Centerspace Form 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, 2021, it owned interests in 62 communities totaling 11,579 apartment homes. This unaudited filing covers the three and six months ended June 30, 2021, compared with the corresponding 2020 periods.
Key Financial Metrics
| Metric | Three Months Ended June 30 | Six Months Ended June 30 |
|---|---|---|
| Revenue | $46.7 million, up 6.3% | $93.3 million, up 5.6% |
| Net income | $23.1 million, versus a $4.1 million loss | $17.9 million, versus an $11.8 million loss |
| Net income available to common shareholders | $19.9 million, versus a $5.4 million loss | $13.5 million, versus a $13.8 million loss |
| Diluted earnings per share | $1.48, versus $(0.44) | $1.02, versus $(1.13) |
| Net operating income | $27.9 million, up 6.7% | $55.3 million, up 7.1% |
| FFO applicable to common shares and Units | $13.7 million, up 10.4% | $26.6 million, up 26.4% |
| Diluted FFO per share and Unit | $0.95, versus $0.93 | $1.87, versus $1.58 |
| Weighted average occupancy | 94.8%, versus 94.5% | 94.7%, versus 94.8% |
NOI margin was approximately 59.8% for the quarter and 59.3% for the six-month period. Operating income was $2.7 million for the quarter and $4.4 million year to date.
- Cash flow provided by operating activities was $30.6 million for the six months ended June 30, 2021, compared with $25.3 million in 2020.
- Investing cash flow was $(40.8) million, primarily reflecting $78.0 million of acquisitions, $9.0 million of property improvements, and $12.8 million of mortgage and notes receivable funding, partially offset by $59.2 million of asset-sale proceeds.
- Financing cash flow was $16.5 million, including $66.4 million of common-share issuance and $49.9 million of net notes proceeds, partially offset by debt repayments and distributions.
- Cash, cash equivalents, and restricted cash totaled $13.6 million at June 30, 2021, including $5.2 million of unrestricted cash.
- Total debt was $695.4 million, down from $721.3 million at December 31, 2020. The weighted average interest rate was 3.70%, and the weighted average maturity was 4.92 years.
- Debt consisted of $407.0 million of unsecured debt and $288.4 million of fixed-rate mortgage debt. The company reported compliance with its debt covenants and no material mortgage defaults.
- Total liquidity was approximately $168.2 million, consisting of $5.2 million of cash and $163.0 million of additional revolving-credit availability.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected higher same-store revenue, contributions from non-same-store communities, and increased variable lease and other property revenue, partly offset by dispositions.
- Same-store revenue increased 3.2% in the quarter and 1.9% for the six-month period. Same-store NOI increased 1.2% and 1.7%, respectively.
- Same-store operating expenses increased 6.2% in the quarter and 2.1% year to date, driven primarily by compensation, utilities, insurance, and real estate taxes.
- Property management expense increased 55.0% for the quarter and 32.9% year to date, primarily due to technology initiatives and higher compensation costs.
- General and administrative expense increased 18.6% for the quarter and 16.2% year to date, reflecting higher incentive and share-based compensation, technology implementation, and legal costs.
- Interest expense increased 2.1% for the quarter and 3.4% year to date due primarily to higher average revolver borrowings and the issuance of Series C notes.
- The company sold five Rochester, Minnesota apartment communities for $60.0 million and recognized a $26.8 million gain. This gain was the principal driver of the GAAP net-income improvement.
- Centerspace acquired Union Pointe, a 256-home community in Longmont, Colorado, for $76.9 million during the six months ended June 30, 2021.
- The company issued 896,000 common shares through its ATM program for approximately $66.4 million net proceeds. Only approximately $99,000 remained available under the program at quarter-end.
- Common shares outstanding increased to 14.045 million from 13.027 million at December 31, 2020.
Outlook, Management Commentary, Risks, and Unusual Items
Management stated that the COVID-19 pandemic had not materially affected financial condition, operating results, or cash flows through June 30, 2021, although reduced collections in Minnesota markets negatively affected same-store revenue. Management continues to monitor potential effects on occupancy, rental collections, rent growth, commercial tenants, operating costs, capital markets, and dividend capacity.
During the quarter, Centerspace entered into contribution agreements to acquire a portfolio of 17 communities from entities managed by KMS. The transaction was expected to close in the third quarter of 2021 and was to be funded primarily with up to $197.3 million of convertible preferred Operating Partnership units, with up to $16.2 million potentially payable in cash. The acquired assets were expected to be subject to approximately $126.5 million of liabilities, some of which the company intended to refinance.
- Near-term obligations included $12.8 million of debt maturities remaining in 2021, $7.3 million of maturities in the first six months of 2022, and approximately $7.8 million remaining to fund under a Minneapolis mezzanine loan.
- The unsecured credit facility had a $250.0 million revolving commitment, $87.0 million drawn, and a stated maturity of August 31, 2022, with one 12-month extension option.
- The $6.0 million operating line of credit matured August 31, 2021.
- Interest-rate swaps reduced exposure to variable-rate debt, but the company reported $12.1 million of derivative liabilities and estimated that $4.4 million would be reclassified from accumulated other comprehensive income into interest expense over the next 12 months.
- COVID-19 developments, rent collections, occupancy, market rents, interest rates, refinancing and covenant compliance, property values, acquisition integration, insurance and casualty costs, environmental matters, REIT qualification, and access to capital markets remain key risks.
- No material pending legal proceedings, material impairment charges, or significant off-balance-sheet arrangements were reported.
Investor Verification Priorities
- Verify the closing, funding structure, assumed liabilities, and integration results of the planned 17-community KMS transaction.
- Assess whether same-store rent growth and collections, particularly in Minnesota, improve or deteriorate after the reporting date.
- Reconcile recurring operating performance and FFO with GAAP earnings, excluding the $26.8 million property-sale gain.
- Review debt maturities, revolver availability, covenant headroom, and the refinancing or extension of the operating line and other near-term obligations.
- Monitor the effect of higher insurance, utilities, compensation, technology, and property-management costs on NOI margins.
- Confirm the status of COVID-19-related rent deferrals, commercial-tenant abatements, eviction restrictions, and any impact on cash flow or distributions.
- Evaluate dilution from common-share issuance, convertible preferred Operating Partnership units, preferred securities, and other equity-linked awards.