CENTERSPACE annual report, FY2021

Centerspace 2021 Form 10-K Summary

Business Context and Reporting Period

Centerspace is a North Dakota REIT focused primarily on owning, managing, acquiring, redeveloping and developing multifamily apartment communities in the Midwest and Mountain West. This Form 10-K covers the year ended December 31, 2021 and was filed February 28, 2022.

At year-end, Centerspace owned interests in 79 apartment communities containing 14,441 homes. Net real estate investments were $1.83 billion, with 51.5% of property concentrated in Minnesota and 30.5% in Colorado. The Company operates through Centerspace, LP and owned 83.3% of the Operating Partnership at year-end.

Financial Performance and Key Metrics

Metric	2021	2020	Change
Total revenue	$201.7 million	$178.0 million	+13.3%
Net operating income	$119.8 million	$104.8 million	+14.3%
Operating income	$29.9 million	$33.8 million	-11.7%
Net income (loss)	$(2.1) million	$4.7 million	Decline
Net loss available to common shareholders	$(6.5) million	$(1.8) million	Loss increased
Diluted EPS	$(0.47)	$(0.15)	Decline
FFO applicable to common shares and Units	$54.9 million	$47.4 million	+16.0%
Core FFO applicable to common shares and Units	$62.1 million	$51.6 million	+20.3%
Net cash provided by operating activities	$84.0 million	$61.2 million	+37.2%

Calculated margins were approximately 59.4% for NOI, 14.8% for operating income and negative 1.0% for consolidated net income. Same-store revenue and NOI each increased 4.8%, primarily from higher rental revenue, while same-store weighted-average occupancy decreased from 94.7% to 94.4%.

Property operating expenses increased 11.9% to $81.9 million, including higher utilities, compensation, turnover, maintenance, marketing, insurance and real estate taxes.
Property management expense increased 50.9% to $8.8 million, driven partly by $1.2 million of nonrecurring technology initiatives and $1.2 million of acquisition-related staffing and compensation costs.
Interest expense increased 5.6% to $29.1 million, while depreciation and amortization increased 21.9% to $92.2 million.
The Company recorded a $5.4 million loss related to terminating interest-rate swaps and $535,000 of debt-extinguishment losses.

Cash Flow, Debt and Liquidity

Cash and cash equivalents were $31.3 million at December 31, 2021, compared with $392,000 in 2020. Including restricted cash, total cash was $38.6 million.
Total liquidity was approximately $204.8 million, consisting of $31.3 million of cash and $173.5 million of additional availability under the revolving credit facility.
Gross total debt was $859.8 million, compared with $721.3 million in 2020. The Company reported total debt equal to 37.2% of total gross real estate investments.
Debt consisted of $76.0 million drawn on the revolving credit facility, $300.0 million of unsecured senior notes, $198.9 million under a Fannie Mae credit facility and $284.9 million of other mortgage debt.
The revolving credit facility matures in September 2025, has $250.0 million of commitments and includes an accordion option to increase capacity to $400.0 million.
Weighted-average interest rates were 3.26% for total debt, 3.81% for other mortgage debt and 2.78% for the Fannie Mae facility. Approximately $75.0 million of revolving debt was hedged through an interest-rate swap at year-end.
The Company declared $42.7 million of distributions to common shareholders and Operating Partnership unitholders, compared with $84.0 million of operating cash flow and $54.9 million of FFO.

Material Changes Versus 2020

Centerspace acquired $499.8 million of real estate, including a 17-community, 2,696-home Minneapolis and St. Cloud portfolio, Civic Lofts in Denver and Union Pointe in Longmont, Colorado.
The Company issued 1.8 million Series E preferred units with a $181.4 million aggregate liquidation preference as partial consideration for the portfolio acquisition. The units carry a 3.875% distribution rate and are convertible into Operating Partnership Units.
The Company issued 1.8 million common shares through its ATM programs for approximately $156.4 million net of commissions and issuance costs. The new 2021 ATM program had $158.7 million of remaining capacity at year-end.
Centerspace issued $175.0 million of unsecured senior notes during 2021 and had $300.0 million of unsecured senior notes outstanding at year-end.
The Company paid off $145.0 million of term loans, reduced revolving credit borrowings by approximately $76.9 million and added $198.9 million of Fannie Mae financing.
Five Rochester, Minnesota apartment communities and one commercial property were sold for an aggregate $62.3 million, generating a gain of approximately $27.5 million.
Common shares outstanding increased from 13.0 million to 15.0 million, while the Company’s interest in the Operating Partnership declined from 93.0% to 83.3%, primarily reflecting the Series E issuance and other equity activity.

Guidance, Outlook, Risks and Unusual Items

Management did not provide specific numerical earnings or revenue guidance in the filing. Its outlook emphasizes improving operating margins through resident-experience initiatives, value-add investments, technology and expense controls; pursuing acquisitions in Minneapolis and Denver; exploring Nashville; and maintaining balance-sheet flexibility.

Management stated that COVID-19 did not have a material impact on 2021 financial condition, results or cash flows, but continuing effects remain uncertain and could affect rent collections, occupancy, capital markets, operating costs and distributions.
The Company experienced a ransomware attack in November 2021. It recovered critical operational data and reported no material impact on business, operations or financial results, but acknowledged continuing cybersecurity exposure.
Inflation, labor costs, insurance costs and supply-chain constraints could increase operating and renovation expenses or delay projects. Short-term apartment leases provide pricing flexibility but also expose revenue to rapid declines in market rents.
Key risks include multifamily and geographic concentration, acquisition integration, property values, refinancing and covenant compliance, rising interest rates, LIBOR transition, insurance availability, environmental liabilities, climate events and REIT qualification.
Thirty-four communities containing approximately 6,511 homes are subject to tax-protection agreements that could require payments to contributors if sold in taxable transactions.
Subsequent events included acquisitions totaling $114.5 million in January 2022 and termination of the remaining $75.0 million interest-rate swap and $70.0 million forward swap for $3.3 million in February 2022.
The filing discusses the potential economic effects of the Russia-Ukraine conflict, although the conflict began after the balance-sheet date.

Grant Thornton issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. The filing identifies accounting for the Series E preferred units as a critical audit matter.

Important Facts for Investors to Verify

Reconcile the reported $859.8 million gross debt with the balance-sheet carrying amounts and review principal maturities, particularly the $108.9 million scheduled for 2025.
Assess whether same-store rent growth and NOI growth can continue despite occupancy declines, inflation, insurance increases and labor-cost pressure.
Evaluate the impact of the large 2021 acquisitions, including integration costs, leverage, Series E preferred distributions and dilution to common shareholders.
Review the sustainability of distributions relative to FFO, operating cash flow, capital expenditures and REIT distribution requirements.
Monitor refinancing, interest-rate, LIBOR-transition and covenant risks, including the impact of the February 2022 swap terminations.
Review cybersecurity remediation following the November 2021 ransomware attack and assess whether future losses or disruptions could be material.
Verify the tax-protection restrictions, potential indemnification obligations and the Company’s continued qualification as a REIT.