CENTERSPACE annual report, FY2022

Business Context and Reporting Period

Centerspace filed this Form 10-K for the year ended December 31, 2022. The company is a North Dakota REIT focused on owning, managing, acquiring, developing, and redeveloping multifamily apartment communities, primarily in the Midwest and Mountain West.

Portfolio: 84 apartment communities and 15,065 homes.
Net real estate investment: $2.0 billion; gross real estate investments: $2.5 billion.
Geographic concentration: Minnesota represented 52.3% and Colorado 31.6% of net real estate assets.
Revenue is predominantly apartment rental income, which represented approximately 97.9% of total revenue.

Financial Performance and Key Metrics

Metric	2022	2021	Change
Total revenue	$256.7 million	$201.7 million	27.3% increase
Net operating income	$148.1 million	$119.8 million	23.6% increase
Operating income	$13.9 million	$29.9 million	53.6% decrease
Net loss	$17.6 million	$2.1 million	Higher loss
Net loss available to common shareholders	$20.5 million	$6.5 million	Higher loss
Loss per basic and diluted share	$1.35	$0.47	Higher loss
FFO applicable to common shares and Units	$79.9 million	$54.9 million	45.5% increase
Core FFO per diluted share and Unit	$4.43	$3.99	11.0% increase
Net cash provided by operating activities	$92.0 million	$84.0 million	9.5% increase
Common shareholder and Unit distributions	$47.4 million	Not clearly provided in the filing text	2022 represented 68% of FFO

Same-store revenue increased 10.0% to $197.3 million, while same-store NOI increased 9.0% to $117.0 million. Weighted-average occupancy increased to 94.6% from 94.3%.

Property operating expenses increased 32.7% to $108.6 million. Same-store expenses increased 11.6%, driven primarily by higher utilities, compensation, repairs and maintenance, turnover costs, insurance premiums, and deductibles. Depreciation and amortization increased 14.2% to $105.3 million, and interest expense increased 12.6% to $32.8 million.

Cash Flow, Debt, Liquidity, and Capital Allocation

Cash and cash equivalents declined to $10.5 million from $31.3 million at year-end 2021. Including restricted cash, year-end cash totaled $11.9 million.
Total liquidity was approximately $153.0 million, consisting of $142.5 million available under lines of credit and $10.5 million of cash.
Total debt was $1.012 billion, compared with $859.8 million at year-end 2021. Total indebtedness represented 39.9% of total gross real estate investments.
Debt included $113.5 million drawn on the revolving credit facility, $100.0 million of floating-rate term debt, $300.0 million of unsecured senior notes, and $498.3 million of mortgage debt.
The revolving credit facility had $136.5 million of additional borrowing availability and matures in September 2025. The $100.0 million term loan matures in November 2023 and may be extended for one additional 364-day term, subject to conditions.
Mortgage debt was fixed-rate with a weighted-average interest rate of 3.85%; the Fannie Mae facility had a $198.9 million balance and a 2.78% blended fixed rate.
Contractual principal and interest obligations totaled approximately $1.205 billion, including $182.0 million due within one year.
Capital expenditures for property improvements were $56.6 million. Cash acquisitions totaled $104.7 million, while distributions paid across common, preferred, and noncontrolling interests totaled approximately $60.7 million.
Centerspace issued 321,000 common shares under its ATM program for approximately $31.4 million net proceeds and repurchased 432,000 common shares for $29.1 million.

Material Changes Versus the Prior Comparable Period

Revenue and NOI grew substantially, primarily from same-store rent growth and the contribution of apartment communities acquired in late 2021 and 2022.
Net loss widened materially because higher depreciation, interest expense, operating expenses, and casualty losses more than offset the increase in NOI. The prior year also benefited from a $27.5 million gain on real estate sales, compared with a $41,000 gain in 2022.
Core FFO improved despite higher interest expense and operating costs, partly because 2022 did not include the prior year’s $5.4 million loss related to interest-rate-swap termination.
The portfolio increased from 14,441 to 15,065 homes. 2022 acquisitions included five communities totaling 612 homes, with aggregate acquisition costs of $211.9 million.
Debt increased by approximately $152.0 million, primarily due to acquisition activity and the new term loan.
Liquidity declined from approximately $204.8 million to $153.0 million, reflecting lower cash balances and reduced availability under credit facilities.
Centerspace terminated its remaining interest-rate swaps in February 2022 for $3.2 million and had no interest-rate swaps outstanding at year-end.

Guidance, Outlook, Risks, Contingencies, and Unusual Items

Management did not provide formal quantitative earnings guidance in the filing. Its stated outlook is to improve operating margins through resident-experience initiatives, value-add investments, technology, and expense controls; actively manage the existing portfolio; pursue selective acquisitions and dispositions; and maintain balance-sheet flexibility.

Interest-rate exposure is significant: $213.5 million of variable-rate borrowings was outstanding at year-end. Management estimated that a 100-basis-point increase in SOFR or LIBOR would reduce annual net income by approximately $2.1 million.
Key risks include inflation, rising wages and utilities, higher insurance costs, supply-chain constraints, competition, rent regulation, regional economic deterioration, and concentration in multifamily assets and the Midwest and Mountain West.
Refinancing risk is material, particularly for the $100.0 million term loan maturing in November 2023 and approximately $146.0 million of scheduled debt principal payments in 2023.
Thirty-seven communities, containing approximately 6,758 homes, are subject to tax-protection restrictions that may require tax indemnification payments if sold in taxable transactions.
The company disclosed a lawsuit involving a neighboring property owner alleging retaining-wall water damage; the outcome and potential settlement could not be estimated.
The company previously experienced a ransomware attack that did not have a material impact, but cybersecurity, privacy, environmental, insurance, climate, and litigation risks remain.
Subsequent to year-end, Centerspace entered into purchase and sale agreements for nine communities that management expected to close in the first quarter; completion and final terms were not assured.
Management reported effective disclosure controls and internal control over financial reporting. Grant Thornton issued unqualified opinions on the financial statements and internal controls and identified no critical audit matters.

Most Important Facts for Investors to Verify

Whether same-store rent growth and 94.6% occupancy can offset rising operating expenses, insurance costs, and interest expense.
The refinancing or extension strategy for the $100.0 million term loan and other 2023 maturities.
Availability and pricing under the revolving credit facility as property values and lending conditions change.
The sustainability of distributions relative to Core FFO, capital expenditures, debt service, and required REIT distributions.
The status, closing terms, financing, and expected contribution of the nine communities subject to post-year-end purchase and sale agreements.
Potential effects of interest-rate volatility, rent regulation, tax-protection agreements, insurance limitations, and the disclosed retaining-wall litigation.
The comparability of FFO and Core FFO with other REITs, since these are non-GAAP measures and may be calculated differently.