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Item 2. Management’s Discussion and Analysis

2020-11-02 compared with 2020-08-03 · 130 added, 109 removed, 221 unchanged (52% 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 report, our audited financial statements for the year ended December 31, 2019 , which are included in our Form 10-K filed with the SEC on February 19, 2020, and the risk factors in Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2019 , and our Form 10-Q for the quarter ended June 30, 2020 (the "Report").

Currently, one of the most significant factors is the continuing adverse effects of the COVID-19 pandemic and its associated potential economic impact on our financial condition, results of operations, and cash flows as well as the adverse effects on our residents and commercial tenants, the real estate market, and the global economy and financial markets generally.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements included in this report, our audited financial statements for the year ended December 31, 2019, which are included in our Form 10-K filed with the SEC on February 19, 2020, and the risk factors in Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2019, and in our Form 10-Q for the quarter ended September 30, 2020 (the "Report").

Currently, one of the most significant risk factors is the continuing adverse effects of the COVID-19 pandemic and its associated potential economic impact on our financial condition, results of operations, and cash flows as well as the adverse effects on our residents

and commercial tenants, the real estate market, and the global economy and financial markets generally.

The extent to which COVID-19 continues to impact us and our residents and commercial tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures.

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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 our 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, 2019 and Form 10-Q for the quarter ended June 30, 2020, as they are updated and supplemented in this Report.

Executive Summary

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

As of June 30, 2020 , we owned interests in 70 apartment communities consisting of 12,135 apartment homes.

Property owned, as presented in the condensed consolidated balance sheets, was $1.7 billion at June 30, 2020 , compared to $1.6 billion at December 31, 2019 .

As of September 30, 2020, we owned interests in 67 apartment communities consisting of 11,910 apartment homes.

Property owned, as presented in the condensed consolidated balance sheets, was $1.8 billion at September 30, 2020, compared to $1.6 billion at December 31, 2019.

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

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Our first priority continues to be the health and well-being of our residents, team members, and the communities we serve.

In order to minimize the impact of COVID-19 on our team, residents, and communities, we undertook several measures in March 2020 to protect our residents, team members, and the communities in which we serve, as described in our Form 10-Q for the quarter ended March 31, 2020.

Enhanced cleaning protocols at our communities and offices, implemented physical distancing in communities common spaces, and instituted remote work guidelines for our team members, all in accordance with state and local guidelines.

We are utilizing technology to allow our property teams to interact remotely with prospective residents through virtual leasing.

We have provided rent deferrals to residents and rent abatement to commercial tenants who were financially impacted by the COVID-19 pandemic.

To support our team members working on-site, IRET has provided additional COVID-19 paid time off and enhanced flextime arrangements.

Certain states and cities, including some of those in which our apartment communities are located, have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, shelter-in-place or stay-at-home directives, restrictions on types of businesses that may continue to operate, and restrictions on the types of construction projects that may continue.

cannot predict when restrictions currently in place will expire or whether additional restrictions will be imposed in the future.

We cannot predict when restrictions currently in place will expire or whether additional restrictions will be imposed in the future.

In the second quarter, we implemented a plan to safely re-open common spaces in several of our communities while adhering to state and local guidelines, but we recognize that an increase in COVID-19 cases in these markets could cause us to close common spaces or take other preventive measures.

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Financial Impact of the COVID-19 Pandemic

Although the COVID-19 pandemic has affected our operations and the conduct of business at our apartment communities and offices, the COVID-19 pandemic did not have a material impact on our financial condition, operating results, or cash flows for the three months ended June 30, 2020.

However, absent the ability to contain or treat the COVID-19 virus, with a corresponding re-opening of the economy, the COVID-19 pandemic could adversely impact our financial condition, results of operations, and cash flows in future quarters.

Many companies, especially in urban areas, have extended directives for employees to work from home during the COVID-19 pandemic.

These extended directives have resulted in decreased traffic to businesses and, in some cases, closures of businesses in urban areas, which has resulted in lower demand and lower rent increases for our five urban based apartment communities.

Absent the ability to contain or treat the COVID-19 virus, with a corresponding re-opening of the economy, the COVID-19 pandemic could adversely impact our financial condition, results of operations, and cash flows in future quarters.

Under the Coronavirus Aid, Relief, and Economic Security Act (the "CARES Act”), the federal government provided $600 per week in unemployment benefits in addition to any state unemployment benefits for unemployed workers, but this additional federal funding expired on July 31, 2020.

We believe that the absence of this funding could impact our residents' ability to pay rent in August (and subsequent months), particularly if unemployment rates continue to remain high or even rise as a result of the ongoing COVID-19 pandemic, which in turn could adversely affect our results of operations.

The ongoing COVID-19 pandemic may have the following adverse financial and economic impacts, which would be exacerbated by the discontinuation of federal government relief:

We believe that the absence of this funding could impact our residents' ability to pay rent, particularly since unemployment rates continue to remain high as a result of the ongoing COVID-19 pandemic, which in turn could adversely affect our results of operations.

The ongoing COVID-19 pandemic may have the following adverse financial and economic impacts, which would be exacerbated by the continued absence of federal government relief for unemployed workers:

• cause our residents or commercial tenants to defer or stop rental payments, and abandon or fail to renew leases, which would reduce our primary source of net operating income and cash flows;

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We have taken the following actions in order to protect our residents and employees, manage expenses and preserve cash flow during the COVID-19 pandemic:

With respect to capital projects and investments, we continue to monitor changing government rules and regulations related to COVID-19 and continue to abide by the guidelines set forth by the Center for Disease Control and have initiated a review of capital spend to identify projects that can be delayed;

• with respect to capital projects and investments, we continue to monitor changing government rules and regulations related to COVID-19 and continue to abide by the guidelines set forth by the Center for Disease Control and initiated a review of capital spend to identify projects that were delayed;

• we have eliminated the majority of planned travel expense for our team members through the end of 2020;

• we have moved the meetings of our Board of Trustees to virtual meetings, thereby limiting the expense associated with in-person meetings.

The extent to which the economic disruption associated with the COVID-19 pandemic impacts our business and financial results will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope,

severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures, among others.

Despite our efforts to manage our r esponse to the effects of the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on our rental revenue for the remainder of 2020 and future years cannot be determined at present.

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Our management remains committed to ensuring the safety of our team members, residents, and communities, and to maintaining the financial stability of our business enterprise for the duration of the COVID-19 pandemic.

Overview of the Three Months Ended June 30, 2020

For the three months ended June 30, 2020 , revenue decreased by $3.0 million to $43.9 million , compared to $46.9 million for the three months ended June 30, 2019 , primarily due to dispositions.

Total expenses decreased by $1.6 million to $41.4 million for the three months ended June 30, 2020 , compared to $43.0 million for the three months ended June 30, 2019 due to property operating expenses, excluding real estate taxes.

Funds from Operations ("FFO") applicable to common shares and Units for the three months ended June 30, 2020 decreased to $12.4 million compared to $18.8 million for the comparable period ended June 30, 2019 , primarily due to a gain on litigation settlement of $6.3 million in the prior year which did not recur in the current period, decreased NOI, and increased casualty loss, offset by reductions in interest expense and general and administrative expense.

Overview of the Three Months Ended September 30, 2020

For the three months ended September 30, 2020, revenue decreased by $3.3 million to $44.1 million, compared to $47.4 million for the three months ended September 30, 2019, primarily due to dispositions.

Total expenses decreased by $1.7 million to $42.1 million for the three months ended September 30, 2020, compared to $43.8 million for the three months ended

September 30, 2019 primarily due to decreased property operating expenses as a result of dispositions, net of acquisitions.

Funds from Operations ("FFO") applicable to common shares and Units for the three months ended September 30, 2020 increased to $12.6 million compared to $12.2 million for the comparable period ended September 30, 2019, primarily due to reductions in interest expense, debt extinguishment costs, and general and administrative expense.

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

In our ongoing efforts to improve the quality of our portfolio and balance sheet, in June 2020 we announced that we will be including Nashville as one of our target markets for acquisition of apartment communities.

During the second quarter of 2020 , we disposed of our sole remaining parcel of unimproved land for a total sale price of $1.3 million.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing our acquisitions and dispositions during the six months ended June 30, 2020 and 2019 .

In our ongoing efforts to improve the quality of our portfolio and balanc e sheet, during the third quarter of 2020, we acquired Parkhouse Apartment Homes in Thornton, Colorado for $144.8 million.

We also disposed of four apartment communities in Grand Forks, North Dakota and one commercial property for a total sale price of $43.0 million.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing our acquisitions and dispositions during the nine months ended September 30, 2020 and 2019.

Results of Operations

Reconciliation of Operating Income (Loss) to Net Operating Income

The following table provides a reconciliation of operating income (loss) to net operating income ("NOI"), which is defined below.

Reconciliation of Operating Income to Net Operating Income

The following table provides a reconciliation of operating income to net operating income ("NOI"), which is defined below.

(in thousands, except percentages)

Three Months Ended June 30,

Six Months Ended June 30,

Operating income (loss)

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

2020 2019 $ Change % Change 2020 2019 $ Change % Change

Operating income $ 2,002 $ 3,596 $ (1,594) (44.3) % $ 6,530 $ 8,951 $ (2,421) (27.0) %

Property management expenses 1,442 1,553 (111) (7.1) 4,341 4,552 (211) (4.6) %

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Consolidated Results of Operations

The following consolidated results of operations cover the three and six months ended June 30, 2020 and 2019 .

The following consolidated results of operations cover the three and nine months ended September 30, 2020 and 2019.

(in thousands, except percentages)

Three Months Ended June 30,

Six Months Ended June 30,

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

2020 2019 $ Change % Change 2020 2019 $ Change % Change

Same-store $ 38,043 $ 37,627 $ 416 1.1 % $ 114,208 $ 111,897 $ 2,311 2.1 %

Non-same-store 4,420 1,344 3,076 228.9 % 12,088 2,829 9,259 327.3 %

Other properties and dispositions 1,675 8,465 (6,790) (80.2) % 6,158 25,252 (19,094) (75.6) %

Total 44,138 47,436 (3,298) (7.0) % 132,454 139,978 (7,524) (5.4) %

Property operating expenses, including real estate taxes

Same-store 16,198 15,493 705 4.6 % 47,857 46,190 1,667 3.6 %

Non-same-store 1,712 550 1,162 211.3 % 4,546 1,197 3,349 279.8 %

Other properties and dispositions 621 3,867 (3,246) (83.9) % 2,831 12,075 (9,244) (76.6) %

Total 18,531 19,910 (1,379) (6.9) % 55,234 59,462 (4,228) (7.1) %

Net operating income

Same-store 21,845 22,134 (289) (1.3) % 66,351 65,707 644 1.0 %

Non-same-store 2,708 794 1,914 241.1 % 7,542 1,632 5,910 362.1 %

Other properties and dispositions 1,054 4,598 (3,544) (77.1) % 3,327 13,177 (9,850) (74.8) %

Total $ 25,607 $ 27,526 $ (1,919) (7.0) % $ 77,220 $ 80,516 $ (3,296) (4.1) %

Property management expenses (1,442) (1,553) (111) (7.1) % (4,341) (4,552) (211) (4.6)

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Income (loss) before gain (loss) on sale of real estate and other investments, and gain (loss) on litigation settlement

(4,492) (4,687) 195 (4.2) % (16,071) (14,335) (1,736) 12.1 %

Gain (loss) on sale of real estate and other investments 25,676 39,105 (13,429) (34.3) % 25,486 39,774 (14,288) (35.9) %

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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ 18,021 $ 29,891 $ (11,870) (39.7) % $ 4,195 $ 24,895 $ (20,700) (83.1) %

Three Months Ended June 30,

Six Months Ended June 30,

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

Weighted Average Occupancy (1)

2020 2019 2020 2019

Same-store 94.4 % 93.5 % 94.8 % 94.5 %

Non-same-store 93.9 % 96.3 % 93.7 % 97.2 %

Total 94.3 % 93.6 % 94.7 % 94.6 %

(1) Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental revenue.

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

Number of Apartment Homes

June 30, 2020

June 30, 2019

Number of Apartment Homes September 30, 2020 September 30, 2019

Same-store 10,567 11,785

Non-same-store 1,343 1,551

Total 11,910 13,336

NOI is a non-GAAP measure, which we define as total real estate revenues less property operating expenses, including real estate taxes.

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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 our real estate portfolio, and accordingly provide less useful information for evaluating ongoing operational performance of our real estate portfolio.

For the comparison of the six months ended June 30, 2020 and 2019 , four apartment communities were non-same-store.

For the comparison of the nine months ended September 30, 2020 and 2019, five apartment communities were non-same-store.

Sold communities are included in "Other," which also includes non-multifamily properties and the non-multifamily components of mixed-use properties.

Revenue decreased by 6.4% to $43.9 million for the three months ended June 30, 2020 , compared to $46.9 million in the three months ended June 30, 2019 .

Revenue decreased by 7.0% to $44.1 million for the three months ended September 30, 2020, compared to $47.4 million in the three months ended September 30, 2019.

Revenue from dispositions and other properties decreased by $6.8 million, offset by a $3.1 million increase from non-same-store communities.

Revenue from same-store communities increased 1.4% or $541,000 in the three months ended June 30, 2020 , compared to the same period in the prior year.

The increase was attributable to 1.1% growth in average rental revenue and a 0.3% increase in occupancy as weighted average occupancy increased to 94.6% from 94.3% for the three months ended June 30, 2020 and 2019 , respectively.

Revenue decreased by 4.6% to $88.3 million for the six months ended June 30, 2020 , compared to $92.5 million in the six months ended June 30, 2019 .

Revenue from same-store communities increased 1.1% or $416,000 in the three months ended September 30, 2020, compared to the same period in the prior year.

The increase was attributable to 0.2% growth in average rental revenue and a 0.9% increase in occupancy as weighted average occupancy increased to 94.4% from 93.5% for the three months ended September 30, 2020 and 2019, respectively.

Revenue decreased by 5.4% to $132.5 million for the nine months ended September 30, 2020, compared to $140.0 million in the nine months ended September 30, 2019.

Revenue from dispositions and other properties decreased by $19.1 million, offset by a $9.3 million increase from non-same-store communities.

Revenue from same-store communities increased 2.6% or $2.0 million in the six months ended June 30, 2020 , compared to the same period in the prior year.

The increase was attributable to 2.5% growth in average rental revenue and a 0.1% increase in occupancy as weighted average occupancy increased to 95.0% from 94.9% for the six months ended June 30, 2020 and 2019 , respectively.

Revenue from same-store communities increased 2.1% or $2.3 million in the nine months ended September 30, 2020, compared to the same period in the prior year.

The increase was attributable to 1.8% growth in average rental revenue and a 0.3% increase in occupancy as weighted average occupancy increased to 94.8% from 94.5% for the nine months ended September 30, 2020 and 2019, respectively.

Property operating expenses, including real estate taxes .

Property operating expenses, including real estate taxes, decreased by 8.9% to $17.8 million in the three months ended June 30, 2020 , compared to $19.5 million in the same period of the prior year.

A decrease of $3.1 million from dispositions and other properties was offset by an increase of $1.0 million at non-same-

store communities.

Property operating expenses, including real estate taxes, at same-store communities increased by 1.8% or $280,000 in the three months ended June 30, 2020 , compared to the same period in the prior year.

At same-store communities, real estate taxes increased by $423,000.

Insurance expense at same-store properties increased by $300,000.

These same-store increases were partially offset by a decrease in controllable operating expenses (which exclude insurance and real estate taxes) of $443,000, primarily due to lower utility costs and reduced turnover and general maintenance activities during the initial months of the COVID-19 pandemic.

Property operating expenses, including real estate taxes, decreased by 7.2% to $36.7 million in the six months ended June 30, 2020 , compared to $39.6 million in the same period of the prior year.

Property operating expenses, including real estate taxes, decreased by 6.9% to $18.5 million in the three months ended September 30, 2020, compared to $19.9 million in the same period of the prior year.

A decrease of $3.2 million from dispositions and other properties was offset by an increase of $1.2 million at non-same-store communities.

Property operating expenses, including real estate taxes, at same-store communities increased by 2.9% or $937,000 in the six months ended June 30, 2020 , compared to the same period in the prior year.

At same-store communities, real estate taxes increased by $926,000.

Insurance expense at same-store properties increased by $952,000.

These same-store increases were partially offset by a decrease in controllable operating expenses (which exclude insurance and real estate taxes) of $941,000, primarily due to lower snow removal in the first quarter, lower utility costs, and reduced turnover and general maintenance activities during the initial months of the COVID-19 pandemic.

Property operating expenses, including real estate taxes, at same-store communities increased by 4.6% or

$705,000 in the three months ended September 30, 2020, compared to the same period in the prior year.

At same-store communities, real estate taxes increased by $367,000 and insurance expenses increased by $105,000.

Controllable expenses (which exclude insurance and real estate taxes) increased by $233,000.

The same-store increases in controllable expenses were primarily due to increased compensation costs.

Property operating expenses, including real estate taxes, decreased by 7.1% to $55.2 million in the nine months ended September 30, 2020, compared to $59.5 million in the same period of the prior year.

A decrease of $9.2 million from dispositions and other properties was offset by an increase of $3.3 million at non-same-store communities.

Property operating expenses, including real estate taxes, at same-store communities increased by 3.6% or $1.7 million in the nine months ended September 30, 2020, compared to the same period in the prior year.

At same-store communities, real estate taxes increased by $1.3 million.

Insurance expense at same-store properties increased by $1.0 million.

These same-store increases were partially offset by a decrease in controllable expenses (which exclude insurance and real estate taxes) of $624,000, primarily due to lower snow removal expenses, utility costs, and general maintenance activities, offset by increased compensation costs.

Property management expenses .

Property management expense, consisting of property management overhead and property management fees paid to third parties, was $1.3 million and $1.4 million in the three months ended June 30, 2020 and 2019 , respectively.

Property management expense was $2.9 million and $3.0 million in the six months ended June 30, 2020 and 2019 , respectively.

Property management expense, consisting of property management overhead and property management fees paid to third parties, was $1.4 million and $1.6 million in the three months ended September 30, 2020 and 2019, respectively.

Property management expense was $4.3 million and $4.6 million in the nine months ended September 30, 2020 and 2019, respectively.

Casualty gain (loss).

Casualty loss was $913,000 in the three months ended June 30, 2020 , compared to $92,000 in the same period of the prior year.

The increase was primarily due to weather-related losses during the three months ended June 30, 2020 and an increase in our aggregate stop loss compared to the prior year.

Casualty loss was $1.2 million in the six months ended June 30, 2020 , compared to $733,000 in the same period of the prior year.

The increase was primarily due to weather-related losses and an increase in our aggregate stop loss.

Casualty loss was $91,000 in the three months ended September 30, 2020, compared to $178,000 in the same period of the prior year.

The current quarter's loss included $695,000 related to hail damage incurred during the quarter, offset by a reduction in the estimate of a prior quarter loss of $532,000.

Casualty loss was $1.3 million in the nine months ended September 30, 2020, compared to $911,000 in the same period of the prior year.

The increase was primarily due to weather-related losses and an increase in our aggregate stop loss and deductible.

During the nine months ended September 30, 2020, we incurred an estimated $2.4 million in hail damage at five communities in Rapid City, SD, and one community in Lincoln, NE, resulting in $1.1 million of casualty loss recorded during the period, largely from the write off of the affected assets.

Approximately $2.0 million is expected to be spent over the next 12 months to replace the impacted assets.

Depreciation and amortization.

Depreciation and amortization decreased by 1.5% to $18.2 million in the three months ended June 30, 2020 , compared to $18.4 million in the same period of the prior year, attributable to a decrease of $1.9 million from sold properties, offset by an increase of $1.7 million from non-same-store properties.

Depreciation and amortization decreased by 0.6% to $36.3 million in the six months ended June 30, 2020 , compared to $36.5 million in the same period of the prior year, attributable to a $3.9 million decrease from sold properties, offset by an increase of $3.7 million from non-same-store properties.

Depreciation and amortization increased by 1.3% to $19.0 million in the three months ended September 30, 2020, compared to $18.8 million in the same period of the prior year, attributable to an increase of $1.9 million from non-same-store properties, offset by a decrease of $1.8 million from sold properties.

Depreciation and amortization was $55.3 million in the nine months ended September 30, 2020, compared to $55.3 million in the same period of the prior year, attributable to a $5.7 million decrease from sold properties, offset by an increase of $5.6 million from non-same-store properties.

General and administrative expenses.

General and administrative expenses decreased by 9.8% to $3.2 million in the three months ended June 30, 2020 , compared to $3.5 million in the same period of the prior year, primarily attributable to decreases in compensation, healthcare, and travel costs in the current period.

General and administrative expenses decreased by 9.9% to $6.6 million in the six months ended June 30, 2020 , compared to $7.4 million in the same period of the prior year, primarily attributable to decreases in legal fees of $357,000 related to our successful pursuit of a recovery on a construction defect claim, compensation, and travel costs.

General and administrative expenses decreased by 10.8% to $3.1 million in the three months ended September 30, 2020, compared to $3.4 million in the same period of the prior year, primarily attributable to decreases in compensation, healthcare, travel, and consulting costs in the current period.

General and administrative expenses decreased by 10.1% to $9.7 million in the nine months ended September 30, 2020, compared to $10.8 million in the same period of the prior year, primarily attributable to decreases in legal fees, compensation, and travel costs.

Interest expense.

Interest expense decreased by 8.6% to $6.9 million in the three months ended June 30, 2020 , compared to $7.6 million in the same period of the prior year, primarily due to the replacement of maturing debt with lower rate debt and lower average balances on our lines of credit.

Interest expense decreased by 10.6% to $13.9 million in the six months ended June 30, 2020 , compared to $15.5 million in the same period of the prior year, primarily due to the replacement of maturing debt with lower rate debt and lower average balances on our lines of credit.

Interest expense decreased by 12.0% to $6.8 million in the three months ended September 30, 2020, compared to $7.7 million in the same period of the prior year, primarily due to the replacement of maturing debt with lower rate debt and lower average balances on our lines of credit and mortgage loans.

Interest expense decrease by 11.0% to $20.6 million in the nine months ended September 30, 2020, compared to $23.2 million in the same period of the prior year, primarily due to the replacement of maturing debt with lower rate debt and lower average balances on our lines of credit and mortgage loans.

Interest and other income (loss).

We recorded income of $538,000 in the three months ended June 30, 2020 , compared to income of $468,000 in the same period of the prior year.

We recorded a loss of $2.2 million in the six months ended June 30, 2020 , compared to income of $892,000 in the same period of the prior year.

The decrease was primarily due to a $3.4 million loss in the value of our marketable securities during the during the six months ended June 30, 2020 .

We recorded interest and other income of $281,000 in the three months ended September 30, 2020, compared to income of $498,000 in the same period of the prior year.

We recorded a loss of $2.0 million in interest and other income (loss) for the nine months ended September 30, 2020, compared to income of $1.4 million in the same period of the prior year.

The decrease was primarily due to a $3.4 million loss in the value of our marketable securities during the during the nine months ended September 30, 2020.

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

We had a loss of $190,000 in the three months ended June 30, 2020 , compared to a gain of $615,000 in the same period of the prior year.

We had a loss of $190,000 in the six months ended June 30, 2020 , compared to a gain of $669,000 in the same period of the prior year.

Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements in this report for a table detailing our acquisitions and dispositions during the six -month periods ended June 30, 2020 and 2019 .

We had a gain of $25.7 million in the three months ended September 30, 2020, compared to $39.1 million in the same period of the prior year.

We had a gain of $25.5 million in the nine months ended September 30, 2020, compared to $39.8 million in the same period of the prior year.

Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing our acquisitions and dispositions during the nine-month periods ended September 30, 2020 and 2019.

Net income (loss) available to common shareholders.

Net loss available to common shareholders was $5.4 million for the three months ended June 30, 2020 , compared to net income of $1.4 million in the three months ended June 30, 2019 .

Net loss available to common shareholders was $13.8 million for the six months ended June 30, 2020 , compared to $5.0 million in the six months ended June 30, 2019 .

Net income available to common shareholders was $18.0 million for the three months ended September 30, 2020, compared to $29.9 million in the three months ended September 30, 2019.

Net income available to common shareholders was $4.2 million for the nine months ended September 30, 2020, compared to $24.9 million in the nine months ended September 30, 2019.

Funds from Operations .

We believe that FFO, which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our 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.

We believe that Funds from Operations ("FFO"), which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our 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.

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

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FFO also does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of sufficient cash flow to fund all of our needs or our ability to service indebtedness or make distributions.

FFO applicable to common shares and Units for the three months ended June 30, 2020 , decreased to $12.4 million compared to $18.8 million for the comparable period ended June 30, 2019 , a decrease of 34.2% .

This decrease was primarily due to a gain on litigation settlement of $6.3 million in the prior year which did not recur in the current period, decreased NOI, and increased casualty loss, offset by reductions in interest expense and general and administrative expense.

For the six months ended June 30, 2020 , FFO applicable to common shares and Units decreased to $21.0 million compared to $29.0 million for the comparable period of 2019, representing a decrease of 27.4% .

This decrease was primarily due to a gain on litigation settlement of $6.3 million in 2019 that did not recur in the current period, a loss on marketable securities of $3.4 million in the current period, decreased NOI, and increased casualty loss, offset by reductions in interest expense and general and administrative expense.

FFO applicable to common shares and Units for the three months ended September 30, 2020, increased to $12.6 million compared to $12.2 million for the comparable period ended September 30, 2019, an increase of 3.7%.

This increase was primarily due to reductions in interest expense, debt extinguishment costs, and general and administrative expense, partially offset by decreased NOI from sold properties.

For the nine months ended September 30, 2020, FFO applicable to common shares and Units decreased to $33.7 million compared to $41.1 million for the comparable period of 2019, representing a decrease of 18.2%.

This decrease was primarily due to a gain on litigation settlement of $6.6 million in 2019 that did not recur in the current period, a loss on marketable securities of $3.4 million in the current period, decreased NOI from sold properties, and increased casualty loss, partially offset by reductions in interest expense, debt extinguishment costs, and general and administrative expense.

Reconciliation of Net Income Available to Common Shareholders to Funds from Operations

(in thousands, except per share and unit amounts)

Three Months Ended June 30,

Six Months Ended June 30,

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

2020 2019 2020 2019

Net income (loss) available to common shareholders $ 18,021 $ 29,891 $ 4,195 $ 24,895

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Acquisitions and Dispositions

During the second quarter of 2020 , we acquired no new real estate compared to $2.1 million of acquisitions in the same period of the prior year.

During the second quarter of 2020 , we had one disposition, compared to two dispositions in the second quarter of 2019 .

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this report for a table detailing our acquisitions and dispositions during the six -month periods ended June 30, 2020 and 2019 .

During the third quarter of 2020, we acquired $144.8 million in new real estate compared to $125.3 million of acquisitions in the same period of the prior year.

During the third quarter of 2020, we had five dispositions for an aggregate sale price of $43.0 million, compared to seven dispositions in the third quarter of 2019 for an aggregate sale price of $85.0 million.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing our acquisitions and dispositions during the nine-month periods ended September 30, 2020 and 2019.

Distributions Declared

Distributions of $0.70 and $1.40 per common share and Unit were declared during the three and six months ended June 30, 2020 and 2019 .

Distributions of $0.4140625 and $0.828125 per Series C preferred share were declared during the three and six months ended June 30, 2020 and 2019 .

Distributions of $0.9655 and $1.931 per Series D preferred unit were declared during the three and six months ended June 30, 2020 and 2019 , respectively.

Distributions of $0.70 and $2.10 per common share and Unit were declared during the three and nine months ended September 30, 2020 and 2019.

Distributions of $0.4140625 and $1.2421875 per Series C preferred share were declared during the three and nine months ended September 30, 2020 and 2019.

Distributions of $0.9655 and $2.8965 per Series D preferred unit were declared during the three and nine months ended September 30, 2020 and 2019, respectively.

Liquidity and Capital Resources

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Although we believe that our financial condition and liquidity are sufficient to meet our reasonably anticipated liquidity demands during 2020, factors that could impact our future liquidity include, but are not limited to, volatility in capital and credit markets, our ability to access capital and credit markets, the effects of the COVID-19 pandemic, including its potential impact on our ability to access the capital and credit markets on reasonable terms (or at all), the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

As of June 30, 2020 , we had total liquidity of approximately $239.7 million , which included $187.0 million available on our line of credit and $52.7 million of cash and cash equivalents.

As of September 30, 2020, we had total liquidity of approximately $131.8 million, which included $115.0 million available on our line of credit and $16.8 million of cash and cash equivalents.

As of December 31, 2019, we had total liquidity of approximately $226.5 million, which included $199.9 million on our line of credit and $26.6 million of cash and cash equivalents.

The decline in total liquidity since the end of the second quarter is primarily a result of funding our acquisition of Parkhouse Apartment Homes.

As of September 30, 2020, we had 45 unencumbered apartment communities, representing 64.6% of third quarter multifamily NOI, of which 4 apartment communities, representing approximately 5.4% of third quarter NOI, are not pledged under the UAP.

COVID-19-Related Impacts on Liquidity

We anticipate that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flows generated from operations (although cash flows may be reduced as a result of lower monthly collections of rent as well as the potential for lower occupancy or reduced rental rates during and after the COVID-19 pandemic), and availability under our unsecured lines of credit.

At the end of the second quarter, we had $239.7 million of total liquidity on our balance sheet, including $187.0 million available under our unsecured line of credit and $52.7 million of cash and cash equivalents.

We have approximately $9.4 million of debt maturities remaining in 2020 and approximately $35.6 million of debt maturities in 2021.

We have approximately $34.0 million remaining to fund, primarily over the next 12 months, under construction and mezzanine loans we originated for the development of a multifamily community in Minneapolis, Minnesota.

Other available sources of liquidity proceeds from property dispositions, including restricted cash related to net tax deferred proceeds;

We anticipate that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flows generated from operations and availability under our unsecured lines of credit.

Although cash flows may be reduced as a result of lower monthly collections of rent as well as the potential for lower occupancy or reduced rental rates during and after the COVID-19 pandemic, we have other available sources of liquidity such as proceeds from property dispositions, including restricted cash related to net tax deferred proceeds;

offerings of preferred and common shares under our shelf registration statement, including offerings of common shares under our 2019 ATM Program;

and long term unsecured term loans and secured mortgages.

However, due to the economic disruption caused by COVID-19-related events, the terms of future debt and equity issuances may not be as favorable for the foreseeable future as they have been in recent years.

We have the following contractual obligations over the next fifteen months:

• no debt maturities remaining in 2020 and $35.3 million of debt maturities in 2021 and

• approximately $27.2 million remaining to fund, primarily over the next 12 months, under construction and mezzanine loans we originated for the development of a multifamily community in Minneapolis, Minnesota.

Due to the economic disruption caused by COVID-19-related events, the terms of future debt and equity issuances may not be as favorable for the foreseeable future as they have been in recent years.

For a discussion of our debt facilities and the impact of COVID-19-related effects thereon, see "Debt" and "Potential Impact of COVID-19-Related Effects on Continuing Debt Availability" below.

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a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million unsecured term loan that matures on August 31, 2025.

As of June 30, 2020 , our line of credit had total commitments of $250.0 million , with borrowing capacity based on the value of properties contained in an unencumbered asset pool ("UAP").

The UAP provided for a borrowing capacity of approximately $250.0 million at quarter-end, offering additional borrowing availability of $187.0 million beyond the $63.0 million drawn, including the balance on our operating line of credit, as of June 30, 2020 .

As of September 30, 2020, our line of credit had total commitments of $250.0 million, with borrowing capacity based on the value of properties contained in an unencumbered asset pool ("UAP").

The UAP provided for a borrowing capacity of approximately $250.0 million at quarter-end, offering additional borrowing availability of $115.0 million beyond the $135.0 million drawn, including the balance on our operating line of credit, as of September 30, 2020.

At December 31, 2019, the line of credit borrowing capacity was $250.0 million based on the UAP, of which $50.1 million was drawn on the line, including the balance on our operating line of credit.

This credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.

As of June 30, 2020 , we had a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes.

As of September 30, 2020, we had a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes.

In September 2019, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually, under this facility.

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

This operating line has a one-year term, with pricing based on a market spread plus the one-month LIBOR index rate.

Mortgage loan indebtedness was $325.2 million and $331.4 million on June 30, 2020 and December 31, 2019 , respectively.

This operating line matures on August 1, 2021, with pricing based on a market spread plus the one-month LIBOR index rate.

Mortgage loan indebtedness was $314.5 million and $331.4 million on September 30, 2020 and December 31, 2019, respectively.

All of our mortgage debt is 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, 2020 , the weighted average interest rate on our mortgage debt was 4.01% .

As of September 30, 2020, the weighted average interest rate on our mortgage debt was 3.99%.

Potential Impact of COVID-19-Related Effects on Continuing Debt Availability

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The proceeds from the sale of common shares under the 2019 ATM program are intended to be used for general corporate purposes, which may include the funding of future acquisitions and the repayment of indebtedness.

During the six months ended June 30, 2020 , we issued approximately 674,000 common shares under the 2019 ATM program at an average price of $71.56 per share, net of commissions.

Total consideration, net of commissions and issuance costs, was approximately $48.3 million .

As of June 30, 2020 , common shares having an aggregate offering price of up to $79.5 million remained available under the 2019 ATM Program.

During the nine months ended September 30, 2020, we issued approximately 819,082 common shares under the 2019 ATM program at an average price of $70.23 per share, net of commissions.

Total consideration, net of commissions and issuance costs, was $57.5 million.

As of September 30, 2020, common shares having an aggregate offering price of up to $69.2 million remained available under the 2019 ATM Program.

Changes in Cash, Cash Equivalents, and Restricted Cash

The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in our 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, 2020 , we generated capital from various activities, including:

Receiving $48.3 million in net proceeds from the issuance of approximately 674,000 common shares under our 2019 ATM Program;

Repayment of $10.0 million of note receivables;

In addition to cash flow from operations, during the nine months ended September 30, 2020, we generated capital from various activities, including:

• Receiving $57.5 million in net proceeds from the issuance of 819,082 common shares under our 2019 ATM Program;

• Receiving $10.0 million for the payoff of a note receivable;

• Selling $3.9 million of marketable securities;

• Disposing of four apartment communities in Grand Forks, North Dakota and one commercial property for $43.0 million;

• Selling a parcel of unimproved land for $1.3 million.

During the six months ended June 30, 2020 , we used capital for various activities, including:

During the nine months ended September 30, 2020, we used capital for various activities, including:

• Acquiring Ironwood Apartments, a 182-home apartment community located in New Hope, Minnesota, an inner-ring suburb of Minneapolis, for an aggregate purchase price of $46.3 million, of which $28.6 million was paid in cash and $17.7 million from payoff of a note receivable and accrued interest;

Acquiring the noncontrolling interests in 71 France for $12.2 million ;

• Acquiring Parkhouse Apartment Homes, a 465-home apartment community located in Thornton, Colorado, a suburb of Denver, for an aggregate purchase price of $144.8 million;

• Acquiring the remaining noncontrolling interests in 71 France for $12.2 million;

• Funding of mezzanine/construction loans of $11.9 million;

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• Repurchasing 237,007 Series C preferred shares for an aggregate total cost of approximately $5.6 million;

• Funding acquisition capital for apartment communities of approximately $1.3 million;

• Funding capital improvements for apartment communities of approximately $20.4 million.

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Off-Balance Sheet Arrangements

As of June 30, 2020 , we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

As of September 30, 2020, 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 our critical accounting policies is included in our Form 10-K for the year ended December 31, 2019, filed with the SEC on February 19, 2020 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 our critical accounting policies during the six months ended June 30, 2020 .

There have been no other significant changes to our critical accounting policies during the nine months ended September 30, 2020.

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