CENTERSPACE 10-K

Item 1. Business OVERVIEW Investors Real Estate Trust doing business as Centerspace (“we,” “us,” “our,” “Centerspace,” or the “Company”) is a real estate investment trust (“REIT”) organized under the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of apartment communities. Over the past several years, we have extensively repositioned our portfolio from a diversified, multi-segment collection of properties into a single segment concentrated on apartment communities. Our current emphasis is on making operational enhancements that will improve our residents’ experience, redeveloping some of our existing apartment communities to meet current market demands, and acquiring new apartment communities in the Minneapolis/St. Paul and Denver metropolitan areas. On December 9, 2020, we announced a new name, Centerspace, and brand platform that reflects both transformation of the Company and our vision for the future. We 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 December 31, 2020, we owned interests in 67 apartment communities, containing 11,910 homes and having a total real estate investment amount, net of accumulated depreciation, of $1.4 billion. Our corporate headquarters is located in Minot, North Dakota. We also have a corporate office in Minneapolis, Minnesota. Effective January 1, 2019, we changed our fiscal year end from April 30 to December 31. As a result of this change, we filed a transition report on Form 10-KT for the eight-month transition period ended December 31, 2018, in accordance with SEC rules and regulations. The references in this Report to the terms listed below reflect the respective period noted (all other reporting periods defined separately): Term Financial Reporting Period Year ended December 31, 2020 January 1, 2020 through December 31, 2020 Year ended December 31, 2019 January 1, 2019 through December 31, 2019 Year ended December 31, 2018 January 1, 2018 through December 31, 2018 Transition period ended December 31, 2018 May 1, 2018 through December 31, 2018 Fiscal year ended April 30, 2018 May 1, 2017 through April 30, 2018 Website and Available Information Our internet address is www.centerspacehomes.com. We make available, free of charge, through the “SEC filings” tab under the Investors section of our website, our Transition Report on Form 10-KT, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, and proxy statements for our Annual Meetings of Shareholders, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after 3 Table of Contents such reports are filed with or furnished to the SEC. These reports are also available at www.sec.gov. We also make press releases, investor presentations, and certain supplemental information available on our website. Current copies of our Code of Conduct; Code of Ethics for Senior Financial Officers; and Charters for the Audit, Compensation, and Nominating and Governance Committees of our Board of Trustees are also available on our website under the “Corporate Governance” tab under the Investors section of our website. Copies of these documents are also available free of charge to shareholders upon request addressed to the Secretary at Centerspace, P.O. Box 1988, Minot, North Dakota 58702-1988. Information on our website does not constitute part of this Report. STRUCTURE We were organized under the laws of North Dakota on July 31, 1970, and have operated as a REIT under Sections 856-858 of the Internal Revenue Code since our formation. On February 1, 1997, we were restructured as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”), and we conduct our daily business operations primarily through our operating partnership, Centerspace, LP (the “Operating Partnership”). The sole general partner of Centerspace, LP is Centerspace, Inc., a North Dakota corporation and our wholly owned subsidiary. All of our assets and liabilities have been contributed to Centerspace, LP, through Centerspace, Inc., in exchange for the sole general partnership interest in Centerspace, LP. Centerspace, LP holds substantially all of the assets of the Company. Centerspace, LP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units, which is one of the reasons the Company is structured in this manner. As of December 31, 2020, Centerspace, Inc. owned a 93.0% interest in Centerspace, LP. The remaining interest in Centerspace, LP is held by individual limited partners. BUSINESS STRATEGIES Our business is focused on our mission - to provide a great home - for our residents, our employees and our investors. We fulfill this mission by providing renters well-located options that range from workforce to lifestyle housing. While fulfilling our mission, we are seeking consistent earnings growth through exceptional operations, disciplined capital allocation, and market knowledge and efficiencies. Our operations and investment strategies are the foundation for fulfilling our mission. Operations Strategy We manage our apartment communities with a focus on providing an exceptional resident experience and maximizing our property financial results. Our initiatives to optimize our operations include: • Providing excellent customer service to enhance resident satisfaction and retention; • Employing new technologies that make our communities more efficient and more accessible to residents; • Optimizing revenues; • Controlling operating costs; and • Unlocking value within the portfolio through redevelopment and enhancement of existing assets. Investment Strategy Our business objective under our current strategic plan is to employ an investment strategy that includes the following elements: • Investing in income-producing apartment communities that grow distributable cash flow and are located in key geographic markets with populations ranking in the top 50 U.S. metropolitan statistical areas, including expansion in the Minneapolis and Denver markets and our planned entrance into the Nashville market; • Selecting markets with favorable market characteristics, including strong growth prospects and employment forecasts, high occupancy rates, strong rent growth potential, and institutional liquidity; • Leveraging our portfolio to take advantage of our heightened market knowledge and regional experience; • Building a strong market presence in new markets; and • Reducing our exposure to tertiary markets. 4 Table of Contents FINANCING AND DISTRIBUTIONS To fund our investment and capital activities, we rely on a combination of issuance of common shares, preferred shares, OP Units in exchange for property, and borrowed funds. We regularly issue dividends to our shareholders. Each of these is described below. At-the-Market Offering In November 2019, we entered into an equity distribution agreement in connection with an at-the-market offering (“2019 ATM Program”) through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times that we determine. 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 year ended December 31, 2020, we issued 829,078 common shares under the 2019 ATM Program at an average price of $71.39 per share, net of commissions. Total consideration, net of commissions and issuance costs, was approximately $59.2 million. As of December 31, 2020, we had common shares having an aggregate offering price of up to $68.5 million remaining available under the 2019 ATM Program. Issuance of Senior Securities On October 2, 2017, we issued 4,118,460 shares of 6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C preferred shares”). As of December 31, 2020, 3,881,453 shares remained outstanding. Depending on future interest rates and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares. Bank Financing and Other Debt As of December 31, 2020, we owned 47 apartment communities that were not encumbered by mortgages, with 34 of these properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility (“unsecured credit facility”) is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in the unencumbered asset pool (“UAP”). As of December 31, 2020, the additional borrowing availability was $97.1 million beyond the $152.9 million drawn, including the balance on our operating line of credit (discussed below), priced at an interest rate of 2.85%, including the impact of our interest rate swap. This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election. Under our primary unsecured credit facility, we also have a $70.0 million unsecured term loan, which matures on January 15, 2024, and a $75.0 million unsecured term loan, which matures on August 31, 2025. We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes (“unsecured senior notes”). Under this agreement, 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. As of December 31, 2020, we had $25.0 million remaining available under the private shelf agreement. As of December 31, 2020, we owned 20 apartment communities that served as collateral for mortgage loans. All of these mortgages payable were non-recourse to us other than for standard carve-out obligations. We also have a $6.0 million operating line of credit, which is designed to enhance treasury management activities and more effectively manage cash balances. As of December 31, 2020, our ratio of total indebtedness to total gross real estate investments was 39.3%. Issuance of Securities in Exchange for Property Our organizational structure allows us to issue shares and limited partnership units (or “OP Units”) of Centerspace, LP in exchange for real estate. The OP Units generally are redeemable, at our option for cash or common shares on a one-for-one basis. Generally, OP Units receive the same per unit cash distributions as the per share dividends paid on common shares. Our Declaration of Trust, as amended (our “Declaration of Trust”), does not contain any restrictions on our ability to offer limited partnership units of Centerspace, LP in exchange for property. As a result, any decision to do so is vested solely in our Board of Trustees. On February 26, 2019, we issued 165,600 newly created Series D preferred units as partial consideration for the acquisition of SouthFork Townhomes. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862% per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D 5 Table of Contents preferred units for cash equal to the issue price. Each Series D preferred unit is convertible, at the holder’s option, into 1.37931 Units, representing a conversion exchange rate of $72.50 per unit. The holders of the Series D preferred units do not have any voting rights. For the years ended December 31, 2020 and 2019, the transition period ended December 31, 2018 and the fiscal year ended April 30, 2018, we did not issue any regular OP Units of Centerspace, LP in exchange for properties. Distributions to Shareholders The Internal Revenue Code requires a REIT to distribute 90% of its net taxable income, excluding net capital gains, to its shareholders, and a separate requirement to distribute 100% net capital gains or pay a corporate level tax in lieu thereof. We have distributed, and intend to continue to distribute, enough of our taxable income to satisfy these requirements. Our general practice has been to target cash distributions to our common shareholders and the holders of limited partnership units of approximately 65% to 90% of our funds from operations and to use the remaining funds for capital improvements or the reduction of debt. Distributions to our common shareholders and unitholders in the years ended December 31, 2020 and 2019 totaled approximately 81% and 69%, respectively, on a per share and unit basis of our funds from operations. For additional information on our sources of liquidity and funds from operations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.” HUMAN CAPITAL We strive to be a great place to work and offer competitive benefits and training programs to our team members. Our objective is to attract and reward individuals with the talent and skills to help support our business objectives and make our communities home for our residents. Our total rewards program includes competitive compensation, paid leave, paid holidays, volunteer time, health and dental benefits, discounted rental rates on our apartments, employee assistance program, life insurance, 401(k) plan, and more. As of December 31, 2020, we had 365 employees (340 full-time and 25 part-time) across six states. Training is important, and we facilitate that through a learning management system which allows us to provide custom training as well as utilize a library of multifamily focused courses specializing in customer service, sales, leadership, diversity, and fair housing. We take great pride in our pay for performance strategy where team members are aligned with overall company performance as well as specific performance metrics based on roles. Our annual performance management process invites team members to complete a self-review along with their manager's assessment. The results of these assessments are a component of the merit increase and pay for performance strategy. As part of our Environmental, Social, and Governance (ESG) initiatives, we publish an annual ESG report detailing our efforts related to furthering our mission - through providing corporate sponsorship in the communities which we serve, offering paid time off for team members to volunteer, training and compensation programs, and our commitment to diversity, equity, and inclusion. As of December 31, 2020: • The average tenure of our team members is 3.6 years; • 53% of our total team members, 46% of our senior management, and 37% of our Board of Trustees are female; • We have over 200 custom courses on our learning management system; • Over 10,000 training courses were completed by team members; • Our online reputation management scores increased from 504 to 605; • 76.5% of our team members participated in our engagement management survey; and • 648 volunteer hours were completed by team members. INSURANCE We purchase general liability and property insurance coverage for each of our properties. We also purchase limited terrorism, environmental, and flood insurance as well as other types of insurance coverage related to a variety of risks and exposures. There are certain types of losses that may not be covered or could exceed coverage limits. Due to changing market conditions, our insurance policies are also subject to increasing deductibles and coverage limits. Based on market conditions, we may change or potentially eliminate insurance coverages or face higher deductibles or other costs. Although we believe that we have adequate insurance coverage on our properties, we may incur losses, which could be material, due to uninsured risks, deductibles and/or losses in excess of coverage limits, any of which could have a material adverse effect on our business. 6 Table of Contents COMPETITION There are numerous housing alternatives that compete with our apartment communities in attracting residents. Our apartment communities compete directly with other apartment communities, condominiums, and single-family homes in the areas in which our properties are located. If the demand for our apartment communities is reduced or competitors develop or acquire competing housing, rental and occupancy rates may decrease, which could have a material adverse effect on our business. Additionally, we compete with other real estate investors, including REITs, to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the cost of those acquisitions. GOVERNMENT REGULATION See the discussion under the caption “ Risks Related to Our Properties and Operations -- We may be responsible for potential liabilities under environmental laws” in Item 1A, Risk Factors, for information concerning the potential effects of environmental matters on our business, “ Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs and investment strategies ” in Item 1A, Risk Factors, for information concerning the potential effects of compliance with disabled persons and other safety regulations on our business, “ Changes in federal or state laws and regulations relating to climate change could result in increased costs to our business, including capital expenditures to improve the energy efficiency of our existing communities or new development communities without a corresponding increase in revenue ” in Item 1A, Risk Factors, for information concerning the potential effects of climate change regulation on our business, “ Complying with zoning and permitting law may affect our acquisition, redevelopment, and development costs ” in Item 1A. Risk Factors, for information concerning the potential costs associated with zoning and permitting regulations, and “ The current pandemic of COVID-19 and the potential future outbreak of other highly infectious or contagious diseases may materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our equityholders ” in Item 1A Risk Factors, for information concerning the potential effects of regulations related to the COVID-19 pandemic, which discussions thereunder are incorporated by reference into this Item 1. 7 Table of Contents