Centerspace 2020 Form 10-K Summary
Business context and reporting period
Investors Real Estate Trust, doing business as Centerspace, is a North Dakota REIT focused on owning, managing, acquiring, developing and redeveloping multifamily apartment communities. The filing covers the year ended December 31, 2020, with comparison to the year ended December 31, 2019. The Company changed its name and brand to Centerspace in December 2020.
- Portfolio at December 31, 2020: 67 apartment communities and 11,910 homes.
- Net real estate investments: $1.4 billion; gross property owned: $1.8 billion.
- Geographic concentration: Minnesota 44.9% and Colorado 30.8% of total property owned, with additional exposure to North Dakota, Nebraska, South Dakota and Montana.
- Centerspace operated as a single reportable multifamily segment and owned approximately 93.0% of its operating partnership.
Financial performance and key metrics
| Metric | 2020 | 2019 | Change |
|---|---|---|---|
| Revenue | $178.0 million | $185.8 million | Down 4.2% |
| Net income | $4.7 million | $84.8 million | Down 94.4% |
| Net income available to common shareholders | $(1.8) million | $71.8 million | Down $73.6 million |
| Diluted earnings per common share | $(0.15) | $6.00 | Declined |
| Net operating income | $104.8 million | $107.4 million | Down 2.4% |
| Same-store revenue | $152.8 million | $149.6 million | Up 2.1% |
| Same-store NOI | $89.6 million | $88.0 million | Up 1.8% |
| Funds from operations applicable to common shares and units | $47.4 million | $52.9 million | Down 10.4% |
| Net cash provided by operating activities | $61.2 million | $69.6 million | Down $8.4 million |
| Common distributions declared | $38.5 million | Not clearly provided in the same disclosure | 81% of FFO |
Calculated operating indicators include an NOI margin of approximately 58.9% of revenue and an operating-income margin of approximately 4.7%. NOI is a non-GAAP measure and is not equivalent to cash flow from operations.
- Weighted average occupancy increased to 94.7% from 94.4%; same-store occupancy increased to 94.8% from 94.4%.
- Interest expense declined 9.9% to $27.5 million, primarily because maturing debt was replaced with lower-rate debt and borrowing costs on the credit line declined.
- Gain on sales of real estate and other investments fell to $25.5 million from $97.6 million. The prior year also included a $6.6 million construction-defect litigation settlement gain, neither of which recurred in 2020.
- The Company recorded a $3.4 million realized loss on marketable securities and $1.7 million of casualty losses.
- Property operating expenses declined 6.6% overall, largely because of dispositions, while same-store expenses increased 2.6%, primarily from higher insurance and real estate taxes.
Liquidity, debt and capital resources
- Total debt was $721.3 million at year-end, up from $651.5 million, and represented 39.3% of total gross real estate investments.
- Debt consisted primarily of $152.9 million drawn on revolving lines, $145.0 million of term loans, $125.0 million of unsecured senior notes and $298.4 million of fixed-rate mortgage debt.
- Available liquidity was approximately $97.5 million, consisting of $97.1 million of credit availability and $392,000 of cash and cash equivalents, compared with $226.5 million at December 31, 2019.
- The primary revolving facility matures August 31, 2022, with one 12-month extension option. Term loans mature in January 2024 and August 2025; senior notes mature in 2028 and 2029.
- The Company had $26.1 million of debt maturities during 2021 and expected to fund $20.6 million under construction and mezzanine loans.
- Operating cash flow was $61.2 million, while investing activities used $165.0 million and financing activities provided $64.9 million. Cash, cash equivalents and restricted cash declined to $7.3 million from $46.1 million.
- During 2020, Centerspace issued 829,078 common shares under its ATM program for approximately $59.2 million net of costs, acquired two communities totaling 647 homes for approximately $191.0 million, funded $30.3 million of capital improvements and repurchased 237,000 Series C preferred shares for approximately $5.6 million.
- All mortgage debt was fixed rate; interest-rate swaps synthetically fixed $195.0 million of variable-rate borrowings. Management estimated that a 100-basis-point increase in 30-day LIBOR would reduce annual net income by approximately $1.0 million.
Material changes, outlook and risks
- Centerspace continued its portfolio transformation toward multifamily housing, expanding in Minneapolis and Denver while disposing of four apartment communities, one commercial property and one parcel of land for aggregate proceeds of $44.3 million.
- Management stated that COVID-19 did not materially affect 2020 financial condition, operating results or cash flows, but reported lower demand and rent growth at five urban communities, rent deferrals, commercial rent abatements and additional operating protocols.
- Commercial tenant abatements reduced 2020 revenue by $656,000; approximately $99,600 remained outstanding under resident rent-deferral arrangements at year-end.
- Management expects to focus on improving operating margins through resident-experience initiatives, value-add investments, technology and expense controls. It plans to pursue acquisitions in Minneapolis and Denver and explore Nashville as a potential market. No quantitative earnings or FFO guidance was provided.
- Subsequent to year-end, the Company acquired a 256-home Colorado community for $76.9 million and issued $50.0 million of 2.7% Series C unsecured notes due 2030.
- Key risks include COVID-19 and economic deterioration, rent collection and occupancy, concentration in multifamily properties and Midwest/Mountain West markets, refinancing and covenant compliance, interest-rate and LIBOR transition risk, insurance availability and costs, casualty and weather events, environmental liabilities, cybersecurity, competition and REIT qualification.
- The filing states that management was in compliance with debt covenants at year-end and that no material legal proceedings were pending. Grant Thornton issued unqualified opinions on the financial statements and internal control over financial reporting.
Investor verification priorities
- Verify rent collections, delinquency trends, concessions, resident deferrals and occupancy following the COVID-19 period.
- Assess whether same-store revenue and NOI growth can offset higher insurance, taxes, labor and maintenance costs.
- Review 2021 debt maturities, credit-facility availability, covenant headroom and refinancing requirements.
- Reconcile reported FFO and distributions, including the effect of preferred dividends, noncontrolling interests and capital expenditures.
- Evaluate acquisition performance and leverage following the Parkhouse, Ironwood and subsequent Union Pointe transactions.
- Review exposure to interest-rate swaps, LIBOR transition, casualty losses, insurance deductibles and the $1.3 million of expected 2021 hail-related replacement costs.
- Confirm the tax characterization of distributions, of which 78.47% was reported as return of capital, and monitor continued REIT qualification.