CENTERSPACE 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report. Historical results and trends which might appear in the consolidated financial statements should not be interpreted as being indicative of future operations. We are presenting our result of operations for the years ended December 31, 2020 and 2019. For additional comparison of results of operations for the years ended December 31, 2019 and December 31, 2018, please refer to our Annual Report on Form 10-K filed with the SEC on February 19, 2020. For additional comparison of results of operations for the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019. This and other sections of this Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Exchange Act, with respect to our 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. Executive Summary We own, manage, acquire, redevelop, and develop apartment communities. 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 December 31, 2020, we owned interests in 67 apartment communities consisting of 11,910 homes as detailed in Item 2 - Properties. Property owned, as presented in the consolidated balance sheet, was $1.8 billion at December 31, 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. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and developing and training team members to create vibrant apartment communities through resident-centered operations. We believe that delivering superior resident experiences will drive consistent profitability for our shareholders. We have paid quarterly distributions every quarter since our first distribution in 1971. COVID-19 Developments The COVID-19 pandemic has had an impact on our business since March 2020, when it spread to many of the markets in which we own properties. Our first priority continues to be the health and well-being of our residents, team members, and the communities we serve. We enhanced cleaning protocols at our communities and offices, implemented physical distancing in community 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, we have 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. We cannot predict when restrictions currently in place will expire or whether additional restrictions will be imposed in the future. 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. Financial Impact of the COVID-19 Pandemic 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. The COVID-19 pandemic and these directives have affected our operations and the conduct of business at our apartment communities and offices, but did not have a material impact on our financial condition, operating results, or cash flows for the twelve months ended December 31, 2020. 26 Table of Contents Absent the ability to contain or treat the COVID-19 virus, with a corresponding re-opening of the economy, the ongoing COVID-19 pandemic may have adverse financial and economic impacts that include, but are not limited to, the following: • 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; • cause the capital markets generally to become restricted or unavailable, thereby limiting our access to any needed debt or equity capital financing; • impact the business of, or cause the loss of, certain critical third-party suppliers or other service providers; • restrict our ability to continue to pay dividends on a quarterly basis at the current rate; • impair the value of our tangible or intangible assets; • require us to record loss contingencies and incur additional expenses related to our COVID-19 response; or • cause the U.S. economy to suffer an extended economic slowdown, which could lead to a prolonged recession or even economic depression, which in turn would affect the demand for our apartment communities and could have an adverse impact on our business and operating results. 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: • we eliminated the majority of travel for our team members during 2020 and reduced planned travel through 2021; • left vacant positions unfilled; • used onsite team members to perform work normally contracted to third parties; and • we have moved the meetings of our Board of Trustees to virtual meetings, thereby limiting the expense associated with in-person meetings. Despite our efforts to manage our response to the effects of the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on our rental revenue in future years cannot be determined at present. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with residents, commercial tenants, government officials, and business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse impacts on our business. 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. Significant Transactions and Events for the Year Ended December 31, 2020 Highlights . For the year ended December 31, 2020, our highlights included the following: • Net Loss was $0.15 per diluted share for the year ended December 31, 2020, compared to Net Income of $6.00 per diluted share for the year ended December 31, 2019; • Same-store year-over-year revenue growth of 2.1%, driven by 1.7% growth in rental revenue and 0.4% growth in occupancy; • Same-store net operating income growth of 1.8%; • Funded $18.5 million of multifamily construction loans; • Announced Nashville as one of our target markets; and • Rebranded the Company as Centerspace to reflect both the transformation of the company and its vision for the future. Acquisitions and Dispositions . During the year ended December 31, 2020, we completed the following transactions in furtherance of our strategic plan: • Continued our focus on key growth markets, expanding in Minneapolis, Minnesota and Denver, Colorado, acquiring a total of two apartment communities in these markets, consisting of 647 homes, for an aggregate purchase price of $191.0 million; • Acquired the remaining noncontrolling interest in 71 France for $12.2 million; 27 Table of Contents • Disposed of four apartment communities in Grand Forks, North Dakota, a commercial property, and a parcel of unimproved land for an aggregate sale price of $44.3 million. Financing Transactions. During the year ended December 31, 2020, we completed the following financing transactions: • We issued 829,078 common shares under the 2019 ATM Program for total consideration, net of commissions and issuance costs, of approximately $59.2 million. Outlook We intend to continue our focus on maximizing the financial performance of the communities in our existing portfolio. To accomplish this, we have introduced initiatives to expand our operating margin by enhancing the resident experience, making value-add investments, and implementing technology solutions and expense controls. We will actively manage our existing portfolio and strategically pursue acquisitions of multifamily communities in our target markets of Minneapolis, Minnesota and Denver, Colorado as opportunities arise and market conditions allow. We will explore potential new markets and acquisition opportunities, including in Nashville, Tennessee, as market conditions allow. Our continued management of a strong balance sheet should provide us with flexibility to pursue both internal and external growth. 28 Table of Contents RESULTS OF OPERATIONS Reconciliation of Operating Income (Loss) 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) Year Ended December 31, 2020 2019 $ Change % Change Operating income (loss) $ 8,340 $ 11,417 $ (3,077) (27.0) % Adjustments: Property management expenses 5,801 6,186 (385) (6.2) % Casualty loss 1,662 1,116 546 48.9 % Depreciation and amortization 75,593 74,271 1,322 1.8 % General and administrative expenses 13,440 14,450 (1,010) (7.0) % Net operating income $ 104,836 $ 107,440 $ (2,604) (2.4) % Consolidated Results of Operations The following consolidated results of operations cover the years ended December 31, 2020 and 2019. (in thousands) Year Ended December 31, 2020 2019 $ Change % Change Revenue Same-store $ 152,790 $ 149,615 $ 3,175 2.1 % Non-same-store 18,441 6,020 12,421 206.3 % Other properties and dispositions 6,763 30,120 (23,357) (77.5) % Total 177,994 185,755 (7,761) (4.2) % Property operating expenses, including real estate taxes Same-store 63,227 61,622 1,605 2.6 % Non-same-store 6,817 2,287 4,530 198.1 % Other properties and dispositions 3,114 14,406 (11,292) (78.4) % Total 73,158 78,315 (5,157) (6.6) % Net operating income Same-store 89,563 87,993 1,570 1.8 % Non-same-store 11,624 3,733 7,891 211.4 % Other properties and dispositions 3,649 15,714 (12,065) (76.8) % Total $ 104,836 $ 107,440 $ (2,604) (2.4) % Property management expense (5,801) (6,186) (385) (6.2) % Casualty loss (1,662) (1,116) 546 48.9 % Depreciation and amortization (75,593) (74,271) 1,322 1.8 % General and administrative expenses (13,440) (14,450) (1,010) (7.0) % Interest expense (27,525) (30,537) (3,012) (9.9) % Loss on extinguishment of debt (23) (2,360) (2,337) (99.0) % Interest and other income (loss) (1,552) 2,092 (3,644) (174.2) % Income (loss) before gain (loss) on sale of real estate and other investments, and gain (loss) on litigation settlement (20,760) (19,388) (1,372) (7.1) % Gain (loss) on sale of real estate and other investments 25,503 97,624 (72,121) (73.9) % Gain (loss) on litigation settlement — 6,586 (6,586) (100.0) % NET INCOME (LOSS) $ 4,743 $ 84,822 $ (80,079) (94.4) % Dividends to preferred unitholders (640) (537) (103) 19.2 % Net (income) loss attributable to noncontrolling interests – Operating Partnership 212 (6,752) 6,964 (103.1) % Net (income) loss attributable to noncontrolling interests – consolidated real estate entities 126 1,136 (1,010) (88.9) % Net income (loss) attributable to controlling interests 4,441 78,669 (74,228) (94.4) % Dividends to preferred shareholders (6,528) (6,821) 293 (4.3) % Redemption of preferred shares 297 — 297 100.0 % NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (1,790) $ 71,848 $ (73,638) (102.5) % 29 Table of Contents Year Ended December 31, Weighted Average Occupancy (1) 2020 2019 Same-store 94.8 % 94.4 % Non-same-store 93.2 % 94.8 % Total 94.7 % 94.4 % (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 homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant homes valued at estimated market rents. When calculating actual rents for occupied homes and market rents for vacant homes, delinquencies and concessions are not taken into account. The currently offered effective rates on new leases at the community are used as the starting point in determination of the market rates of vacant homes. We believe that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at is estimated market rate. 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 real estate companies. December 31, Number of Homes 2020 2019 Same-store 10,567 10,567 Non-same-store 1,343 696 Total 11,910 11,263 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, which is reconciled to operating income (loss) in the table above. 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 depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance. Throughout this Report, 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 development 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. Management believes that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are performing year-over-year. Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing residents, controlling operating costs, and making prudent capital improvements. The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store communities are due to the addition of those properties to our real estate portfolio, and accordingly provide less useful information for evaluating the ongoing operational performance of our real estate portfolio. For the comparison of the twelve months ended December 31, 2020 and 2019, 62 apartment communities were classified as same-store and five apartment communities were non-same-store. See Item 2 - Properties for the list of communities classified as same-store and non-same-store. Sold communities are included in “Other” for the periods prior to the sale, which also includes non-multifamily properties and the non-multifamily components of mixed-use properties. Revenue. Total revenue decreased by 4.2% to $178.0 million for the year ended December 31, 2020 compared to $185.8 million in the year ended December 31, 2019. A decrease of $23.4 million from dispositions and other properties was offset by an increase of $12.4 million from five non-same-store apartment communities. Revenue from same-store communities increased by 2.1% or $3.2 million in the year ended December 31, 2020, compared to the same period in the prior year. Approximately 1.7% of the increase was attributable to growth in average rental revenue, which was impacted by $450,000 of additional ratio utility billings ("RUBs") revenue as a result of the acceleration of our billing cycle after transitioning to a new RUBs service provider during the fourth quarter. Approximately 0.4% of the increase was due to higher occupancy as weighted average occupancy increased from 94.4% to 94.8% for the years ended December 31, 2019 and 2020, respectively. Property operating expenses, including real estate taxes. Total property operating expenses, including real estate taxes, decreased by 6.6% to $73.2 million in the year ended December 31, 2020 compare d to $78.3 million in the year ended December 31, 2019. A total of $11.3 million of the decrease was attributable to other properties, primarily due to dispositions, but was partially offset by an increase of $4.5 million from non-same-store apartment communities. Property operating expenses at same-store communities increased by 2.6% or $1.6 million in the year ended December 31, 2020, compared to the 30 Table of Contents same period in the prior year. Insurance and real estate taxes comprised $1.2 million and $1.6 million of the increase, respectively. The increase in real estate taxes was primarily due to increases in Rochester, Minneapolis, and Denver. The increase in non-controllable expenses was offset by a $1.2 million decrease in controllable operating expenses, primarily due to decreased snow removal costs, utilities, and cost containment efforts related to the COVID-19 pandemic. Net operating income. NOI decreased by 2.4% to $104.8 million in the year ended December 31, 2020 compared to $107.4 million in the year ended December 31, 2019. Property management expense. Property management expense, consisting of property management overhead and property management fees paid to third parties, was $5.8 million in the year ended December 31, 2020 and $6.2 million in the year ended December 31, 2019. The decrease was primarily driven by compensation costs, reduced travel, and advertising. Casualty gain (loss). Casualty loss increased by 48.9% to $1.7 million in the year ended December 31, 2020, compared to $1.1 million in the year ended December 31, 2019. The increase was primarily due to hail losses that were historically insured at lower deductibles, but beginning in 2020 our carriers limited coverage and increased deductibles for hail and wind-related losses. We also incurred losses at one property due to plumbing failures. Related to the 2020 hail losses, in the fourth quarter of 2020 we also incurred $754,000 in capitalized asset replacement costs, with an additional $1.3 million expected to be incurred in 2021. Depreciation and amortization. Depreciation and amortization increased by 1.8% to $75.6 million in the year ended December 31, 2020, compared to $74.3 million in the year ended December 31, 2019. This increase was primarily due to non-same-store properties and offset by decreases from sold properties. General and administrative expenses. General and administrative expenses decreased by 7.0% to $13.4 million in the year ended December 31, 2020, compared to $14.5 million in the year ended December 31, 2019, primarily attributable to decreases of $680,000 in compensation costs, $178,000 in severance-related costs, $381,000 in consulting costs, $277,000 in legal costs related to our pursuit of a construction defect claim which was resolved in the prior year, and $238,000 in decreased travel due to the COVID-19 pandemic. These decreases were partially offset by an increase of $402,000 in rebranding costs and $137,000 due to incentive compensation related to higher share award valuations compared to previous awards in the long-term incentive plan. Operating income. Operating income decreased by 27.0% to $8.3 million in the year ended December 31, 2020, compared to a gain of $11.4 million in the year ended December 31, 2019. Interest expense. Interest expense decreased 9.9% to $27.5 million in the year ended December 31, 2020, compared to $30.5 million in the year ended December 31, 2019, primarily due to the replacement of maturing debt with lower interest rate debt and lower interest rates on our line of credit. Loss on extinguishment of debt. We recorded loss on extinguishment of debt in the years ended December 31, 2020 and 2019 of $23,000 and $2.4 million, respectively, primarily due to prepayment penalties associated with the disposal of assets and the write-off of unamortized loan costs. Interest and other income (loss). We recorded a loss of $1.6 million in interest and other income (loss) in the year ended December 31, 2020, compared to income of $2.1 million in the prior year. The decrease was primarily due to a $3.4 million loss from certain marketable securities. Gain (loss) on sale of real estate and other investments. In the years ended December 31, 2020 and 2019, we recorded gains on sale of real estate and other investments in continuing operations of $25.5 million and $97.6 million, respectively, primarily related to increased dispositions in 2019. Gain (loss) on litigation settlement. In the year ended December 31, 2019, we recorded a gain on litigation settlement of $6.6 million from the settlement of a construction defect claim. 31 Table of Contents Funds from Operations 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 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; and • 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. The exclusion in Nareit’s definition of FFO of impairment write-downs and gains and losses from the sale of real estate assets helps to identify the operating results of the long-term assets that form the base of our 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 the definition. We believe all such interpretations not specifically provided for in the Nareit definition are consistent with the 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 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 needs, including the ability to service indebtedness or make distributions to shareholders. Net loss available to common shareholders for the year ended December 31, 2020 decreased to $1.8 million compared to net income of $71.8 million for the year ended December 31, 2019. FFO applicable to common shares and Units for the year ended December 31, 2020, decreased to $47.4 million compared to $52.9 million for the year ended December 31, 2019, a change of 10.4%, primarily due to a $6.6 million gain on litigation settlement in the prior year which did not recur in the current year, as well as decreased NOI from sold properties and increased loss on marketable securities in the current year. The decrease in FFO was partially offset by increases in NOI from same-store and non-same-store communities and reductions in interest expense and prepayment penalties. For a comparison of FFO applicable to common shares and Units for the years ended December 31, 2019 and 2018, refer to our Annual Report on Form 10-K filed with the SEC on February 19, 2020. For a comparison of FFO applicable to common shares and Units for the eight months ended December 31, 2018 and 2017 and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019. 32 Table of Contents Reconciliation of Net Income Available to Common Shareholders to Funds from Operations (in thousands, except per share and unit amounts) Year Ended December 31, 2020 2019 Net income (loss) available to common shareholders $ (1,790) $ 71,848 Adjustments: Noncontrolling interests – Operating Partnership (212) 6,752 Depreciation and amortization 75,593 74,271 Less depreciation – non real estate (353) (322) Less depreciation – partially owned entities (379) (2,059) (Gain) loss on sale of real estate (25,503) (97,624) Funds from operations applicable to common shares and Units $ 47,356 $ 52,866 Funds from operations applicable to common shares and Units $ 47,356 $ 52,866 Dividends to preferred unitholders 640 537 Funds from operations applicable to common shares and Units - diluted $ 47,996 $ 53,403 Per Share Data Earnings (loss) per common share - diluted $ (0.15) $ 6.00 FFO per share and Unit - diluted $ 3.47 $ 4.05 Weighted average shares and Units - diluted 13,835 13,182 Liquidity and Capital Resources Overview Our primary sources of liquidity are cash and cash equivalents on hand and cash flows generated from operations. Other sources include availability under our unsecured lines of credit, 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 debt and secured mortgages. Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to our communities, distributions to the holders of our preferred shares, common shares, Series D preferred units, and Units, value-add redevelopment, common and preferred share buybacks and Unit redemptions, and acquisition of additional communities. We intend to maintain a strong balance sheet and preserve our financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise. We intend to maintain our capital structure by taking certain actions, including: • extending and sequencing our debt maturity dates; • managing interest rate exposure through the appropriate use of a mix of fixed and floating debt and utilizing our lines of credit and senior notes as appropriate; • maintaining adequate coverage ratios on our debt obligations; and • where appropriate, accessing the equity markets through our 2019 ATM Program and other offerings under our shelf registration statement. We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities and, from time to time, through draws on our lines of credit. We believe our ability to generate cash from property operating activities and draws on our lines of credit to be adequate to meet all expected operating requirements and to make distributions to our shareholders in accordance with the REIT provisions of the Internal Revenue Code. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are also generally expected to be funded from existing cash on hand, cash flow generated from property operations, draws on our lines of credit and/or new borrowings, and we believe we will have sufficient liquidity to meet our commitments over the next twelve months. 33 Table of Contents To maintain our qualification as a REIT, we must pay dividends to our shareholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. Under a separate requirement, we must distribute 100% of net capital gains or pay a corporate level tax in lieu thereof. While we have historically satisfied this distribution requirement by making cash distributions to our shareholders, we may choose to satisfy this requirement by making distributions of other property, including, in limited circumstances, our own common shares. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund ongoing operations. We pay dividends from cash available for distribution. Until it is distributed, cash available for distribution is typically invested in investment grade securities or is used to reduce balances outstanding under our line of credit. In the event of deterioration in property operating results, we may need to consider additional cash preservation alternatives, including reducing development activities, capital improvements, and renovations. For the year ended December 31, 2020, we declared cash distributions of $38.5 million to common shareholders and unitholders of Centerspace, LP, as compared to net cash provided by operating activities of $61.2 million and FFO of $47.4 million. Factors that could increase or decrease our future liquidity include, but are not limited to, changes in interest rates or sources of financing, general volatility in capital and credit markets, changes in minimum REIT dividend requirements, and our ability to access the capital markets on favorable terms, or at all. As a result of the foregoing conditions or general economic conditions in our markets that affect our ability to attract and retain residents, we may not generate sufficient cash flow from operations. If we are unable to obtain capital from other sources, we may not be able to pay the distribution required to maintain our status as a REIT, make required principal and interest payments, make strategic acquisitions or make necessary routine capital improvements or undertake value add renovation opportunities with respect to our existing portfolio of operating assets. As of December 31, 2020, we had total liquidity of approximately $97.5 million, which included $97.1 million available on our line of credit based on the value of properties contained in our unencumbered asset pool (“UAP”) and $392,000 of cash and cash equivalents. As of December 31, 2019, we had total liquidity of approximately $226.5 million, which included $199.9 million available on our line of credit based on the UAP and $26.6 million of cash and cash equivalents. 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 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 offerings of preferred and common shares under our shelf registration statement, offerings of common shares under our 2019 ATM Program; and long term unsecured term loans and secured mortgages. We have the following contractual obligations over the next twelve months: • $26.1 million of debt maturities in 2021; and • $20.6 million remaining to fund, under construction and mezzanine loans we originated for the development of a multifamily community in Minneapolis, Minnesota. Potential Impact of COVID-19-Related Effects on Continuing Debt Availability Although we are in compliance with our covenants under all of our debt facilities and currently expect to continue to remain in compliance with these covenants, there can be no assurance that we will remain in compliance with those covenants or be able to access these funds depending on the length of the COVID-19 pandemic and the breadth of its impact on the U.S. economy generally and the credit markets in particular. Under the terms of our credit facility, we may be unable to obtain advances under our credit facility if: • we are unable to make certain representations and warranties, including a certification that, since April 30, 2018, there has been no adverse change in our business, financial condition, operations, performance or properties, taken as a whole, which would reasonably be expected to have a material adverse effect; • changes in our consolidated property NOI or capitalization rates applicable to the properties in our borrowing base reduce or eliminate availability under our credit facility; or • changes in the nature and composition (including occupancy rate) of the properties in our borrowing base cause these properties to become ineligible to be part of our borrowing base, and if we are not able to replace such properties with other qualifying properties, such ineligibility could reduce or eliminate the availability under our credit facility. 34 Table of Contents Even if we remain in compliance with the foregoing representations, warranties, and covenants, we may be unable to access the full amount available under our credit facilities if our lenders fail to fund their commitments, which could occur if: • credit market deterioration or overall economic conditions affect the ability of one or more of our lenders to meet their funding commitments under our revolving credit facility. If a lender fails to fund its commitment under the revolving credit facility, that portion of the credit facility will be unavailable if the lender’s commitment is not replaced by a new commitment from an alternate lender; • distressed market conditions cause our lenders to transfer their commitments to other institutions, which could result in committed funds not being available, particularly if consolidation of the commitments under our credit facility or among its lenders were to occur; or • we are unable to obtain additional letters of credit due to a default by any lender in meeting its funding obligations. As of the date of this filing, we have not experienced any restrictions or limitations on the availability of credit in our markets or with our lenders, although there can be no assurance that we will continue to be able to access the credit markets generally or our credit facility in the future. Debt We have an unsecured credit facility for $395.0 million, with the commitment allocated to a revolving line of credit for $250.0 million and the remaining $145.0 million allocated between two term loans: a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million term loan that matures on August 31, 2025. As of December 31, 2020, our line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in the UAP. As 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). 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. The multi-bank line of credit bears interest either at the lender’s base rate plus a margin ranging from 35 to 85 basis points, or LIBOR, plus a margin ranging from 135 to 190 basis points based on our consolidated leverage. The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.This credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election. We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory 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, under this facility. An additional $25.0 million remains available under this agreement. Subsequent to December 31, 2020, we issued $50.0 million of 2.7% unsecured Series C notes, due June 6, 2030. In concert with this issuance, we amended and expanded our Note Purchase Private Shelf Agreement (the "Agreement") with Prudential to increase the aggregate amount available under the Agreement from $150.0 million to $225.0 million. After the issuance of Series C notes, we have $50.0 million remaining under the Agreement. We also have a $6.0 million operating 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 August 1, 2021, with pricing based on a market spread plus the one-month LIBOR index rate. Mortgage loan indebtedness was $298.4 million on December 31, 2020 and $331.4 million on December 31, 2019. As of December 31, 2020, the weighted average rate of interest on our mortgage debt was 3.93%, compared to 4.02% on December 31, 2019. Refer to Note 6 of our consolidated financial statements contained in this Report for the principal payments due on our mortgage indebtedness and other tabular information. All of our term debt is at fixed rates of interest, with staggered maturities. This reduces the exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on our results of operations and cash flows. Equity In November 2019, we entered into an equity distribution agreement in connection with the 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 35 Table of Contents 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, common shares having an aggregate offering price of up to $68.5 million remained available under the 2019 ATM Program. On December 5, 2019, our Board of Trustees authorized a new share purchase program to repurchase up to $50 million of our common shares or preferred shares over a one-year period. Under this repurchase program, we could repurchase common shares or preferred shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. This program expired on December 5, 2020. During the year ended December 31, 2020, we repurchased and retired approximately 237,000 Series C preferred shares for an aggregate cost of $5.6 million, including commissions, at an average price per share of $23.75. During the year ended December 31, 2019, we repurchased and retired approximately 329,000 common shares for an aggregate cost of $18.0 million, including commissions, at an average price per share of $54.69. As of December 31, 2020 and 2019, we had 3.9 million and 4.1 million Series C preferred shares outstanding, respectively. Changes in Cash, Cash Equivalents, and Restricted Cash As of December 31, 2020, we had restricted cash consisting of $1.9 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $5.0 million in deposits for real estate acquisitions. As of December 31, 2019, we had restricted cash consisting of $2.3 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $17.2 million in net tax-deferred exchange proceeds remaining from a portion of our dispositions. The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in our consolidated statements of cash flows in Item 15 of this report. In addition to cash flows from operations, during the year ended December 31, 2020, we generated capital from various activities, including: • Receipt of $59.2 million from the issuance of 829,078 common shares under our 2019 ATM Program; • Disposition of four apartment communities in Grand Forks, North Dakota, one commercial property, and one parcel of unimproved land for an aggregate sale price of $44.3 million; • Receipt of $10.0 million from repayment of a mortgage receivable; • Draws of $102.8 million on our line of credit; and • Sale of $3.9 million of marketable securities. During the year ended December 31, 2020, we used capital for various activities, including: • Acquisition of 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; • Acquisition of 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; • Acquisition of the remaining noncontrolling interest in 71 France for $12.2 million; • Funding $18.5 million of mezzanine/construction loans; • Repaying approximately $32.9 million of mortgage principal; • Repurchasing 237,000 Series C preferred shares for an aggregate cost of approximately $5.6 million; • Paying distributions on common shares and Units of $35.0 million; and • Funding capital improvements for apartment communities of approximately $30.3 million. 36 Table of Contents Contractual Obligations and Other Commitments Our primary contractual obligations relate to borrowings under our lines of credit, term loans, unsecured senior notes, and mortgages payable. The primary line of credit had a $153.0 million balance outstanding at December 31, 2020 and matures in August 2022, with a 12-month option to extend the maturity date, subject to customary conditions. We also had two term loans with an aggregate balance of $145.0 million at December 31, 2020: a $70.0 million term loan that matures in January 2024 and a $75.0 million term loan that matures in August 2025. In addition, we had unsecured senior notes with an aggregate balance of $125.0 million at December 31, 2020. The $75.0 million of Series A senior notes mature on September 13, 2029 and the $50.0 million of Series B senior notes mature on September 30, 2028. (in thousands) Less than More than Total 1 Year 1-3 Years 3-5 Years 5 Years Mortgages payable (principal and interest) $ 356,659 $ 37,042 $ 100,155 $ 49,756 $ 169,706 Lines of credit (principal and interest) (1) $ 160,440 $ 10,263 $ 150,177 — — Notes payable (principal and interest) $ 198,574 $ 10,902 $ 21,804 $ 161,077 $ 4,791 Total $ 715,673 $ 58,207 $ 272,136 $ 210,833 $ 174,497 (1) The future interest payments on the lines of credit were estimated using the outstanding principal balance and interest rate in effect as of December 31, 2020. Inflation Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability to increase rents upon the commencement of new leases or renewal of existing leases, thereby minimizing the risk of inflation. 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. Off-Balance-Sheet Arrangements As of December 31, 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 Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this Report. Real Estate . Real estate is carried at cost, net of accumulated depreciation, less an adjustment for impairment, if any. Depreciation requires an estimate by management of the useful life of each asset as well as an allocation of the costs associated with a property to its various components. As described further below, the process of allocating property costs to its components involves a considerable amount of subjective judgments to be made by management. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We use a 10-37 year estimated life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures, and equipment. Maintenance and repairs are charged to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally five to twenty years. Property sales or dispositions are recorded when control of the assets are transferred to the buyer and we have no significant continuing involvement with the property sold. The gain or loss on disposal is recognized net of certain closing and other costs associated with the disposition. Acquisition of Investments in Real Estate. Upon acquisitions of real estate, we assess the fair value of acquired tangible assets (including land, buildings and personal property), which is determined by valuing the property as if it were vacant, and consider whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases and resident relationships) and assumed liabilities, and allocate the purchase price based on these assessments. The as-if-vacant value is allocated to land, buildings, and personal property based on our determination of the relative fair value 37 Table of Contents of these assets. Techniques used to estimate fair value include discounted cash flow analysis and reference to recent sales of comparable properties. Estimates of future cash flows are based on a number of factors, including the historical operating results, known trends, and market/economic conditions that may affect the property. Land value is assigned based on the purchase price if land is acquired separately or based on a relative fair value allocation if acquired in a portfolio acquisition. Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis include an estimate of carrying costs and foregone rental income during hypothetical expected lease-up periods, consideration of current market conditions, and costs to execute similar leases. We also consider information about each property obtained during our pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired. Capitalization of Costs. We follow the real estate project costs guidance in ASC 970, Real Estate – General, in accounting for the costs of re-development projects. As real estate is undergoing re-development, all project costs directly associated with and attributable to the construction of a project are capitalized to the cost of the real property. The capitalization period begins when re-development activities and expenditures begin and ends upon completion, which is when the asset is ready for its intended use. Generally, rental property is considered substantially complete upon issuance of a certificate of occupancy. Impairment. We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the property against the carrying amount of that property. If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount. If our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. Recent Accounting Pronouncements For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to our consolidated financial statements appearing elsewhere in this Report.