Business Context and Reporting Period
Centerspace, formerly Investors Real Estate Trust, is a North Dakota REIT focused on owning, managing, acquiring, redeveloping, and developing multifamily communities. As of March 31, 2021, it owned interests in 68 communities comprising 12,168 apartment homes. This unaudited Form 10-Q covers the three months ended March 31, 2021, compared with the three months ended March 31, 2020.
Key Financial Metrics
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Revenue | $46.6 million | $44.4 million | 5.0% increase |
| Net income (loss) | $(5.2) million | $(7.7) million | $2.5 million improvement |
| Net loss available to common shareholders | $(6.5) million | $(8.4) million | $2.0 million improvement |
| Diluted loss per common share | $(0.49) | $(0.69) | Improved $0.20 |
| Net operating income | $27.4 million | $25.5 million | 7.6% increase |
| NOI margin | 58.7% | 57.4% | Improved |
| FFO applicable to common shares and Units | $12.9 million | $8.7 million | 49.4% increase |
| Diluted FFO per share and Unit | $0.92 | $0.66 | Increase |
| Net cash provided by operating activities | $15.0 million | $6.2 million | Increase |
| Total debt at period-end | $796.5 million | Not provided in the filing for Q1 2020 | $75.2 million increase from Dec. 31, 2020 |
| Cash and cash equivalents | $10.8 million | $26.3 million | Compared with March 31, 2020 |
| Total liquidity | $79.3 million | Not clearly provided | Included $68.5 million of revolver availability and $10.8 million of cash |
Revenue consisted primarily of fixed lease income of $43.8 million, variable lease income of $2.0 million, and other property revenue of $0.8 million. Weighted average occupancy was 94.6%, compared with 95.3% in the prior-year quarter; same-store occupancy was 94.9% versus 95.3%.
Total debt comprised $181.5 million of revolving lines of credit, $145.0 million of term loans, $175.0 million of unsecured senior notes, and $295.0 million of fixed-rate mortgages. The weighted average interest rate on total debt was 3.37%. Management stated that the company was in compliance with applicable debt covenants and mortgage requirements at March 31, 2021.
Cash, cash equivalents, and restricted cash totaled $12.4 million at March 31, 2021. Operating cash flow was more than offset by $85.0 million of investing outflows, principally the $76.9 million acquisition of Union Pointe and $5.4 million of mortgage and notes receivable funding. Financing activities provided $75.2 million, including $50.0 million of unsecured senior notes and $11.8 million of common-share issuance proceeds.
Material Changes Versus the Prior Comparable Period
- Revenue increased $2.2 million, primarily from non-same-store communities and the expanded portfolio.
- Same-store revenue increased 0.4%, while same-store NOI increased 1.4%; same-store property expenses declined 0.9%.
- NOI increased $1.9 million, or 7.6%, but operating income declined 18.1% because depreciation, general and administrative, and property management expenses increased.
- Net loss improved primarily because Q1 2020 included a $3.6 million loss on marketable securities that did not recur. Interest expense increased 4.6% to $7.2 million.
- FFO increased $4.3 million, or 49.4%, to $12.9 million, reflecting the nonrecurrence of the prior-year securities loss and higher NOI.
- Centerspace acquired the 256-home Union Pointe community in Longmont, Colorado, for $76.9 million, compared with $46.3 million of acquisitions in Q1 2020.
- Total assets increased to $1.54 billion from $1.46 billion at December 31, 2020, while total debt increased to $796.5 million from $721.3 million.
- Centerspace issued 164,279 common shares under its 2019 ATM program for net proceeds of approximately $11.8 million. Approximately $55.3 million remained available under the program at quarter-end.
- The company issued $50.0 million of Series C unsecured senior notes in January 2021 at a 2.70% annual interest rate, leaving $50.0 million available under its private shelf agreement.
Guidance, Outlook, Commentary, Risks, and Unusual Items
The filing does not provide quantitative earnings or FFO guidance. Management intends to preserve financial flexibility, generate positive operating cash flow, maintain appropriate debt and leverage levels, control overhead, and pursue selected investments.
Management stated that COVID-19 had not materially affected financial condition, operating results, or cash flows through March 31, 2021, but cautioned that the ultimate effect on rental revenue and future results remains uncertain. Risks include rent deferrals, lower occupancy or rental rates, tenant nonpayment, additional operating costs, restricted capital-market access, and potential pressure on dividends.
As of March 31, 2021, approximately $57,000 of resident rent deferrals remained outstanding, compared with approximately $99,600 at December 31, 2020. Commercial tenant abatements reduced Q1 2021 revenue by $47,000.
Subsequent to quarter-end, Centerspace received $2.0 million of non-refundable deposits and expected to complete the sale of six Rochester, Minnesota communities containing 589 apartment homes for an aggregate price of $60.0 million on May 24, 2021. Management expected to use the proceeds to reduce the line of credit and increase liquidity.
Other risks include multifamily concentration, geographic concentration, interest-rate and refinancing exposure, debt covenant compliance, property valuation declines, acquisition integration, capital expenditure funding, REIT qualification, environmental matters, insurance availability, cybersecurity, severe weather, and regulatory or litigation exposure. The filing reports no material pending legal proceedings, no material defaults, no impairment charges, and no significant off-balance-sheet arrangements.
Interest-rate swaps had a fair value liability of $12.8 million at March 31, 2021. Management estimated that $4.4 million of accumulated other comprehensive loss would be reclassified as an increase to interest expense during the following twelve months.
Facts Investors Should Verify
- Whether the planned $60.0 million Rochester disposition closed on May 24, 2021 and the extent to which proceeds reduced revolver borrowings.
- Post-quarter-end occupancy, rent growth, collections, concessions, and resident rent-deferral balances, particularly in urban communities affected by work-from-home trends.
- Leverage, covenant headroom, revolver availability, and refinancing requirements, including the operating line maturity in August 2021 and the credit facility maturity in August 2022.
- Whether the $76.9 million Union Pointe acquisition achieves expected occupancy, rent growth, and NOI after integration.
- The sustainability of the $0.70 quarterly common distribution given the GAAP net loss, debt-funded acquisitions, and capital requirements.
- Reconciliations and definitions for non-GAAP NOI and FFO, including the impact of the nonrecurring Q1 2020 marketable-securities loss.
- Future effects of interest-rate swap settlements, variable-rate debt, LIBOR transition, and the $4.4 million expected reclassification to interest expense.