Centerspace 10-Q Summary — Q1 2023
Business Context and Reporting Period
Centerspace is a North Dakota REIT focused on owning, managing, acquiring, redeveloping, and developing apartment communities. As of March 31, 2023, it owned interests in 75 communities containing 13,497 apartment homes. This unaudited Form 10-Q covers the three months ended March 31, 2023, compared with the three months ended March 31, 2022.
Key Financial Metrics
| Metric | Q1 2023 | Q1 2022 | Change |
|---|---|---|---|
| Revenue | $67.9 million | $60.3 million | Up 12.6% |
| Net income | $52.3 million | $(10.6) million | Improved $62.9 million |
| Net income available to common shareholders | $42.0 million | $(10.2) million | Improved $52.2 million |
| Diluted earnings per share | $2.76 | $(0.68) | Improved $3.44 |
| Net operating income | $39.0 million | $34.4 million | Up 13.2% |
| Core FFO applicable to common shares and Units | $19.5 million | $17.9 million | Up 9.0% |
| Core FFO per diluted share and Unit | $1.07 | $0.98 | Up 9.2% |
| Net cash provided by operating activities | $21.8 million | $11.6 million | Up $10.2 million |
Revenue growth was driven primarily by a 10.5% increase in same-store revenue and contributions from non-same-store communities. Same-store occupancy increased to 94.8% from 94.1%, while total weighted average occupancy increased to 94.9% from 94.0%.
Total property operating expenses, including real estate taxes, were $28.9 million, producing an NOI margin of approximately 57.4%. Reported net income margin was approximately 77.1%, but was significantly affected by a $60.2 million gain on property dispositions and is not representative of recurring operating profitability.
At March 31, 2023, total assets were $2.0 billion, including $1.9 billion of net real estate investments. Total debt was approximately $921.7 million, compared with $1.0 billion at December 31, 2022. The weighted average debt interest rate was 3.71%, and the weighted average maturity was 6.06 years.
Cash and cash equivalents were $8.9 million, and total cash, cash equivalents, and restricted cash were $57.8 million. Management reported total liquidity of approximately $121.4 million, including $112.5 million of available credit-line capacity and $8.9 million of cash and cash equivalents.
Material Changes Versus the Prior Comparable Period
- Centerspace sold nine apartment communities in four exchange transactions for aggregate proceeds of $144.3 million and recognized a $60.2 million gain. No properties were sold in Q1 2022.
- The company used disposition proceeds to repay its $100.0 million variable-rate term loan, reducing total debt by approximately $90.1 million from year-end 2022.
- No real estate acquisitions occurred in Q1 2023, compared with $116.9 million of acquisitions in Q1 2022.
- Same-store NOI increased 11.0% to $34.3 million, supported by higher average monthly revenue per occupied home and improved occupancy.
- Interest expense increased 33.8% to $10.3 million because of higher debt balances associated with 2022 acquisitions and rising interest rates.
- General and administrative expense increased 71.6% to $7.7 million, primarily because of $3.2 million in executive severance and transition costs associated with the former CEO’s departure.
- FFO declined 12.3% to $16.3 million, while Core FFO increased 9.0% after adjustments for severance, transition costs, and other non-routine items.
- Common distributions remained $0.73 per share and Unit. The company repurchased 19,464 common shares for $1.0 million during the quarter.
Outlook, Commentary, Risks, and Unusual Items
The filing does not provide a specific quantitative earnings, FFO, revenue, or occupancy guidance range. Management states that it intends to focus on positive operating cash flow, appropriate debt levels and leverage, financial flexibility, and controlling overhead costs.
- Management expects short-term apartment leases to provide flexibility to adjust rents, but inflation, insurance, labor, energy, repairs, maintenance, and construction costs may rise faster than rental revenue.
- Variable-rate debt exposes the company to higher interest expense. The company had no remaining interest-rate swaps at March 31, 2023.
- The primary unsecured credit facility had $110.5 million of additional borrowing availability, matures in September 2025, and includes an accordion option to increase capacity to $400.0 million.
- Subsequent to quarter-end, the company closed on a $90.0 million secured note bearing interest at 5.04% for 12 years, released $47.8 million of tax-deferred exchange proceeds from restricted cash, and repurchased an additional 104,503 common shares for $5.7 million through May 1, 2023.
- A lawsuit alleges that a retaining wall at one property caused water damage to a neighboring property. The company cannot predict the outcome or estimate a potential settlement.
- The company identifies risks from economic deterioration, inflation, interest rates, capital-market access, apartment demand and occupancy, geographic and asset-class concentration, insurance and casualty losses, environmental matters, tax-deferred exchanges, REIT qualification, cybersecurity, climate and weather events, and litigation.
- Centerspace held more than 10% of the carrying value of its real estate portfolio in each of Minneapolis and Denver, creating market concentration exposure.
- Management concluded that disclosure controls and procedures were effective as of March 31, 2023, and reported no material changes to internal control over financial reporting during the quarter.
Important Facts for Investors to Verify
- Separate recurring operating performance from the $60.2 million non-recurring disposition gain and assess cash earnings using FFO and Core FFO.
- Review the effect of higher variable-rate borrowing costs and the company’s debt maturities, particularly the $173.4 million due in 2025 and $616.2 million due thereafter.
- Confirm the sustainability of same-store revenue and NOI growth as rent increases, operating costs, insurance, and real estate taxes evolve.
- Monitor liquidity after the subsequent $90.0 million secured borrowing, additional share repurchases, debt service, distributions, and capital improvements.
- Assess the impact of the CEO transition, related severance costs, and any changes in senior management strategy.
- Review the retaining-wall litigation, environmental contingencies, tax-deferred disposition restrictions, and the company’s ability to reinvest disposition proceeds.
- Consider exposure to Minneapolis and Denver, multifamily-market conditions, inflation, interest rates, and refinancing or capital-market availability.