Business Context and Reporting Period
Centerspace is a North Dakota REIT focused on owning, managing, acquiring, redeveloping, and developing multifamily apartment communities. The unaudited Form 10-Q covers the three and nine months ended September 30, 2021, compared with the comparable 2020 periods. At quarter-end, the company owned interests in 79 communities containing 14,275 apartment homes.
Key Financial Metrics
| Metric | Three Months Ended September 30 | Nine Months Ended September 30 |
|---|---|---|
| Revenue | $50.4 million, up 14.2% | $143.7 million, up 8.5% |
| Operating income | $1.1 million, down 42.9% | $5.5 million, down 15.5% |
| Net income (loss) | $(11.2) million | $6.7 million |
| Net income (loss) available to common shareholders | $(11.1) million; diluted EPS $(0.81) | $2.4 million; diluted EPS $0.12 |
| Net operating income | $30.1 million, up 17.4% | $85.4 million, up 10.5% |
| FFO applicable to common shares and Units | $9.3 million, down 26.1% | $35.9 million, up 6.7% |
| Cash flow from operations | Not separately provided for the quarter | $56.4 million, compared with $47.3 million |
| Total debt | $849.4 million at September 30, 2021, versus $721.3 million at December 31, 2020 | |
| Cash and cash equivalents | $20.8 million; total cash, including restricted cash, $23.2 million | |
| Liquidity | Approximately $219.8 million, including $199.0 million of line availability and cash |
Revenue was approximately 98.1% rental revenue. Total occupancy was 94.4% for the quarter and 94.6% for the nine-month period. Same-store revenue increased 6.2% in the quarter and 3.3% year to date, while same-store NOI increased 7.5% and 3.6%, respectively.
Total debt had a weighted-average interest rate of 3.23% and weighted-average maturity of 7.46 years at September 30, 2021. The company reported compliance with its debt covenants. Shareholders’ equity was $725.2 million and total equity, including noncontrolling interests, was $951.7 million.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by same-store performance and the addition of acquired communities. Non-same-store revenue increased $6.1 million in the quarter and $13.6 million for the nine months.
- NOI increased despite higher operating costs, with same-store property expenses rising 4.4% in the quarter and 2.9% year to date. Insurance, compensation, and utilities were notable cost increases.
- Property management expense increased 52.8% in the quarter and 39.5% year to date, partly because of nonrecurring technology initiatives and higher compensation costs.
- General and administrative expense increased 39.1% in the quarter and 23.4% year to date, including higher incentive compensation, technology, and consulting costs.
- Net income declined sharply in the quarter because 2020 included a $25.7 million gain on asset sales, while 2021 included a $5.4 million loss from terminating interest-rate swaps. Year-to-date 2021 net income was also affected by the swap loss, partially offset by a $26.8 million gain on sales.
- FFO declined in the quarter because of swap termination losses, higher property management and general and administrative costs, and lower NOI from dispositions. Year-to-date FFO increased due to higher NOI and the absence of the prior-year marketable-securities loss.
- Centerspace acquired 17 communities with 2,696 homes in Minneapolis and St. Cloud for an aggregate cost of approximately $359.9 million during the quarter. Consideration included $217.5 million of Series E preferred units and new debt financing.
- Common shares outstanding increased to approximately 14.3 million from 13.0 million at year-end 2020. The company issued 1.1 million shares under its ATM programs for approximately $86.1 million of net proceeds during the nine months.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide formal earnings or operating guidance. Management stated that liquidity is sufficient for reasonably anticipated requirements and intends to focus on positive operating cash flow, appropriate leverage, financial flexibility, and controlled overhead.
On September 30, 2021, the unsecured revolving credit facility was amended to provide $250.0 million of commitments, extend maturity to September 2025, and add a $400.0 million accordion option. The company had $57.0 million drawn and approximately $193.0 million of additional availability. It also issued $125.0 million of senior unsecured notes and entered into a $198.9 million Fannie Mae credit facility with a weighted-average interest rate of 2.78%.
COVID-19 continued to present uncertainty, particularly regarding rent collections, occupancy, rental rates, operating costs, capital-market access, suppliers, and the ability to maintain dividends. Management stated that the pandemic had not materially affected financial condition, operating results, or cash flows through the reporting date, but the ultimate future impact could not be determined.
- The company paid $3.8 million to terminate interest-rate swaps and recognized a $5.4 million loss after related amounts were reclassified from accumulated other comprehensive income.
- There were no impairment charges in the current or prior comparable periods.
- The company reported no material pending litigation, no material debt defaults, and no significant off-balance-sheet arrangements.
- Remaining contractual obligations included approximately $29.8 million of debt maturities in 2022 and approximately $3.9 million of remaining funding commitments under a Minneapolis mezzanine loan.
- Interest-rate, refinancing, capital-market, property-value, occupancy, rent-growth, acquisition-integration, insurance, environmental, climate, cybersecurity, REIT-status, and pandemic risks remain material.
Important Facts for Investors to Verify
- Reconcile the quarter’s GAAP loss with FFO and assess the recurring versus unusual effects of the interest-rate-swap termination loss and 2020 asset-sale gain.
- Evaluate the leverage impact of the $359.9 million portfolio acquisition, $198.9 million Fannie Mae facility, $125.0 million senior-note issuance, and higher total debt.
- Confirm the operating performance and integration of the 17 acquired communities, including occupancy, rent growth, expenses, and lease-up trends.
- Review liquidity availability, unencumbered asset capacity, debt covenants, interest-rate exposure, and scheduled maturities.
- Assess whether same-store NOI growth can offset higher insurance, compensation, utilities, technology, and other operating costs.
- Monitor COVID-19 effects on collections, occupancy, commercial tenants, operating expenses, capital access, and dividends.
- Verify the terms, dilution potential, and distribution obligations associated with the Series E preferred units and the remaining $230.1 million capacity under the 2021 ATM program.
- Clarify the filing’s inconsistent description of certain Fannie Mae facility maturity periods in the MD&A versus the debt note, which describes maturities of seven, ten, and twelve years.