Centerspace(CSR) - 2023 Q3 - Quarterly Report

Part I. Financial Information Item 1. Financial Statements This section presents Centerspace's unaudited condensed consolidated financial statements, highlighting a significant increase in net income to $59.1 million for the nine months ended September 30, 2023, primarily due to real estate sales Condensed Consolidated Balance Sheets As of September 30, 2023, total assets decreased to $1.88 billion due to property sales, while liabilities also decreased, and equity slightly increased Condensed Consolidated Balance Sheets (in thousands) | Balance Sheet Item | Sep 30, 2023 (in thousands) | Dec 31, 2022 (in thousands) | | :--- | :--- | :--- | | Total real estate investments | $1,809,735 | $1,998,723 | | Cash and cash equivalents | $29,701 | $10,458 | | Total Assets | $1,878,281 | $2,033,301 | | Revolving lines of credit | $0 | $113,500 | | Total Liabilities | $901,362 | $1,066,445 | | Total Equity | $960,359 | $950,296 | | Total Liabilities & Equity | $1,878,281 | $2,033,301 | Condensed Consolidated Statements of Operations For Q3 2023, net income significantly improved to $9.2 million due to real estate sales, while nine-month net income surged to $59.1 million driven by similar gains Condensed Consolidated Statements of Operations (in thousands, except EPS) | Metric (in thousands, except EPS) | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | Revenue | $64,568 | $65,438 | $197,241 | $188,868 | | Operating Income | $17,395 | $7,031 | $85,958 | $6,955 | | Net Income (Loss) | $9,169 | $(770) | $59,116 | $(15,076) | | Net Income (Loss) Available to Common Shareholders | $6,167 | $(2,130) | $44,661 | $(16,924) | | Diluted EPS | $0.41 | $(0.14) | $2.96 | $(1.11) | - The significant improvement in net income for both the three and nine-month periods of 2023 was primarily driven by gains on the sale of real estate and other investments, amounting to $11.2 million and $71.3 million, respectively[6] Condensed Consolidated Statements of Cash Flows Net cash from operating activities increased to $77.4 million, while investing activities provided $185.4 million primarily from real estate sales, leading to a $40.3 million net increase in cash Condensed Consolidated Statements of Cash Flows (in thousands) | Cash Flow Activity (in thousands) | Nine Months Ended Sep 30, 2023 | Nine Months Ended Sep 30, 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $77,420 | $68,973 | | Net cash provided by (used by) investing activities | $185,371 | $(137,140) | | Net cash provided by (used by) financing activities | $(222,485) | $45,916 | | Net Increase (Decrease) in Cash | $40,306 | $(22,251) | - The primary driver for the positive cash flow from investing activities was the $223.3 million in net proceeds from the sale of real estate, compared to none in the same period of 2022[21] - Significant uses of cash in financing activities included principal payments on revolving lines of credit ($189.4M), notes payable ($100.0M), and mortgages payable ($46.8M), alongside distributions to shareholders ($32.8M)[21] Notes to Condensed Consolidated Financial Statements These notes detail the company's REIT focus on 71 apartment communities, significant property dispositions, a litigation settlement loss, CEO transition costs, and subsequent property acquisition - As of September 30, 2023, Centerspace owned interests in 71 apartment communities consisting of 12,785 apartment homes[25] - During the nine months ended September 30, 2023, the company disposed of 13 apartment communities for an aggregate sales price of $226.8 million, resulting in a gain of $71.4 million[149][150] - The company recorded a $2.9 million loss on a litigation settlement due to a trial judgment concerning water damage caused by a retaining wall at one of its properties[113][185] - On October 11, 2023, subsequent to the quarter end, the company acquired Lake Vista Apartment Homes in Loveland, Colorado, for $94.5 million[140] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses Q3 2023 financial performance, highlighting a revenue decrease offset by same-store growth, improved net income driven by property sales, increased Core FFO, and strong liquidity - As of September 30, 2023, the company owned interests in 71 apartment communities with 12,785 apartment homes, with a historical cost of $2.3 billion[120] - For Q3 2023, revenue decreased by 1.3% year-over-year, mainly due to dispositions, but this was partially offset by a 5.7% revenue increase from same-store communities[144] - The company's liquidity position is strong, with approximately $285.7 million available as of September 30, 2023, consisting of $256.0 million on lines of credit and $29.7 million in cash[82] Results of Operations Q3 2023 saw a 1.3% revenue decrease due to dispositions, offset by 5.7% same-store revenue growth, with net income improving significantly due to real estate sale gains Results of Operations (in thousands) | Metric (in thousands) | Q3 2023 | Q3 2022 | % Change | | :--- | :--- | :--- | :--- | | Total Revenue | $64,568 | $65,438 | (1.3)% | | Same-Store Revenue | $57,949 | $54,838 | 5.7% | | Net Operating Income (NOI) | $37,823 | $38,109 | (0.8)% | | Same-Store NOI | $34,043 | $32,305 | 5.4% | | Net Income (Loss) | $9,169 | $(770) | * | - For the nine months ended Sep 30, 2023, General and Administrative expenses increased 10.4% to $15.7 million, primarily due to $3.2 million in executive severance and transition costs related to the CEO's departure[241] - Interest expense increased by 8.7% in Q3 and 18.9% YTD, primarily due to higher interest rates[243][267] Funds from Operations (FFO) and Core Funds from Operations (Core FFO) Q3 2023 FFO per share slightly decreased to $1.15, while Core FFO per share increased to $1.20, with nine-month Core FFO growing to $3.56 due to strong performance and non-core item adjustments Per Share Data | Per Share Data | Q3 2023 | Q3 2022 | YTD 2023 | YTD 2022 | | :--- | :--- | :--- | :--- | :--- | | FFO per share and Unit - diluted | $1.15 | $1.13 | $3.15 | $3.16 | | Core FFO per share and Unit - diluted | $1.20 | $1.15 | $3.56 | $3.25 | - Core FFO for the nine months ended Sep 30, 2023, includes adjustments to exclude $3.2 million in severance and transition costs and a $3.2 million loss on litigation settlement and related trial costs[299][272] Liquidity and Capital Resources The company maintained strong liquidity of $285.7 million as of September 30, 2023, utilizing proceeds from property sales and new mortgages to repay debt and fund capital improvements - Total liquidity was approximately $285.7 million as of September 30, 2023, up from $153.0 million at year-end 2022[82] - During the nine months ended September 30, 2023, the company repaid its $100.0 million term loan in full and made net repayments of $113.5 million on its revolving line of credit[85][284] - The company repurchased 124,000 common shares for $6.7 million during the first nine months of 2023, with $14.2 million remaining authorized for purchase under the program as of quarter-end[284][88] Item 3. Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk stems from interest rate fluctuations affecting debt obligations, and it does not use derivative instruments for speculative purposes - Centerspace's main market risk is from fluctuations in interest rates on its debt obligations, which can impact operating results and cash flows[287][314] - The company states it does not use derivative instruments for trading or speculative purposes[287] Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective as of September 30, 2023, with no material changes to internal control over financial reporting during the quarter - The CEO and CFO concluded that as of September 30, 2023, the company's disclosure controls and procedures were effective[288] - There were no material changes to the company's internal control over financial reporting during the third quarter of 2023[316] Part II. Other Information Item 1. Legal Proceedings The company reports no material pending legal proceedings beyond ordinary routine litigation incidental to its business - The company is not involved in any material pending legal proceedings outside of ordinary, routine litigation[290] Item 1A. Risk Factors No material changes to the previously disclosed risk factors were reported for the quarter - No material changes to risk factors were reported for the quarter[98] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds The company issued 8,553 unregistered Common Shares in exchange for Units and detailed equity securities repurchases during the quarter - On July 31, 2023, the company issued 8,553 unregistered Common Shares to limited partners in exchange for their Units, relying on a private offering exemption[291] Equity Securities Repurchases | Period | Total Shares Purchased | Average Price Paid per Share | | :--- | :--- | :--- | | July 2023 | 0 | N/A | | August 2023 | 60 | $61.27 | | September 2023 | 380 | $63.70 | | Total Q3 2023 | 440 | $63.37 | - As of September 30, 2023, the maximum dollar amount that may yet be purchased under the company's share repurchase program is $14,234,010[99] Item 5. Other Information No trustees or executive officers adopted or terminated any Rule 10b5-1 trading plans during the third quarter of 2023 - No trustees or executive officers adopted or terminated any Rule 10b5-1 trading plans during the quarter[108] Item 6. Exhibits This section lists exhibits filed with the quarterly report, including CEO and CFO certifications and interactive data files - The report includes CEO and CFO certifications pursuant to Sections 302 and 906 of the Sarbanes-Oxley Act[327]