Business Context and Reporting Period
Centerspace is a North Dakota REIT focused on owning, managing, acquiring, redeveloping, and developing multifamily apartment communities, primarily in the Midwest and Mountain West. As of March 31, 2024, it owned interests in 70 communities comprising 12,883 apartment homes. This unaudited Form 10-Q covers the three months ended March 31, 2024, compared with the three months ended March 31, 2023.
Key Financial Metrics
| Metric | Q1 2024 | Q1 2023 | Change |
|---|---|---|---|
| Revenue | $64.5 million | $67.9 million | Down 5.0% |
| Net income (loss) | $(4.8) million | $52.3 million | Declined $57.1 million |
| Net income (loss) available to common shareholders | $(5.5) million | $42.0 million | Declined $47.5 million |
| Diluted earnings per share | $(0.37) | $2.76 | Declined $3.13 |
| Net operating income (non-GAAP) | $39.4 million | $39.0 million | Up 1.2% |
| Core FFO applicable to common shares and Units (non-GAAP) | $22.0 million | $19.5 million | Up 12.8% |
| Core FFO per diluted share and Unit | $1.23 | $1.07 | Up $0.16 |
| Net cash provided by operating activities | $24.4 million | $21.8 million | Up $2.6 million |
| Capital improvements | $21.8 million | $11.2 million | Up $10.6 million |
Revenue was approximately 98.2% rental income. Same-store revenue increased 3.5%, same-store NOI increased 7.5%, and same-store weighted average occupancy was 94.6% versus 94.9% in the prior-year quarter. Total NOI margin was approximately 61.1%, compared with 57.4% in Q1 2023.
Balance Sheet, Debt, and Liquidity
- Total assets were $1.90 billion at March 31, 2024, versus $1.93 billion at December 31, 2023.
- Cash and cash equivalents were $12.7 million, and restricted cash was $1.1 million.
- Total debt was $929.1 million, with a weighted average interest rate of 3.59% and weighted average maturity of approximately 6.0 years.
- Debt comprised $40.4 million of revolving lines, $300.0 million of unsecured senior notes, $198.9 million under the Fannie Mae credit facility, and $389.9 million of other mortgages.
- Liquidity was approximately $228.3 million, including $215.6 million of borrowing availability and $12.7 million of cash.
- The principal unsecured credit facility had $40.0 million outstanding and $210.0 million of additional availability at quarter-end. It matures in September 2025, subject to extension options.
- Management stated that the Company was in compliance with applicable debt covenants and had no material mortgage defaults or noncompliance.
Material Changes Versus the Prior Comparable Period
- Revenue decreased primarily because Q1 2023 included substantially more income from properties later disposed of; disposition revenue declined $7.3 million.
- Centerspace sold two Minnesota apartment communities for $19.0 million in Q1 2024, recognizing a $577,000 loss. In Q1 2023, it sold nine communities for $144.3 million and recognized a $60.2 million gain.
- Same-store operating performance improved despite slightly lower occupancy. Average monthly revenue per occupied home increased 3.9%, while same-store operating expenses declined 2.2%.
- General and administrative expense declined 40.1% to $4.6 million because Q1 2023 included approximately $3.2 million of CEO transition, severance, and related costs.
- Interest expense declined 10.8% to $9.2 million, primarily because a higher-rate term loan had been repaid before its original maturity.
- Cash flow from investing activities changed from $131.2 million provided in Q1 2023 to $9.0 million used in Q1 2024, reflecting the much lower level of property dispositions.
- Common share repurchases increased to 87,722 shares costing $4.7 million, compared with 19,000 shares costing $1.0 million in Q1 2023.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative earnings, FFO, revenue, or occupancy guidance. Management stated that it expects liquidity and financial condition to be sufficient for reasonably anticipated needs and intends to prioritize positive operating cash flow, appropriate leverage, controlled overhead, capital improvements, distributions, debt service, and selective investment activity.
- Inflation, labor and materials costs, insurance premiums, supply-chain constraints, and higher interest rates could pressure operating margins, capital projects, and refinancing costs.
- The Company is concentrated in multifamily real estate and in Midwest and Mountain West markets, with more than 10% of real estate carrying value in each of Minneapolis and Denver.
- A casualty loss of $820,000 was recorded in Q1 2024, including $618,000 related to updated loss estimates from four insurance events. A prior apartment fire claim was settled for $1.6 million during the quarter.
- A retaining-wall lawsuit remains ongoing. Centerspace had paid a $2.9 million judgment in 2023 and recorded an additional $1.0 million of judgment interest and costs in 2023; the filing states that additional costs cannot be estimated with certainty.
- The Company had $14.1 million of real estate-related notes receivable at fair value, including an $8.8 million funded balance on a mezzanine loan for an apartment development. The loan bears interest at 10.0% and matures in December 2027 unless extended.
- The Company had $1.0 million of unfunded commitments to two real estate technology venture funds.
- No material changes to previously disclosed risk factors, no significant off-balance-sheet arrangements, and no significant changes to critical accounting policies were reported.
Most Important Facts for Investors to Verify
- Reconcile GAAP net loss with the stronger same-store NOI, FFO, and Core FFO results; non-GAAP measures exclude depreciation and disposition-related effects and are not substitutes for GAAP cash flow or net income.
- Assess the effect of continued property dispositions on revenue, NOI, portfolio scale, and future capital allocation.
- Review debt maturities, including the September 2025 unsecured credit facility maturity, variable-rate exposure, covenant headroom, and refinancing conditions.
- Monitor same-store occupancy, rent growth, expense trends, insurance costs, and market conditions in Minneapolis, Denver, and other concentrated markets.
- Evaluate capital spending of $21.8 million, mezzanine loan funding, distributions, and share repurchases against operating cash flow and available liquidity.
- Follow the retaining-wall litigation, casualty claims, environmental contingencies, and potential uninsured losses.