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Item 2. Management’s Discussion and Analysis

2021-05-03 compared with 2020-11-02 · 107 added, 157 removed, 194 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Conditions and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements included in this 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.

Moreover, you should interpret many of the risks identified in this Report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.

The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements included in this report on Form 10-Q for the quarter ended March 31, 2021 (the “Report”), our audited financial statements for the year ended December 31, 2020, which are included in our Form 10-K filed with the SEC on February 22, 2021, and the risk factors in Item 1A, “Risk Factors,” of our Form 10-K for the year ended December 31, 2020.

We consider this and other sections of this Report to contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to 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.

Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of those words and similar expressions are intended to identify forward-looking statements.

Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “assumes,” “may,” “projects,” “outlook,” “future,” and variations of those words and similar expressions are intended to identify forward-looking statements.

These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial condition, or plans expressed or implied by the forward-looking statements.

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• deteriorating economic conditions and rising unemployment rates in the markets where we own apartment communities or in which we may invest in the future;

• government actions or regulations arising out of the COVID-19 pandemic that limit economic and consumer activity or affect the operation of our properties;

• rental conditions in our markets, including occupancy levels and rental rates, our potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors, including the impact of the COVID-19-related governmental rules and regulations relating to rental rates, evictions, and other rental conditions;

• changes in operating costs, including real estate taxes, utilities, insurance costs, and expenses related to complying with COVID-19 restrictions or otherwise responding to the COVID-19 pandemic;

• timely access to material required to renovate apartment communities;

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

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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 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.

As of March 31, 2021, we owned interests in 68 apartment communities consisting of 12,168 apartment homes.

Property owned, as presented in the condensed consolidated balance sheets, was $1.9 billion at March 31, 2021, compared to $1.8 billion at December 31, 2020.

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

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

We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for our business and our shareholders.

We believe that delivering superior resident

experiences will enhance resident satisfaction while also driving profitability for our business and our shareholders.

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

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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.

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 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.

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.

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.

The COVID-19 pandemic is likely to continue to have an impact on the U.S.

economy and our business for the foreseeable future, but it is difficult to predict the magnitude of the effects of the COVID-19 pandemic due to the uncertainties regarding the scope, severity, and duration of the pandemic, the nature and extent of actions taken to combat the pandemic and mitigate its effects, and the direct and indirect economic effects of the pandemic and associated containment measures.

In addition, ongoing social distancing requirements and stay-at-home directives affect the daily lives of our employees and residents and impact our ability to show apartment homes to potential residents, while the ongoing loss of jobs, rising unemployment levels, and closing of certain commercial businesses affect the ability of certain of our residents and commercial tenants to pay rent on a timely basis, renew existing leases, or enter into new leases.

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

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 September 30, 2020.

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, 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:

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.

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;

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• 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, or at all, which could hinder our ability to meet the REIT distribution requirements and continue to qualify as a REIT ;

• 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;

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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 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 reduced planned travel for our team members through 2021;

• left vacant positions unfilled;

• used onsite team members to perform work normally contracted to third parties;

• 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 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.

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 2021 and 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.

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.

Overview of the Three Months Ended March 31, 2021

For the three months ended March 31, 2021, revenue increased by $2.2 million to $46.6 million, compared to $44.4 million for the three months ended March 31, 2020, primarily due to non-same-store communities.

Total expenses increased by $2.6 million to $45.0 million for the three months ended March 31, 2021, compared to $42.4 million for the three months ended March 31, 2020 primarily due to increased depreciation and amortization and general and administrative expenses.

Funds from Operations (“FFO”) applicable to common shares and Units for the three months ended March 31, 2021 increased to $12.9 million compared to $8.7 million for the comparable period ended March 31, 2020, This increase was primarily due to a prior year loss of $3.6 million on marketable securities that did not occur in the current year, as well as increased NOI from non-same-store and same-store communities.

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 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.

In our ongoing efforts to improve the quality of our portfolio and balanc e sheet, during the first quarter of 2021, we acquired Union Pointe, a 256-home apartment community located in Longmont, Colorado for $76.9 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 three months ended March 31, 2021 and 2020.

Results of Operations

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(in thousands, except percentages)

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

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

Three Months Ended March 31,

2021 2020 $ Change % Change

Operating income $ 1,641 $ 2,004 $ (363) (18.1) %

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Consolidated Results of Operations

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

The following consolidated results of operations cover the three months ended March 31, 2021 and 2020.

(in thousands, except percentages)

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

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

Three Months Ended March 31,

2021 2020 $ Change % Change

Same-store $ 41,743 $ 41,573 $ 170 0.4 %

Non-same-store 4,240 272 3,968 1,458.8 %

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

Other properties 650 972 (322) (33.1) %

Dispositions 15 1,589 (1,574) (99.1) %

Total 46,648 44,406 2,242 5.0 %

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Non-same-store 1,496 120 1,376 1,146.7 %

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

Other properties 289 278 11 4.0 %

Dispositions 71 995 (924) (92.9) %

Total 19,241 18,933 308 1.6 %

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Non-same-store 2,744 152 2,592 1,705.3 %

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

Other properties 361 694 (333) (48.0) %

Dispositions (56) 594 (650) (109.4) %

Total $ 27,407 $ 25,473 $ 1,934 7.6 %

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Interest expense (7,231) (6,911) 320 4.6 %

Loss on extinguishment of debt (4) (1,087) (1,083) (99.6) % (21) (1,496) (1,475) (98.6) %

Interest and other income (loss) 431 (2,777) 3,208 (115.5) %

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) %

Gain (loss) on litigation settlement — 300 (300) (100.0) % — 6,586 (6,586) (100.0) %

NET INCOME (LOSS) $ (5,159) $ (7,684) $ 2,525 (32.9) %

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NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (6,474) $ (8,439) $ 1,965 (23.3) %

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

Three Months Ended March 31,

Weighted Average Occupancy (1)

2020 2019 2020 2019

Same-store 94.9 % 95.3 %

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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 September 30, 2020 September 30, 2019

Number of Apartment Homes March 31, 2021 March 31, 2020

Same-store 11,265 11,265

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Total 12,168 11,447

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

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

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 expenses.

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We have provided certain information on a same-store and non-same-store basis.

Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the case of development properties, have achieved a target level of physical occupancy of 90%.

Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the case of newly-constructed properties, have achieved a target level of physical occupancy of 90%.

On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate full period-over-period operating comparisons for existing apartment communities and their contribution to net income.

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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 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 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 1.1% 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 2.1% 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.

For the comparison of the three months ended March 31, 2021 and 2020, three apartment communities were non-same-store.

Sold communities are included in “Dispositions,” while “Other” includes non-multifamily properties and the non-multifamily components of mixed-use properties.

Revenue increased by 5.0% to $46.6 million for the three months ended March 31, 2021, compared to $44.4 million in the three months ended March 31, 2020.

Revenue from dispositions and other properties, decreased by $1.6 million and $322,000, respectively, offset by a $4.0 million increase from non-same-store communities.

Revenue from same-store communities increased 0.4% or $170,000 in the three months ended March 31, 2021, compared to the same period in the prior year.

The increase was attributable to 0.8% growth in average rental revenue and offset by a decrease of 0.4% in occupancy as weighted average occupancy decreased to 94.9% from 95.3% for the three months ended March 31, 2021 and 2020, respectively.

Property operating expenses, including real estate taxes .

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 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 operating expenses, including real estate taxes, increased by 1.6% to $19.2 million in the three months ended March 31, 2021, compared to $18.9 million in the same period of the prior year.

A decrease of $924,000 from dispositions was offset by an increase of $1.4 million at non-same-store communities.

Property operating expenses, including real estate taxes, at same-store communities decreased by 0.9% or $155,000 in the three months ended March 31, 2021, compared to the same period in the prior year.

At same-store communities, controllable expenses (which exclude insurance and real estate taxes) decreased by $225,000, partially offset by an increase of $87,000 in insurance expenses.

The same-store decreases in controllable expenses were primarily due to decreased compensation and maintenance costs.

Property management expenses .

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.

Property management expense, consisting of property management overhead and property management fees paid to third parties, was $1.8 million and $1.6 million in the three months ended March 31, 2021 and 2020, respectively.

Casualty gain (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.

Casualty loss was $101,000 in the three months ended March 31, 2021, compared to $327,000 in the same period of the prior year.

Depreciation and amortization.

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.

Depreciation and amortization increased by 10.1% to $20.0 million in the three months ended March 31, 2021, compared to $18.2 million in the same period of the prior year, attributable to an increase of $3.4 million from non-same-store properties, offset by a decrease of $1.1 million from same-store properties and $470,000 from sold properties.

General and administrative expenses.

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.

General and administrative expenses increased by 13.9% to $3.9 million in the three months ended March 31, 2021, compared to $3.4 million in the same period of the prior year, primarily attributable to increases of $225,000 in compensation-related costs and $413,000 in technology initiatives, offset by a decrease of $81,000 in consulting.

Interest expense.

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 expense increased by 4.6% to $7.2 million in the three months ended March 31, 2021, compared to $6.9 million in the same period of the prior year, primarily due to maintaining a larger average balance on our line of credit compared to the same period of the prior year and the addition of the Series C notes.

Interest and other income (loss).

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 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.

We recorded interest and other income of $431,000 in the three months ended March 31, 2021, compared to a loss of $2.8 million in the same period of the prior year.

The increase was primarily due to a $3.6 million loss in the value of our marketable securities during the three months ended March 31, 2020 which did not occur in the current period.

Net income (loss) available to common shareholders.

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.

Net income available to common shareholders was $6.5 million for the three months ended March 31, 2021, compared to $8.4 million in the three months ended March 31, 2020.

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 believe that Funds from Operations (“FFO”), which is a non-GAAP financial measures used as 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 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, 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 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.

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

FFO applicable to common shares and Units for the three months ended March 31, 2021, increased to $12.9 million compared to $8.7 million for the comparable period ended March 31, 2020, an increase of 49.4%.

This increase was primarily due to a prior year loss of $3.6 million on marketable securities that did not occur in the current year, as well as increased NOI from non-same-store and same-store communities.

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

(in thousands, except per share and unit amounts)

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

2020 2019 2020 2019

Three Months Ended March 31,

Net income (loss) available to common shareholders $ (6,474) $ (8,439)

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Less depreciation – partially owned entities (24) (282)

(Gain) loss on sale of real estate (25,676) (39,105) (25,486) (39,774)

Funds from operations applicable to common shares and Units $ 12,927 $ 8,654

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Acquisitions and Dispositions

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.

During the first quarter of 2021, we acquired $76.9 million in new real estate compared to $46.3 million of acquisitions in the same period of the prior year.

During the first quarters of 2021 and 2020, we had no dispositions.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing our acquisitions and dispositions during the three-month periods ended March 31, 2021 and 2020.

Distributions Declared

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.

Distributions of $0.70 per common share and Unit were declared during the three months ended March 31, 2021 and 2020.

Distributions of $0.4140625 per Series C preferred share were declared during the three months ended March 31, 2021 and 2020.

Distributions of $0.9655 per Series D preferred unit were declared during the three months ended March 31, 2021 and 2020, respectively.

Liquidity and Capital Resources

We desire to strengthen the current balance sheet, which offers financial flexibility and enables us to pursue and acquire apartment communities that enhance our portfolio composition, operating metrics, and cash flow growth prospects.

We intend to strengthen our capital and liquidity positions by continuing to focus on improving our core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.

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 continuing to focus on our core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.

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

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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 acquisitions of additional communities.

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 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.

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 March 31, 2021, we had total liquidity of approximately $79.3 million, which included $68.5 million available on our line of credit and $10.8 million of cash and cash equivalents.

As of December 31, 2020, we had total liquidity of approximately $97.5 million, which included $97.1 million on our line of credit and $392,000 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 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.

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.

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 unsecured term loan that matures on August 31, 2025.

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 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.

An additional $25.0 million remains available under this 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 $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 September 30, 2020, the weighted average interest rate on our mortgage debt was 3.99%.

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

• $19.6 million debt maturities remaining in 2021 and

• approximately $15.1 million remaining to fund, primarily over the next 12 months, under a mezzanine loan we originated for the development of a multifamily community in Minneapolis, Minnesota.

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

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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.

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 March 31, 2021, our line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in an unencumbered asset pool (“UAP”).

As of March 31, 2021, the additional borrowing availability was $68.5 million beyond the $181.5 million drawn, including the balance on our operating line of credit (discussed below).

At December 31, 2020, the line of credit borrowing capacity was $250.0 million based on the UAP, of which $152.9 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.

In January, we amended and expanded our private shelf agreement to increase the aggregate amount available for issuance of unsecured senior promissory notes to $225.0 million.

In January 2021, we issued $50.0 million of Series C notes due June 6, 2030, bearing interest at a rate of 2.70%.

An additional $50.0 million remains available under this 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 $295.0 million and $298.4 million on March 31, 2021 and December 31, 2020, 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 March 31, 2021, the weighted average interest rate on our mortgage debt was 3.92%, compared to 3.93% as of December 31, 2020.

We have 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 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.

During the three months ended March 31, 2021, we issued 164,279 common shares under the 2019 ATM program at an average price of $72.19 per share, net of commissions.

Total consideration, net of commissions and issuance costs, was $11.9 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.

As of March 31, 2021, common shares having an aggregate offering price of up to $55.3 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 nine months ended September 30, 2020, we generated capital from various activities, including:

In addition to cash flow from operations, during the three months ended March 31, 2021, we generated capital from various activities, including:

• Receiving $50.0 million from the issuance of Series C notes under the private placement agreement;

• Receiving $11.9 million in net proceeds from the issuance of 164,279 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 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 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;

During the three months ended March 31, 2021, we used capital for various activities, including:

• Acquiring Union Pointe, a 256-home apartment community located in Longmont, Colorado, for an aggregate purchase price of $76.9 million;

• Funding of mezzanine and construction loans of $5.4 million;

• Repaying $3.4 million of mortgage principal;

• 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 $2.2 million.

Subsequent to the end of the quarter, Centerspace received $2.0 million of non-refundable deposits and expects to complete the sale of select assets in Rochester, Minnesota on May 24, 2021.

The sale consists of 589 apartment homes in six communities with an aggregate sale price of $60.0 million.

The proceeds from this disposition are expected to be used to pay down the line of credit and increase liquidity.

Contractual Obligations and Other Commitments

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Off-Balance Sheet Arrangements

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.

As of March 31, 2021, 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, 2020, filed with the SEC on February 22, 2021 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 nine months ended September 30, 2020.

There have been no other significant changes to our critical accounting policies during the three months ended March 31, 2021.

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