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. As of June 30, 2022, it owned interests in 83 communities containing 14,838 apartment homes. This unaudited Form 10-Q covers the three and six months ended June 30, 2022, compared with the corresponding 2021 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $63.1 million, up 35.3% | $123.4 million, up 32.3% |
| Net income (loss) | $(3.7) million | $(14.3) million |
| Net income (loss) available to common shareholders | $(4.6) million, or $(0.30) per diluted share | $(14.8) million, or $(0.97) per diluted share |
| Net operating income (NOI) | $36.9 million, up 32.3%; approximately 58.5% of revenue | $71.3 million, up 29.0%; approximately 57.8% of revenue |
| FFO applicable to common shares and Units | $19.1 million, up 39.6%; $1.02 per diluted share and Unit | $37.6 million, up 41.4%; $2.03 per diluted share and Unit |
| Core FFO applicable to common shares and Units | $21.0 million; $1.12 per diluted share and Unit | $38.9 million; $2.10 per diluted share and Unit |
| Weighted average occupancy | 94.8%, versus 94.8% | 94.4%, versus 94.7% |
Same-store revenue increased 11.7% in the second quarter and 10.1% for the six-month period, primarily from higher average monthly revenue per occupied home. Same-store NOI increased 11.5% and 9.7%, respectively. Property operating expenses, including real estate taxes, increased faster than revenue, rising 39.7% in the quarter and 37.1% year to date on a consolidated basis.
Cash provided by operating activities was $34.5 million for the six months ended June 30, 2022, compared with $30.6 million in the prior-year period. Investing cash flow was $(23.5) million, including $9.5 million of cash acquisitions and $13.9 million of property improvements. Financing cash flow was $(34.5) million, reflecting debt repayments, distributions, swap termination costs, and equity issuance. Cash, cash equivalents, and restricted cash declined to $15.1 million from $38.6 million at December 31, 2021.
Total debt was $874.2 million at June 30, 2022, compared with $859.8 million at year-end 2021. The weighted average interest rate was 3.27%, and the weighted average maturity was 6.96 years. Revolving credit borrowings were $73.0 million against $250.0 million of total capacity, leaving $177.0 million of additional availability. Total liquidity was approximately $196.2 million, consisting of $183.0 million of line availability and $13.2 million of cash and cash equivalents.
Material Changes Versus the Prior Comparable Period
- Revenue and NOI increased materially because of strong same-store performance and the contribution from 23 non-same-store communities, including properties acquired in 2021 and 2022.
- Net income available to common shareholders declined from $19.9 million to a $4.6 million loss in the second quarter and from $13.5 million to a $14.8 million loss for the six months. The prior-year periods benefited from a $26.8 million gain on property dispositions; 2022 recorded no comparable disposition gain.
- Depreciation and amortization increased 28.3% for the quarter and 41.9% year to date due to the larger property portfolio.
- General and administrative expense increased 37.5% for the quarter and 26.2% year to date, including $1.1 million of abandoned pursuit costs for the six-month period.
- Interest expense increased 6.7% for both the quarter and year-to-date period due principally to additional unsecured notes and the Fannie Mae Credit Facility.
- Centerspace acquired four Minneapolis communities containing 397 apartment homes for total acquisition costs of $116.9 million during the six months. Consideration included cash, operating partnership units, assumed debt, and the exchange of mortgage receivables. No acquisitions or dispositions occurred during the second quarter.
- The Company issued 321,000 common shares under its ATM program for net proceeds of approximately $31.7 million. It also authorized a $50.0 million share repurchase program, but made no repurchases under the program during the six months.
Guidance, Outlook, Commentary, and Risks
The filing does not provide formal earnings or operating guidance. Management stated that it expects liquidity and financial condition to be sufficient for reasonably anticipated needs and intends to focus on positive operating cash flow, appropriate debt levels, leverage management, and overhead control.
Management highlighted inflation, rising energy and labor costs, supply-chain constraints, construction material availability, and rising interest rates. Short apartment lease terms may allow rent increases, but operating costs could rise faster than rents and reduce margins. The Company terminated its remaining interest rate swaps in February 2022, increasing exposure to variable-rate borrowing costs; no swaps remained at June 30, 2022.
Other identified risks include COVID-19 effects, economic deterioration, rental demand and occupancy, acquisition integration, capital-market access, refinancing and covenant compliance, property values, casualty losses, environmental matters, REIT qualification, cybersecurity, severe weather, and regulatory or litigation risks. Management reported compliance with debt covenants and no material pending legal proceedings. No impairment charges were recorded in either comparable period.
Facts Investors Should Verify
- Reconcile the growth in revenue and NOI with same-store rent growth, occupancy trends, expense inflation, and the contribution from acquired communities.
- Assess the effect of the $874.2 million debt balance, the $177.0 million revolving availability, and scheduled principal payments, including $106.9 million due in 2025.
- Monitor liquidity after distributions, capital improvements, acquisitions, and the February 2022 termination of interest rate swaps.
- Evaluate whether FFO and Core FFO growth adequately offsets the GAAP net loss and the absence of recurring property-sale gains.
- Track inflation, insurance, utilities, labor, repairs, and construction costs relative to the Company’s ability to raise rents.
- Review the use of the remaining $126.6 million ATM capacity and the potential deployment of the $50.0 million share repurchase authorization.