-same-store communities increased by $1.1 million. NOI at non-same-store communities increased by $2.6 million for the six months ended June 30, 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 dispositions decreased by $3.6 million while revenue from other properties decreased by $86,000 in the three months ended June 30, 2024, compared to the same period in the prior year. Property operating expenses, including real estate taxes, at other properties increased by $47,000 while such expenses decreased by $1.6 million for dispositions, compared to the same period in the prior year. NOI at other properties decreased by
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$133,000 and NOI on dispositions decreased $2.0 million, compared to the same period in the prior year. We disposed of four apartment communities and associated commercial space in the third quarter of 2023 and two apartment communities in the first quarter of 2024.
Revenue from dispositions decreased by $10.8 million while revenue from other properties decreased by $124,000 in the six months ended June 30, 2024, compared to the same period in the prior year. Property operating expenses, including real estate taxes, at other properties increased by $142,000 while such expenses decreased by $5.6 million for dispositions, compared to the same period in the prior year. NOI at other properties decreased by $266,000 and NOI on dispositions decreased $5.2 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 was comparable at $2.2 million in the three months ended June 30, 2024 and 2023.
Property management expense, consisting of property management overhead and property management fees paid to third parties decreased by 5.5% to $4.6 million in the six months ended June 30, 2024, compared to $4.8 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 $510,000 in the three months ended June 30, 2024, compared to $53,000 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 increased to $1.3 million in the six months ended June 30, 2024, compared to $305,000 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.
Depreciation and amortization. Depreciation and amortization increased by 5.5% to $25.7 million in the three months ended June 30, 2024, compared to $24.4 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 along with value add and acquisition capital projects; offset by a decrease in depreciation from sold properties.
Depreciation and amortization increased by 4.7% to $52.7 million in the six months ended June 30, 2024, compared to $50.4 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.
General and administrative expenses. General and administrative expenses were comparable at $4.2 million in the three months ended June 30, 2024 and 2023. Compensation costs and consulting fees increased in the three months ended June 30, 2024 compared to the same period of the prior year. These increases were offset by lower legal expenses in the three months ended June 30, 2024 compared to the same period of the prior year due to a litigation settlement in the prior year that did not occur in the current quarter.
General and administrative expenses decreased by 25.6% to $8.8 million in the six months ended June 30, 2024, compared to $11.9 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 six months ended June 30, 2024 and legal expenses in the six months ended June 30, 2024 compared to the same period of the prior year due to a litigation settlement in the prior year that did not occur in the current quarter, offset by higher incentive compensation costs.
Gain (loss) on sale of real estate and other investments. There was no gain (loss) on sale of real estate and other investments in the three months ended June 30, 2024, compared to a loss of $67,000 in the same period of the prior year.
Gain (loss) on sale of real estate and other investments decreased to a loss of $577,000 in the six months ended June 30, 2024, compared to a gain of $60.1 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.
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Loss on Litigation Settlement. There was no loss on litigation settlement in the three and six months ended June 30, 2024, compared to a $2.9 million loss on litigation settlement for the three and six months ended June 30, 2023 due to a trial judgment against Centerspace for property damage and monetary losses to a neighboring property in the prior year that did not occur in the current year. Refer to Note 10 in the Condensed Consolidated Financial Statements.
Interest expense. Interest expense increased by 8.0% to $9.3 million in the three months ended June 30, 2024, compared to $8.6 million in the same period of the prior year, primarily due to a higher mortgage interest resulting from the assumption of a mortgage in connection with an acquisition in the fourth quarter of the prior year.
Interest expense decreased by 2.2% to $18.5 million in the six months ended June 30, 2024, compared to $19.0 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 along with a lower average balance on our line of credit during the six months ended June 30, 2024 compared to the same period of the prior year, partially offset by an increase in mortgage interest.
Interest and other income. Interest and other income increased to $477,000 in the three months ended June 30, 2024, compared to $295,000 in the same period of the prior year. The increase was primarily due to interest income on a real estate related note receivable in the in the current period that did not exist in the same period of the prior year.
Interest and other income increased to $817,000 in the six months ended June 30, 2024, compared to $344,000 in the same period of the prior year. The increase was primarily due to interest income on a note receivable in the in the current period that did not exist in the same period of the prior year, offset by a decrease from interest received on escrow funds in the prior year that did not occur in the six months ended June 30, 2024.
Net income (loss) available to common shareholders. Net loss available to common shareholders increased to $2.9 million for the three months ended June 30, 2024, compared to a net loss of $3.5 million in the three months ended June 30, 2023.
Net loss available to common shareholders decreased to $8.4 million for the six months ended June 30, 2024, compared to a net income of $38.5 million in the six months ended June 30, 2023.
Funds from Operations and Core Funds from Operations .
We believe that Funds from Operations (“FFO”), which is a non-GAAP financial measure used as a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding operating performance, primarily because its calculation does not assume the value of real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation and amortization.
We use the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”). Nareit defines FFO as net income or loss calculated in accordance with GAAP, excluding:
• depreciation and amortization related to real estate;
• gains and losses from the sale of certain real estate assets;
• impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity; and
• similar adjustments for partially owned consolidated real estate entities.
The exclusion in Nareit’s definition of FFO of gains and losses from the sale of real estate assets and impairment write-downs helps to identify the operating results of the long-term assets that form the base of investments and assists management and investors in comparing those operating results between periods.
Due to limitations of the Nareit FFO definition, we have made certain interpretations in applying this definition. We believe that all such interpretations not specifically provided for in the Nareit definition are consistent with this definition. Nareit’s FFO White Paper 2018 Restatement clarified that impairment write-downs of land related to a REIT’s main business are excluded from FFO and a REIT has the option to exclude impairment write-downs of assets that are incidental to the main business.
While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income (loss) 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 cash flow needs, including our ability to service indebtedness or make distributions to shareholders.
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Core Funds from Operations (“Core FFO”), a non-GAAP measure, is FFO adjusted for non-routine items or items not considered core to business operations. By further adjusting for items that are not considered part of core business operations, we believe that Core FFO provides investors with additional information to compare core operating and financial performance between periods. Core FFO should not be considered as an alternative to net income (loss) 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 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 loss available to common shareholders for the three months ended June 30, 2024, increased to a net loss of $2.9 million compared to a net loss of $3.5 million for the same period of the prior year. FFO applicable to common shares and Units for the three months ended June 30, 2024, increased to $22.1 million compared to $20.2 million for the comparable period of the prior year, representing an increase of 9.9%. This FFO increase was primarily due to increased NOI from same-store communities and non-same-store communities, and a decrease from a litigation settlement in the prior year that did not occur in the current year, offset by decreased NOI from dispositions.
Net loss available to common shareholders for the six months ended June 30, 2024, decreased to a net loss of $8.4 million compared to net income of $38.5 million for the same period of the prior year. FFO applicable to common shares and Units for the six months ended June 30, 2024, increased to $43.0 million compared to $36.4 million for the comparable period of the prior year, representing an increase of 18.2%. This FFO increase was primarily due to increased NOI from same-store communities and non-same-store communities, and decreases in general and administrative expense related to the departure of Mark Decker, former CEO, and a litigation settlement in the prior year that did not occur in the current year, offset by decreased NOI from dispositions and an increase in casualty loss.
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Reconciliation of Net Income (Loss) Available to Common Shareholders to Funds from Operations and Core Funds from Operations
(in thousands, except per share and unit amounts)
Three Months Ended June 30, Six Months Ended June 30,
2024 2023 2024 2023
Funds from operations:
Net income (loss) available to common shareholders
$ (2,903) $ (3,470) $ (8,415) $ 38,494
Adjustments:
Noncontrolling interests – Operating Partnership and Series E preferred units (561) (712) (1,640) 7,854
Depreciation and amortization 25,714 24,371 52,726 50,364
Less depreciation – non real estate (82) (89) (167) (180)
Less depreciation – partially owned entities (25) (19) (49) (38)
(Gain) loss on sale of real estate and other assets
— 71 577 (60,088)
FFO applicable to common shares and Units $ 22,143 $ 20,152 $ 43,032 $ 36,406
Adjustments to Core FFO:
Non-cash casualty loss (recovery)
191 (52) 893 (39)
Interest rate swap amortization 173 159 370 297
Amortization of assumed debt 263 (116) 526 (232)
Severance and transition related costs — (19) — 3,180
Loss on litigation settlement and associated trial costs (1)
— 3,201 37 3,201
Other miscellaneous items (2)
31 (22) (11) 32
Core FFO applicable to common shares and Units $ 22,801 $ 23,303 $ 44,847 $ 42,845
FFO applicable to common shares and Units $ 22,143 $ 20,152 $ 43,032 $ 36,406
Dividends to Series D preferred unitholders 160 160 320 320
FFO applicable to common shares and Units - diluted $ 22,303 $ 20,312 $ 43,352 $ 36,726
Core FFO applicable to common shares and Units $ 22,801 $ 23,303 $ 44,847 $ 42,845
Dividends to Series D preferred unitholders 160 160 320 320
Core FFO applicable to common shares and Units - diluted $ 22,961 $ 23,463 $ 45,167 $ 43,165
Per Share Data
Net income (loss) per common share - diluted (3)
$ (0.19) $ (0.23) $ (0.56) $ 2.55
FFO per share and Unit - diluted $ 1.23 $ 1.11 $ 2.39 $ 2.01
Core FFO per share and Unit - diluted $ 1.27 $ 1.28 $ 2.49 $ 2.36
Weighted average shares - basic 14,972 14,949 14,947 14,987
Effect of redeemable operating partnership Units for FFO and Core FFO
835 965 845 967
Effect of Series D preferred units for FFO and Core FFO
228 228 228 228
Effect of Series E preferred units for FFO and Core FFO
2,062 2,103 2,070 2,111
Effect of dilutive restricted stock units and stock options for FFO and Core FFO
32 24 26 20
Weighted average shares and Units for FFO and Core FFO - diluted 18,129 18,269 18,116 18,313
(1) Consists of $37,000 in associated trial costs related to the litigation matter for the six months ended June 30, 2024. Consists of a $2.9 million loss on litigation settlement for a trial judgment entered against the Company and $340,000 in associated trial costs related to the litigation matter for the three and six months ended June 30, 2023
(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 six months ended June 30, 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 six months ended June 30, 2024.
Distributions Declared
Distributions of $0.75 and $0.73 per common share and Unit were declared during the three months ended June 30, 2024 and 2023, respectively. Distributions of $1.50 and $1.46 were declared during the six months ended June 30, 2024 and 2023, respectively. Distributions of $0.4140625 per Series C preferred share were declared during the three months ended June 30, 2024 and 2023 and $0.828125 per Series C preferred share for the six months ended June 30, 2024 and 2023. Distributions of
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$0.9655 per Series D preferred unit were declared during the three months ended June 30, 2024 and 2023 and $1.931 per Series D preferred unit for the six months ended June 30, 2024 and 2023. Distributions of $0.96875 per Series E preferred unit were declared during the three months ended June 30, 2024 and 2023 and $1.9375 per Series E preferred unit for the six months ended June 30, 2024 and 2023.
Liquidity and Capital Resources
Overview
We strive to maintain a strong balance sheet and preserve financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise. We intend to continue to focus on core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.
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, including offerings of common shares under the 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, funding of mezzanine loans, and acquisitions of additional communities.
Although we believe that our financial condition and liquidity are sufficient to meet our reasonably anticipated liquidity demands, factors that could impact our future liquidity include, but are not limited to, volatility in capital and credit markets, interest rate increases, the ability to access capital and credit markets, the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.
As of June 30, 2024, we had total liquidity of approximately $222.3 million, which included $208.0 million available on the lines of credit based on the value of unencumbered properties and $14.3 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.
Debt
As of June 30, 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, (the “Unsecured Credit Facility”). As of June 30, 2024, there was $48.0 million outstanding on this line of credit and additional borrowing availability was $202.0 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. The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes. On July 26, 2024, the Unsecured Credit Facility was amended to extend maturity and to modify the leverage-based margin ratios applicable to borrowings. As amended, this credit facility matures in July 2028, 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.
As amended, 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 20-80 basis points, or the daily or term Secured Overnight Financing Rate (“SOFR”), plus a margin that ranges from 120-180 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 June 30, 2024 and 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.
We had a private shelf agreement with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. (collectively, “PGIM”) under which we 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 June 30, 2024 and December 31, 2023.
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(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 %
We have a $198.9 million Fannie Mae Credit Facility Agreement (the “FMCF”). The FMCF is currently secured by mortgages on 11 apartment communities. The notes are interest-only, have varying maturity dates of 7, 10, and 12 years, and a blended, weighted average interest rate of 2.78%. As of June 30, 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 and unamortized premiums and discounts, was $389.1 million and $392.3 million at June 30, 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 June 30, 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.
Equity
We have an equity distribution agreement in connection with the 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 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 shares sold during the three and six months ended June 30, 2024. As of June 30, 2024, common shares having an aggregate offering price of up to $118.9 million remained available under the ATM Program. Further information can be found in Note 4 - Equity and Mezzanine Equity in the Condensed Consolidated notes.
(in thousands, except per share amounts)
Three and Six Months Ended June 30,
Number of Common Shares
Net Consideration (1)
Average Net Price Per Share
2024 110 $ 7,561 $ 68.77
(1) Total consideration is net of $115 in commissions during the three and six months ended June 30, 2024.
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, we are 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 six months ended June 30, 2024 and 2023. As of June 30, 2024, we had $4.7 million remaining authorized for purchase under this program.
(in thousands, except per share amounts)
Three Months Ended June 30, Number of Common Shares Aggregate Cost (1)
Average Price Per Share (1)
2024 — $ — $ —
2023 105 5,696 $ 54.51
Six Months Ended June 30,
2024 88 $ 4,703 $ 53.62
2023 124 6,718 $ 54.19
(1) Amount includes commissions.
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Changes in Cash, Cash Equivalents, and Restricted Cash
As of June 30, 2024, we had cash and cash equivalents of $14.3 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 six months ended June 30, 2024, we generated capital from various activities, including:
• Receiving $18.3 million in net proceeds from the sale of two apartment communities;
• Receiving $18.0 million in net draws on the lines of credit;
• Receiving $7.4 million in net proceeds from the issuance of common shares; and
• Receiving $1.9 million in net insurance proceeds primarily due to one large casualty event that was settled.
During the six months ended June 30, 2024, we used capital for various activities, including:
• Funding of mezzanine loan of $13.1 million;
• Repaying $3.1 million of mortgage principal;
• Paying distributions on common shares, Series E preferred units, Units, and Series C preferred shares of $29.9 million;
• Repurchasing 87,722 common shares for $4.7 million; and
• Funding capital improvements for apartment communities of approximately $35.6 million.
Contractual Obligations and Other Commitments
Contractual obligations and other commitments were disclosed in our Form 10-K for the year ended December 31, 2023. Refer to Note 10 of the Notes to the Condensed Consolidated Financial Statements for additional details. There have been no material changes to our contractual obligations and other commitments since that report was filed.
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. However, the cost to operate and maintain communities could increase at a rate greater than our ability to increase rents, which could adversely affect our results of operations. High inflation could have a negative impact on our residents and their ability to absorb rent increases.
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, 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 June 30, 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
In preparing the Condensed Consolidated Financial Statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of critical accounting policies is included in our Form 10-K for the year ended December 31, 2023,
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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 six months ended June 30, 2024.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.