Business Context and Reporting Period
Centerspace is a North Dakota REIT focused on owning, managing, acquiring, redeveloping, and developing multifamily apartment communities. As of September 30, 2022, it owned interests in 84 communities comprising 15,064 apartment homes. This unaudited Form 10-Q covers the three and nine months ended September 30, 2022, compared with the same periods in 2021.
Key Financial Metrics
| Metric | Q3 2022 | Q3 2021 | Nine Months 2022 | Nine Months 2021 |
|---|---|---|---|---|
| Revenue | $65.4 million | $50.4 million | $188.9 million | $143.7 million |
| Net income (loss) | $(0.8) million | $(11.2) million | $(15.1) million | $6.7 million |
| Net income (loss) available to common shareholders | $(2.1) million | $(11.1) million | $(16.9) million | $2.4 million |
| Diluted earnings per share | $(0.14) | $(0.79) | $(1.11) | $0.12 |
| Net operating income | $38.1 million | $30.1 million | $109.5 million | $85.4 million |
| NOI margin | 58.2% | 59.6% | 58.0% | 59.4% |
| FFO applicable to common shares and Units | $21.0 million | $9.3 million | $58.7 million | $35.9 million |
| Cash flow from operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $69.0 million | $56.4 million |
Q3 revenue increased 29.8%, while nine-month revenue increased 31.4%. Same-store revenue increased 11.1% in Q3 and 10.4% year to date, driven primarily by higher average monthly revenue per occupied home. Total weighted average occupancy was 94.5% in Q3 and 94.5% for the nine-month period.
At September 30, 2022, total assets were $2.04 billion, including $2.00 billion of net real estate investments. Cash and cash equivalents were $15.0 million, and total cash, cash equivalents, and restricted cash were $16.4 million.
Total debt was $971.3 million, compared with $859.8 million at December 31, 2021. The weighted average interest rate was 3.45%, versus 3.26% at year-end 2021. Debt consisted primarily of $171.5 million drawn on revolving credit facilities, $300.0 million of unsecured senior notes, $198.9 million under the Fannie Mae credit facility, and $301.0 million of other mortgage debt.
Reported liquidity was approximately $99.5 million at September 30, 2022, consisting of $84.5 million of unused line capacity and $15.0 million of cash, compared with approximately $211.3 million at December 31, 2021. The primary unsecured credit facility had $78.5 million of additional availability beyond $171.5 million drawn. Management stated that the Company was in compliance with its debt covenants.
Material Changes Versus the Prior Comparable Period
- Q3 NOI increased 26.8% to $38.1 million; nine-month NOI increased 28.2% to $109.5 million. NOI margin declined modestly because property operating expenses grew faster than revenue.
- Same-store NOI increased 11.4% in Q3 and 10.3% for the nine-month period. Same-store occupancy was broadly stable at 94.5% in Q3 and declined slightly for the nine-month period.
- Operating expenses increased 18.6% in Q3 and 31.7% for the nine-month period, including higher property operating costs, real estate taxes, depreciation, management expenses, and general and administrative costs.
- Q3 net loss available to common shareholders improved by $9.0 million, primarily because of stronger NOI and the absence of the $5.4 million interest-rate-swap termination loss recognized in Q3 2021.
- Nine-month net income available to common shareholders declined from $2.4 million to a $16.9 million loss, largely because the prior-year period included a $26.8 million gain on property sales; 2022 included only $27,000 of such gains.
- FFO applicable to common shares and Units increased 125.9% in Q3 and 63.3% for the nine-month period. FFO is a non-GAAP measure and is not a substitute for GAAP earnings or operating cash flow.
- Centerspace acquired five communities during the nine-month period for aggregate consideration of $211.9 million, including the $95.0 million acquisition of Lyra Apartments in Centennial, Colorado, on September 30, 2022. No real estate was disposed of in 2022.
- Common shares outstanding increased to 15.4 million from 15.0 million at year-end 2021. The Company issued 321,000 shares under its ATM program for $31.7 million net and repurchased approximately 5,000 shares for $359,000 through September 30.
Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide quantitative earnings or FFO guidance. Management stated that it believes current financial condition and liquidity are sufficient for reasonably anticipated requirements, but future liquidity may be affected by capital-market access, interest-rate increases, debt refinancing, acquisitions, capital expenditures, distributions, and share repurchases.
- Centerspace terminated its remaining interest-rate swaps in February 2022 for $3.2 million, increasing exposure to variable interest rates. No interest-rate swaps remained at September 30, 2022.
- Inflation and supply-chain pressures are increasing energy, labor, insurance, repairs, maintenance, and construction costs. Management cautioned that expenses could rise faster than rents.
- COVID-19 effects had generally decreased, but management stated that the ultimate effect on rental revenue could not be determined.
- Key operating risks include occupancy and rental-rate pressure, resident turnover and delinquencies, concentrated exposure to multifamily housing and selected U.S. markets, acquisition integration, property values, financing costs, interest rates, insurance and casualty losses, environmental liabilities, and REIT qualification requirements.
- The Company reported no material pending litigation, no material defaults or mortgage noncompliance, and no significant off-balance-sheet arrangements. It had $1.6 million of unfunded commitments to two real estate technology venture funds.
- After quarter-end, through October 31, 2022, Centerspace repurchased 426,773 common shares for $28.7 million at an average price of $67.25 per share.
Investor Verification Items
- Verify the sustainability of same-store rent growth and the effect of rising utilities, insurance, labor, taxes, and maintenance costs on NOI margins.
- Assess liquidity after the post-quarter-end share repurchases and monitor the amount drawn, availability, and pricing under the revolving facilities.
- Evaluate exposure to higher interest rates following termination of the interest-rate swaps and the November 29, 2022 maturity of the $6.0 million operating line.
- Review acquisition performance, including Lyra Apartments and the Minneapolis communities, relative to underwriting assumptions.
- Reconcile FFO and Core FFO to GAAP earnings and operating cash flow, and assess whether distributions are adequately covered by recurring cash generation.
- Monitor debt maturities, covenant compliance, refinancing conditions, and the decline in total liquidity from year-end 2021.