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, primarily in the Midwest and Mountain West. The filing covers the three and nine months ended September 30, 2023. At quarter-end, the Company owned interests in 71 communities comprising 12,785 apartment homes. The interim financial statements are unaudited.
Key Financial Metrics
| Metric | Three Months Ended September 30, 2023 | Year-over-Year Change | Nine Months Ended September 30, 2023 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $64.6 million | Down 1.3% | $197.2 million | Up 4.4% |
| Net income | $9.2 million | Compared with $(0.8) million | $59.1 million | Compared with $(15.1) million |
| Net income available to common shareholders | $6.2 million | Compared with $(2.1) million | $44.7 million | Compared with $(16.9) million |
| Diluted earnings per share | $0.41 | Compared with $(0.14) | $2.96 | Compared with $(1.11) |
| Net operating income | $37.8 million | Down 0.8% | $116.5 million | Up 6.5% |
| Core FFO applicable to common shares and Units | $21.7 million | Up 1.2% | $64.6 million | Up 6.9% |
| Core FFO per diluted share and Unit | $1.20 | Compared with $1.15 | $3.56 | Compared with $3.25 |
Approximate revenue margins were 58.6% for quarterly NOI, 14.2% for quarterly net income, 59.1% for nine-month NOI, and 30.0% for nine-month net income. NOI, FFO, and Core FFO are non-GAAP measures and are not substitutes for GAAP earnings or operating cash flow.
- Same-store revenue increased 5.7% in the quarter and 8.3% for the nine-month period, driven primarily by higher average monthly revenue per occupied home and modestly higher occupancy.
- Same-store NOI increased 5.4% in the quarter and 9.5% for the nine-month period.
- Total weighted average occupancy was 94.6% in the quarter and 94.9% for the nine-month period, compared with 94.5% for both comparable 2022 periods.
- Net cash provided by operating activities was $77.4 million for the nine months, compared with $69.0 million in 2022.
- Capital improvements were approximately $39.4 million during the nine months.
- Cash, cash equivalents, and restricted cash totaled $52.2 million at September 30, 2023, including $29.7 million of unrestricted cash and $22.5 million of restricted cash.
Debt and Liquidity
- Total debt was $842.6 million at September 30, 2023, down from $1.012 billion at December 31, 2022. The weighted average interest rate was 3.46%, with a weighted average maturity of approximately 7.0 years.
- The Company had no outstanding balance on its $250.0 million unsecured revolving credit facility and no balance on its $6.0 million operating line. Reported total liquidity was approximately $285.7 million, consisting of $256.0 million of available credit and $29.7 million of cash.
- Debt reduction included repayment of the $100.0 million variable-rate term loan, net repayment of $113.5 million on the revolving credit facility, and $46.8 million of mortgage principal.
- Mortgage debt increased following a $90.0 million secured note issued in April 2023. Mortgage debt was $542.6 million, while unsecured senior notes totaled $300.0 million, before deferred financing costs.
- The Company stated that it was in compliance with applicable debt covenants and that no material mortgage defaults or instances of noncompliance existed at quarter-end.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue declined because property dispositions reduced revenue by $5.3 million, offsetting growth in same-store and non-same-store communities.
- Quarterly net income improved primarily because of an $11.2 million gain on property sales and lower general and administrative and property management expenses, partially offset by higher interest expense and casualty losses.
- For the nine-month period, the Company sold 13 apartment communities in five transactions for aggregate proceeds of $226.8 million and recognized a $71.3 million gain. It made no acquisitions during the period, compared with $211.9 million of acquisitions in the first nine months of 2022.
- Interest expense increased 18.9% for the nine-month period to $27.5 million, primarily due to higher interest rates.
- General and administrative expense increased 10.4% for the nine-month period, principally because of $3.2 million in CEO severance and transition costs and legal costs related to litigation.
- The Company repurchased 124,000 common shares for $6.7 million during the nine months. Approximately $14.2 million remained available under the repurchase authorization at quarter-end.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
The filing does not provide a clear quantitative earnings, revenue, occupancy, or Core FFO outlook. Management stated that liquidity was sufficient for reasonably anticipated demands, but identified capital-market volatility, higher interest rates, refinancing access, operating cost inflation, insurance costs, and the ability to complete property sales and reinvest proceeds as important uncertainties.
- Inflation and supply-chain pressures may increase energy, labor, repairs, maintenance, and capital-project costs faster than rents can be increased.
- The portfolio is concentrated in multifamily housing and in the Midwest and Mountain West, with more than 10% of real estate carrying value in each of Minneapolis and Denver.
- Casualty losses included a $1.0 million write-down related to an April fire and a $695,000 write-down for pool damage during the quarter. Insurance recoveries may differ from estimates.
- The Company recorded a $2.9 million litigation settlement loss for a retaining-wall dispute and paid the judgment after quarter-end. The filing states that additional costs cannot be estimated with certainty.
- Twenty-eight properties containing 4,935 apartment homes are subject to restrictions on taxable dispositions that could require tax indemnification payments or affect sale structuring.
- The Company had $1.2 million of unfunded commitments to two real estate technology venture funds.
- On October 11, 2023, after quarter-end, Centerspace acquired Lake Vista Apartment Homes in Loveland, Colorado, for $94.5 million, financed through assumption of $52.7 million of mortgage debt and cash.
- Management reported effective disclosure controls and no material changes to internal control over financial reporting. The filing states that there were no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Whether same-store rent growth and occupancy remain sufficient to offset higher insurance, tax, labor, maintenance, and interest costs.
- The sustainability of Core FFO after adjusting for property dispositions, executive transition costs, litigation-related costs, and other non-routine items.
- The impact of the Lake Vista acquisition and assumed mortgage debt on leverage, liquidity, and future operating results.
- Upcoming debt maturities, refinancing requirements, interest-rate exposure, and continued compliance with financial covenants.
- The timing and tax consequences of reinvesting disposition proceeds, including restrictions on taxable dispositions and potential tax indemnification obligations.
- The final amount and timing of insurance recoveries related to the fire and pool damage, and whether additional litigation costs arise.
- The Company’s ability to maintain common and preferred distributions while funding capital improvements and managing debt.