Centerspace 10-Q Summary
Business Context and Reporting Period
Centerspace is a North Dakota REIT focused on owning, managing, acquiring, redeveloping, and developing multifamily apartment communities. This unaudited Form 10-Q covers the three months ended March 31, 2022, compared with the three months ended March 31, 2021. At quarter-end, the Company owned interests in 83 communities comprising 14,838 apartment homes.
Financial Performance and Position
| Metric | Q1 2022 | Q1 2021 | Change |
|---|---|---|---|
| Revenue | $60.3 million | $46.6 million | +29.3% |
| Net operating income | $34.4 million | $27.4 million | +25.7% |
| Operating income (loss) | $(3.9) million | $1.6 million | $(5.6) million |
| Net income (loss) | $(10.6) million | $(5.2) million | $(5.4) million |
| Net loss available to common shareholders | $(10.2) million | $(6.5) million | $(3.7) million |
| Diluted loss per common share | $(0.68) | $(0.49) | $(0.19) |
| Cash flow from operating activities | $11.6 million | $15.0 million | $(3.4) million |
| FFO applicable to common shares and Units | $18.5 million | $12.9 million | +43.3% |
| Core FFO applicable to common shares and Units | $17.9 million | $13.3 million | +34.4% |
Revenue was approximately 57.1% represented by NOI, while the operating and net loss margins were approximately 6.5% and 17.5%, respectively. Same-store revenue increased 8.6%, driven by a 9.5% increase in average rental revenue, partially offset by weighted-average occupancy declining to 93.9% from 94.7%. Same-store NOI increased 7.8%.
Total assets were $2.0 billion at March 31, 2022, including $1.9 billion of net real estate investments. Total debt was $871.0 million, consisting principally of $346.0 million of unsecured debt and $525.0 million of mortgage debt, with a weighted-average interest rate of 3.29% and weighted-average maturity of 7.14 years. Cash and cash equivalents were $13.3 million, and cash, cash equivalents, and restricted cash totaled $15.7 million. Reported total liquidity was approximately $223.3 million, including $210.0 million of line-of-credit availability.
Material Changes Versus the Prior Comparable Period
- Revenue increased $13.7 million, primarily from same-store growth and the addition of acquired communities.
- NOI increased $7.0 million, but expenses grew faster than revenue in several categories, including property operating expenses, depreciation and amortization, property management, and general and administrative expenses.
- Depreciation and amortization increased 55.1% to $31.0 million, principally reflecting the expanded property portfolio.
- Interest expense increased 6.7% to $7.7 million due primarily to additional unsecured notes and the Fannie Mae credit facility.
- The Company acquired four Minneapolis communities for an aggregate cost of $116.9 million. Consideration included $9.1 million of cash, $22.9 million of Operating Partnership Units, assumed debt, and the exchange of mortgage and mezzanine loans.
- Centerspace issued 321,000 common shares under its ATM program for net proceeds of approximately $31.7 million. Up to $126.6 million remained available under the program at quarter-end.
- Total debt increased from $859.8 million at December 31, 2021 to $871.0 million, while cash and cash equivalents declined from $31.3 million to $13.3 million.
- The Company terminated its remaining interest-rate swaps, paying $3.2 million. It had no interest-rate swaps outstanding at March 31, 2022, increasing exposure to variable-rate interest costs.
Guidance, Outlook, Risks, and Unusual Items
The filing does not provide formal full-year earnings or operating guidance. Management reported confidence that current financial condition and liquidity were sufficient for reasonably anticipated needs, while noting dependence on operating cash flow, credit availability, equity and debt markets, property transactions, and continued access to financing.
- Management highlighted inflation, rising energy and labor costs, higher interest rates, supply-chain constraints, and potential increases in operating and borrowing costs.
- COVID-19 effects remained uncertain, including possible impacts on rental revenue, operations, residents, vendors, and future restrictions.
- Multifamily concentration and geographic concentration expose the Company to apartment demand, occupancy, rent growth, employment, and local economic conditions.
- Acquisition integration, lease-up execution, capital expenditures, property valuations, refinancing, debt covenants, and interest-rate volatility remain material considerations.
- FFO and Core FFO improved substantially but are non-GAAP measures and should not be treated as substitutes for GAAP earnings or operating cash flow.
- The Company recorded no real estate impairment charges and reported no material pending legal proceedings or significant off-balance-sheet arrangements.
- Disclosure controls and procedures were reported effective, with no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Whether same-store rent growth can persist while occupancy remains below the prior-year level and operating costs continue to rise.
- The contribution, lease-up status, and integration performance of the four Minneapolis acquisitions.
- Liquidity after the decline in cash and the effect of increased variable-rate exposure following termination of the swaps.
- Debt maturities, covenant compliance, refinancing requirements, and the $204.0 million of stated availability under the primary revolving facility.
- The sustainability of common distributions of $0.73 per share per quarter relative to operating cash flow, FFO, capital expenditures, and debt service.
- The reconciliation and quality of FFO and Core FFO, including the effect of the $582,000 interest-rate-swap mark-to-market gain and other adjustments.