CENTERSPACE - Quarter Report: 2022 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q


☑			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to ____________

Commission File Number 001-35624

CENTERSPACE

(Exact name of registrant as specified in its charter)

North Dakota

45-0311232

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification No.)

3100 10th Street SW

Post Office Box 1988

Minot

58702-1988

(Address of principal executive offices)

(Zip code)

(701) 837-4738

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.

Yes

☑

☐

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes

☑

☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer

☑

Accelerated filer

☐

Non-accelerated filer

☐

Smaller Reporting Company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes

☐

☑

Securities registered pursuant to Section 12(b) of the Exchange Act:


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of Beneficial Interest, no par value	CSR	New York Stock Exchange
Series C Cumulative Redeemable Preferred Shares	CSR-PRC	New York Stock Exchange

The number of common shares of beneficial interest outstanding as of October 24, 2022, was 15,068,988.

Table of Contents

TABLE OF CONTENTS


			Page
Part I. Financial Information
Item 1. Financial Statements - Third Quarter - 2022:			3
Condensed Consolidated Balance Sheets September 30, 2022 (unaudited) and December 31, 2021			3
Condensed Consolidated Statements of Operations (unaudited) For the Three and Nine Months ended September 30, 2022 and 2021			4
Condensed Consolidated Statements of Comprehensive Income (Loss) (unaudited) For the Three and Nine Months ended September 30, 2022 and 2021			5
Condensed Consolidated Statements of Equity (unaudited) For the Three and Nine Months ended September 30, 2022 and 2021			6
Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months ended September 30, 2022 and 2021			8
Notes to Condensed Consolidated Financial Statements (unaudited)			10
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			24
Item 3. Quantitative and Qualitative Disclosures About Market Risk			35
Item 4. Controls and Procedures			36

Part II. Other Information
Item 1. Legal Proceedings			37
Item 1A. Risk Factors			37
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			37
Item 3. Defaults Upon Senior Securities			37
Item 4. Mine Safety Disclosures			37
Item 5. Other Information			37
Item 6. Exhibits			38
Signatures			39

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PART I

Item 1. Financial Statements.

CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS


	(in thousands, except per share data)
	September 30, 2022		December 31, 2021
ASSETS	(Unaudited)		(Audited)
Real estate investments
Property owned	$	2,513,470	$	2,271,170
Less accumulated depreciation	(511,000)		(443,592)
	2,002,470		1,827,578

Mortgage loans receivable at fair value	—		43,276
Total real estate investments	2,002,470		1,870,854
Cash and cash equivalents	14,957		31,267
Restricted cash	1,417		7,358
Other assets	19,742		30,582
TOTAL ASSETS	$	2,038,586	$	1,940,061
LIABILITIES, MEZZANINE EQUITY, AND EQUITY
LIABILITIES
Accounts payable and accrued expenses	$	58,322	$	62,403
Revolving lines of credit	171,500		76,000

Notes payable, net of unamortized loan costs of $612 and $656, respectively	299,388		299,344
Mortgages payable, net of unamortized loan costs of $3,624 and $3,187, respectively	496,530		480,703
TOTAL LIABILITIES	$	1,025,740	$	918,450
COMMITMENTS AND CONTINGENCIES (NOTE 10)

SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 166 units issued and outstanding at September 30, 2022 and December 31, 2021, aggregate liquidation preference of $16,560)	$	16,560	$	25,331
EQUITY
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $25 per share liquidation preference, 3,881 shares issued and outstanding at September 30, 2022 and December 31, 2021, aggregate liquidation preference of $97,036)	93,530		93,530
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 15,376 shares issued and outstanding at September 30, 2022 and 15,016 shares issued and outstanding at December 31, 2021)	1,209,732		1,157,255
Accumulated distributions in excess of net income	(524,905)		(474,318)
Accumulated other comprehensive income (loss)	(2,158)		(4,435)
Total shareholders’ equity	$	776,199	$	772,032
Noncontrolling interests – Operating Partnership and Series E preferred units	219,466		223,600
Noncontrolling interests – consolidated real estate entities	621		648
TOTAL EQUITY	$	996,286	$	996,280
TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY	$	2,038,586	$	1,940,061

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)


	(in thousands, except per share data)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
REVENUE	$	65,438	$	50,413	$	188,868	$	143,717
EXPENSES
Property operating expenses, excluding real estate taxes	20,290		14,434		58,315		40,901
Real estate taxes	7,039		5,916		21,103		17,450
Property management expense	2,563		2,203		7,537		6,055
Casualty (gain) loss	276		(10)		1,256		64
Depreciation and amortization	23,720		22,447		79,489		61,747

General and administrative expenses	4,519		4,279		14,240		11,982

TOTAL EXPENSES	$	58,407	$	49,269	$	181,940	$	138,199
Gain (loss) on sale of real estate and other investments	—		—		27		26,840
Operating income (loss)	7,031		1,144		6,955		32,358
Interest expense	(7,871)		(7,302)		(23,147)		(21,622)

Interest and other income (loss)	70		(5,082)		1,116		(4,032)
NET INCOME (LOSS)	$	(770)	$	(11,240)	$	(15,076)	$	6,704
Dividends to Series D preferred unitholders	(160)		(160)		(480)		(480)
Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units	439		1,930		3,546		1,013
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	(32)		(22)		(93)		(58)
Net income (loss) attributable to controlling interests	(523)		(9,492)		(12,103)		7,179
Dividends to preferred shareholders	(1,607)		(1,607)		(4,821)		(4,821)

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(2,130)	$	(11,099)	$	(16,924)	$	2,358




NET INCOME (LOSS) PER COMMON SHARE – BASIC	$	(0.14)	$	(0.79)	$	(1.11)	$	0.17




NET INCOME (LOSS) PER COMMON SHARE – DILUTED	$	(0.14)	$	(0.79)	$	(1.11)	$	0.12

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS) (unaudited)


	(in thousands)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income (loss)	$	(770)	$	(11,240)	$	(15,076)	$	6,704
Other comprehensive income (loss):
Unrealized gain (loss) from derivative instrument	—		(70)		1,581		1,555
(Gain) loss on derivative instrument reclassified into earnings	204		6,350		696		8,566
Total comprehensive income (loss)	$	(566)	$	(4,960)	$	(12,799)	$	16,825
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units	473		3,055		3,937		2,389
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	(32)		(22)		(93)		(58)
Comprehensive income (loss) attributable to controlling interests	$	(125)	$	(1,927)	$	(8,955)	$	19,156

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)


	(in thousands, except per share data)
Nine Months Ended September 30, 2021	PREFERRED SHARES		NUMBER OF COMMON SHARES	COMMON SHARES		ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME		ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)		NONCONTROLLING INTERESTS		TOTAL EQUITY
Balance at December 31, 2020	$	93,530	13,027	$	968,263	$	(427,681)	$	(15,905)	$	54,616	$	672,823
Net income (loss) attributable to controlling interests and noncontrolling interests						7,179				(955)		6,224
Change in fair value of derivatives								10,121				10,121
Distributions - common shares and units ($2.12 per share and unit)						(29,368)				(1,891)		(31,259)
Distributions – Series C preferred shares ($1.2421875 per Series C share)						(4,821)						(4,821)
Distributions - Series E preferred units ($0.322917 per unit)										(585)		(585)
Share-based compensation, net of forfeitures			28	2,088								2,088
Sale of common shares, net			1,095	85,864								85,864
Issuance of Series E preferred units				44,905						172,608		217,513
Redemption of units for common shares			131	(2,815)						2,815		—



Change in redemption value of Series D preferred units				(5,025)								(5,025)


Other			—	(1,150)						(113)		(1,263)
Balance at September 30, 2021	$	93,530	14,281	$	1,092,130	$	(454,691)	$	(5,784)	$	226,495	$	951,680

Nine Months Ended September 30, 2022
Balance at December 31, 2021	$	93,530	15,016	$	1,157,255	$	(474,318)	$	(4,435)	$	224,248	$	996,280
Net income (loss) attributable to controlling interests and noncontrolling interests						(12,103)				(3,453)		(15,556)
Change in fair value of derivatives								2,277				2,277
Distributions - common shares and units ($2.19 per share and unit)						(33,663)				(2,169)		(35,832)
Distributions – Series C preferred shares ($1.2421875 per Series C share)						(4,821)						(4,821)
Distributions - Series E preferred units ($2.90625 per unit)										(5,272)		(5,272)
Share-based compensation, net of forfeitures			25	1,908								1,908
Sale of common shares, net			321	31,499								31,499

Issuance of units				13,023						9,859		22,882
Redemption of units for common shares			19	(831)						831		—
Redemption of units for cash										(3,837)		(3,837)
Shares repurchased	—		(5)	(359)		—						(359)
Change in redemption value of Series D preferred units				8,771								8,771

Shares withheld for taxes				(1,280)								(1,280)
Other			—	(254)						(120)		(374)
Balance at September 30, 2022	$	93,530	15,376	$	1,209,732	$	(524,905)	$	(2,158)	$	220,087	$	996,286

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)


	(in thousands, except per share data)
Three Months Ended September 30, 2021	PREFERRED SHARES		NUMBER OF COMMON SHARES	COMMON SHARES		ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME		ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)		NONCONTROLLING INTERESTS		TOTAL EQUITY
Balance at June 30, 2021	$	93,530	14,045	$	1,033,940	$	(433,310)	$	(12,064)	$	53,790	$	735,886
Net income (loss) attributable to controlling interests and noncontrolling interests						(9,492)				(1,908)		(11,400)
Change in fair value of derivatives								6,280				6,280
Distributions - common shares and units ($0.72 per share and unit)						(10,282)				(609)		(10,891)
Distributions – Series C preferred shares ($0.4140625 per Series C share)						(1,607)						(1,607)
Distributions - Series E preferred units ($0.322917 per unit)										(585)		(585)
Share-based compensation, net of forfeitures			1	600								600
Sale of common shares, net			199	19,508								19,508
Issuance of Series E preferred units				44,905						172,608		217,513
Redemption of units for common shares			36	(3,233)						3,233		—




Change in redemption value of Series D preferred units				(3,563)								(3,563)
Other			—	(27)						(34)		(61)
Balance at September 30, 2021	$	93,530	14,281	$	1,092,130	$	(454,691)	$	(5,784)	$	226,495	$	951,680

Three Months Ended September 30, 2022
Balance at June 30, 2022	$	93,530	15,373	$	1,207,849	$	(511,552)	$	(2,362)	$	223,153	$	1,010,618
Net income (loss) attributable to controlling interests and noncontrolling interests						(523)				(407)		(930)
Change in fair value of derivatives								204				204
Distributions - common shares and units ($0.73 per share and unit)						(11,223)				(715)		(11,938)
Distributions – Series C preferred shares ($0.4140625 per Series C share)						(1,607)						(1,607)
Distributions - Series E preferred units ($0.96875 per unit)										(1,757)		(1,757)
Share-based compensation, net of forfeitures			—	709								709


Redemption of units for common shares			8	(456)						456		—
Redemption of units for cash										(607)		(607)
Shares repurchased	—		(5)	(359)		—						(359)
Change in redemption value of Series D preferred units				2,067								2,067

Other			—	(78)						(36)		(114)
Balance at September 30, 2022	$	93,530	15,376	$	1,209,732	$	(524,905)	$	(2,158)	$	220,087	$	996,286

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)


	(in thousands)
	Nine Months Ended September 30,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	(15,076)	$	6,704
Adjustments to reconcile net income (loss) to net cash provided by (used by) operating activities:
Depreciation and amortization, including amortization of capitalized loan costs	80,104		62,527
(Gain) loss on sale of real estate and other investments	—		(26,840)



Share-based compensation expense	1,908		2,088
(Gain) loss on interest rate swap termination, amortization, and mark-to-market	(221)		5,343


Other, net	660		3,275
Changes in other assets and liabilities:
Other assets	4,158		(4,550)
Accounts payable and accrued expenses	(2,560)		7,808
Net cash provided by (used by) operating activities	$	68,973	$	56,355
CASH FLOWS FROM INVESTING ACTIVITIES

Proceeds from repayment of mortgage loans and notes receivable	353		139
Increase in mortgages and notes receivable	—		(17,498)
Proceeds from sale of real estate and other investments	—		59,233
Payments for acquisitions of real estate investments	(104,666)		(209,669)
Payments for improvements of real estate investments	(33,625)		(20,655)
Other investing activities	798		(441)
Net cash provided by (used by) investing activities	$	(137,140)	$	(188,891)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from mortgages payable	—		196,725
Principal payments on mortgages payable	(27,426)		(27,650)
Proceeds from revolving lines of credit	150,000		173,733
Principal payments on revolving lines of credit	(54,500)		(269,604)
Net proceeds from notes payable	—		174,544
Principal payments on notes payable	—		(145,000)
Payment for termination of interest rate swap	(3,209)		(3,804)

Net proceeds from issuance of common shares	31,499		85,864
Repurchase of common shares	(359)		—

Redemption of partnership units	(3,837)		—
Distributions paid to common shareholders	(33,252)		(28,205)
Distributions paid to preferred shareholders	(4,821)		(4,821)
Distributions paid to preferred unitholders	(480)		(480)
Distributions paid to noncontrolling interests – Operating Partnership and Series E preferred units	(7,325)		(2,550)

Other financing activities	(374)		(334)
Net cash provided by (used by) financing activities	$	45,916	$	148,418
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(22,251)		15,882
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD	38,625		7,310
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	16,374	$	23,192


SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrued capital expenditures	$	2,458	$	1,239
Operating partnership units converted to shares	(831)		(2,815)
Distributions declared but not paid to common shareholders	11,938		10,891


Retirement of shares withheld for taxes	1,280		929
Real estate assets acquired through assumption of debt	41,623		20,000
Fair value adjustment to debt	1,224		2,367

Note receivable exchanged through real estate acquisition	43,276		—
Real estate assets acquired through issuance of operating partnership units	22,882		—
Real estate assets acquired through issuance of Series E preferred units	—		217,513

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	21,856	$	20,050

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (continued)


	(in thousands)
Balance sheet description	September 30, 2022		December 31, 2021		September 30, 2021
Cash and cash equivalents	$	14,957	$	31,267	$	20,816
Restricted cash	1,417		7,358		2,376
Total cash, cash equivalents and restricted cash	$	16,374	$	38,625	$	23,192

See accompanying Notes to Condensed Consolidated Financial Statements.

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CENTERSPACE AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

September 30, 2022

NOTE 1 • ORGANIZATION

Centerspace, collectively with its consolidated subsidiaries (“Centerspace,” “the Company,” “we,” “us,” or “our”), is a North Dakota real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities. As of September 30, 2022, Centerspace owned interests in 84 apartment communities consisting of 15,064 apartment homes.

NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

Centerspace conducts a majority of its business activities through a consolidated operating partnership, Centerspace, LP (f/k/a IRET Properties), a North Dakota limited partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying Condensed Consolidated Financial Statements include the Company’s accounts and the accounts of all its subsidiaries in which it maintains a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation.

The Condensed Consolidated Financial Statements also reflect the Operating Partnership’s ownership of a joint venture entity in which the Operating Partnership has a general partner or controlling interest. This entity is consolidated into the Company’s operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.

UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Centerspace’s interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of financial position, results of operations, and cash flows for the interim periods, have been included.

The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim Condensed Consolidated Financial Statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, as filed with the SEC on February 28, 2022.

USE OF ESTIMATES

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

CASH, CASH EQUIVALENTS, AND RESTRICTED CASH

As of September 30, 2022 and December 31, 2021, restricted cash consisted primarily of deposits for real estate acquisitions and escrows held by lenders for real estate taxes, insurance, and capital additions.

LEASES

As a lessor, Centerspace primarily leases multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 97.8% of total revenues and includes gross market rent less adjustments for gain or loss to lease, concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 2.2% of total revenues and are primarily driven by other fee income, which is typically recognized when earned, at a point in time.

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Some of the Company’s apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.

Many of the leases contain non-lease components for utility reimbursement from residents and common area maintenance from commercial tenants. Centerspace has elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.

The aggregate amount of future scheduled lease income on commercial operating leases, excluding any variable lease income and non-lease components, as of September 30, 2022, was as follows:


	(in thousands)
2022 (remainder)	$	566
2023	2,630
2024	2,566
2025	2,511
2026	1,905
Thereafter	1,505
Total scheduled lease income - commercial operating leases	$	11,683

REVENUES AND GAINS ON SALE OF REAL ESTATE

Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the Company expects to be entitled for those goods and services.

Revenue streams that are included in revenues from contracts with customers include other property revenue such as application fees and other miscellaneous items. Centerspace recognizes revenue for these rental related items not included as a component of a lease as earned.

The following table presents the disaggregation of revenue streams for the three and nine months ended September 30, 2022 and 2021:


		(in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,
Revenue Stream	Applicable Standard	2022		2021		2022		2021
Fixed lease income - operating leases	Leases	$	60,851	$	47,292	$	176,911	$	134,817
Variable lease income - operating leases	Leases	2,905		2,171		7,728		6,243
Other property revenue	Revenue from contracts with customers	1,682		950		4,229		2,657
Total revenue		$	65,438	$	50,413	$	188,868	$	143,717

In addition to lease income and other property revenue, the Company recognizes gains or losses on the sale of real estate when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. For the nine months ended September 30, 2022 and 2021, we recognized $27,000 and $26.8 million, respectively, as a gain on the sale of real estate and other assets.

IMPAIRMENT OF LONG-LIVED ASSETS

The Company evaluates long-lived assets, including investments in real estate, for impairment indicators at least quarterly. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns. If indicators exist, the Company compares the expected future undiscounted cash flows for the property against the carrying amount of that property. If the sum of the estimated undiscounted cash flows is less than the carrying amount, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount. If the anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, the evaluation of impairment charges may be different and such differences could be material to the consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates, and capital requirements that could differ materially from actual results. Reducing planned property holding periods may increase the likelihood of recording impairment losses.

During the three and nine months ended September 30, 2022 and 2021, the Company recorded no impairment charges.

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MORTGAGE LOANS RECEIVABLE AND NOTES RECEIVABLE

The Company has a tax increment financing note receivable (“TIF”) with a principal balance of $6.1 million and $6.4 million at September 30, 2022 and December 31, 2021, respectively, which appears within other assets in the Condensed Consolidated Balance Sheets. The note bears an interest rate of 4.5% with payments due in February and August of each year.

Centerspace originated a $29.9 million construction loan and a $15.3 million mezzanine loan for the development of a multifamily community located in Minneapolis, Minnesota. The construction and mezzanine loans bore and accrued interest at 4.5% and 11.5%, respectively. The Company exercised its option to purchase the apartment community in exchange for the loans and cash, during the nine months ended September 30, 2022. As of September 30, 2022, the loans had no remaining balance. As of December 31, 2021, the Company had fully funded the $29.9 million construction loan and $13.4 million of the mezzanine loan, both of which appear within mortgage loans receivable in the Condensed Consolidated Balance Sheets.

VARIABLE INTEREST ENTITIES

Centerspace has determined that its Operating Partnership and each of its less-than-wholly owned real estate partnerships are variable interest entities (each, a “VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. The Company is the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on the balance sheet because the Company has a controlling financial interest in the VIEs and has both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because the Operating Partnership is a VIE, all of the Company’s assets and liabilities are held through a VIE.

NOTE 3 • EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares of beneficial interest (“common shares”) outstanding during the period. Centerspace has issued restricted stock units (“RSUs”) and incentive stock options (“ISOs”) under the 2015 Incentive Plan, Series D Convertible Preferred Units (“Series D preferred units”), and Series E Convertible Preferred Units (“Series E preferred units”), which could have a dilutive effect on the earnings per share upon exercise of the RSUs or ISOs or upon conversion of the Series D or Series E preferred units (refer to Note 4 for further discussion of the Series D and the Series E preferred units). Other than the issuance of RSUs, ISOs, Series D preferred units, and Series E preferred units, there are no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in Centerspace’s sole discretion, it may issue common shares in exchange for Units on a one-for-one basis.

For the three months ended September 30, 2022, operating partnership units of 984,000, Series D preferred units of 228,000, as converted, Series E preferred units of 2.2 million, time-based RSUs of 7,000, weighted average stock options of 23,000, and performance-based RSUs of 30,000, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

For the three months ended September 30, 2021, operating partnership units of 865,000, Series D preferred units of 228,000, as converted, Series E preferred units of 705,000, time-based RSUs of 13,000, weighted average stock options of 46,000, and performance-based RSUs of 32,000 were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

For the nine months ended September 30, 2022, operating partnership units of 980,000, Series D preferred units of 228,000, as converted, Series E preferred units of 2.2 million, time-based RSUs of 10,000, weighted average stock options of 38,000, and performance-based RSUs of 33,000, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

For the nine months ended September 30, 2021, performance-based RSUs of 32,000, were excluded from the calculation of diluted earnings per share because they were anti-dilutive.

The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the Condensed Consolidated Financial Statements for the three and nine months ended September 30, 2022 and 2021.

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	(in thousands, except per share data)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
NUMERATOR


Net income (loss) attributable to controlling interests	$	(523)	$	(9,492)	$	(12,103)	$	7,179
Dividends to preferred shareholders	(1,607)		(1,607)		(4,821)		(4,821)

Numerator for basic earnings (loss) per share – net income available to common shareholders	(2,130)		(11,099)		(16,924)		2,358
Noncontrolling interests – Operating Partnership and Series E preferred units	(439)		(1,930)		(3,546)		(1,013)

Dividends to preferred unitholders	160		160		480		480
Numerator for diluted earnings (loss) per share	$	(2,409)	$	(12,869)	$	(19,990)	$	1,825
DENOMINATOR
Denominator for basic earnings per share weighted average shares	15,373		14,065		15,280		13,501
Effect of redeemable operating partnership units	—		—		—		917
Effect of Series D preferred units	—		—		—		228
Effect of Series E preferred units	—		—		—		239
Effect of dilutive restricted stock units and stock options	—		—		—		32
Denominator for diluted earnings per share	15,373		14,065		15,280		14,917



NET INCOME (LOSS) PER COMMON SHARE – BASIC	$	(0.14)	$	(0.79)	$	(1.11)	$	0.17



NET INCOME (LOSS) PER COMMON SHARE – DILUTED	$	(0.14)	$	(0.79)	$	(1.11)	$	0.12

NOTE 4 • EQUITY AND MEZZANINE EQUITY

Operating Partnership Units. The Operating Partnership had 980,000 and 832,000 outstanding Units at September 30, 2022 and December 31, 2021, respectively. During the nine months ended September 30, 2022, we issued 209,000 Units as partial consideration for the acquisition of three apartment communities.

Exchange Rights. Centerspace redeemed Units in exchange for common shares in connection with Unitholders exercising their exchange rights during the three and nine months ended September 30, 2022 and 2021 as detailed in the table below.


	(in thousands)
Three Months Ended September 30,	Number of Units	Net Book Basis
2022	8	$	456
2021	36	$	(3,233)

Nine Months Ended September 30,
2022	19	$	831
2021	131	$	(2,815)

Pursuant to the exercise of exchange rights, the Company redeemed Units for cash during the three and nine months ended September 30, 2022 and 2021 as detailed in the table below.


	(in thousands, except per Unit data)
Three Months Ended September 30,	Number of Units	Aggregate Cost		Average Price Per Unit
2022	7	$	607	$	81.18
2021	—	$	—	$	—

Nine Months Ended September 30,
2022	42	$	3,837	$	90.93
2021	—	$	—	$	—

Series E Preferred Units (Noncontrolling Interests). On September 1, 2021, Centerspace issued 1.8 million Series E preferred units with a par value of $100 per Series E preferred unit as partial consideration for the acquisition of 17 apartment communities. The Series E preferred unit holders receive a preferred distribution at the rate of 3.875% per year. Each Series E

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preferred unit is convertible, at the holder’s option, into 1.2048 Units. The Series E preferred units have an aggregate liquidation preference of $181.4 million. The holders of the Series E preferred units do not have voting rights.

Common Shares and Equity Awards. Common shares outstanding on September 30, 2022 and December 31, 2021, totaled 15.4 million and 15.0 million, respectively. There were 199 and 24,496 shares issued upon the vesting of equity awards under the 2015 Incentive Plan during the three and nine months ended September 30, 2022, respectively, with a total grant-date fair value of $18,000 and $637,000, respectively. There were 578 and 26,764 shares issued upon the vesting of equity awards under the 2015 Incentive Plan during the three and nine months ended September 30, 2021, respectively, with a total grant-date fair value of $32,000 and $946,000, respectively. These shares vested based on performance and service criteria.

Equity Distribution Agreement. Centerspace had an equity distribution agreement in connection with an at-the-market offering (“2019 ATM Program”) through which it could offer and sell common shares having an aggregate sales price of up to $150.0 million. In September 2021, the Company replaced the 2019 ATM Program with a new at-the-market offering (“2021 ATM Program”) through which it may offer and sell common shares having an aggregate sales price of up to $250.0 million, in amounts and at times determined by management. Under the 2021 ATM Program, the Company may enter into separate forward sale agreements. The proceeds from the sale of common shares under the 2021 ATM Program may be used for general corporate purposes, including the funding of acquisitions, construction or mezzanine loans, community renovations, and the repayment of indebtedness. The table below provides details on the sale of common shares during the three and nine months ended September 30, 2022 and 2021 under both the 2019 and 2021 ATM Programs. As of September 30, 2022, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program.


	(in thousands, except per share amounts)
Three Months Ended September 30,	Number of Common Shares	Net Consideration(1)		Average Net Price Per Share
2022	—	$	—	$	—
2021	199	$	19,632	$	98.58

Nine Months Ended September 30,
2022	321	$	31,732	$	98.89
2021	1,095	$	86,127	$	78.63

(1)Total consideration is net of $338 in commissions and issuance costs during the nine months ended September 30, 2022 and $299 and $1.0 million for the three and nine months ended September 30, 2021, respectively.

Share Repurchase Program. On June 13, 2022, the Board of Trustees approved a new share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to an aggregate of $50.0 million of the Company's outstanding common shares. Under the Share Repurchase Program, the Company is authorized to repurchase common shares through open market purchases, privately-negotiated transactions, block trades or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources or other financial and operational performance, market conditions, securities law limitations, and other factors. The table below provides details on the shares repurchased during the three and nine months ended September 30, 2022. As of September 30, 2022, the Company had $49.6 million remaining authorized for purchase under this program. Refer to Note 12 for repurchases made subsequent to September 30, 2022.


	(in thousands, except per share amounts)
	Number of Common Shares	Total Consideration(1)		Average Net Price Per Share(1)
Three and Nine Months Ended September 30, 2022	5	$	359	$	65.97

(1)Amount includes commissions.

Series C Preferred Shares. Series C preferred shares outstanding were 3.9 million shares at September 30, 2022 and December 31, 2021. The Series C preferred shares are nonvoting and redeemable for cash at $25.00 per share at Centerspace’s option after October 2, 2022. Holders of these shares are entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an annual rate of $1.65625 per share, which is equal to 6.625% of the $25.00 per share liquidation preference ($97.0 million liquidation preference in the aggregate).

Series D Preferred Units (Mezzanine Equity). Series D preferred units outstanding were 165,600 preferred units at September 30, 2022 and December 31, 2021. The Series D preferred units have a par value price of $100 per preferred unit. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862% per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the

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issuance price. Each Series D preferred unit is convertible, at the holder’s option, into 1.37931 Units. The Series D preferred units have an aggregate liquidation preference of $16.6 million. Changes in the redemption value are charged to common shares on the Condensed Consolidated Balance Sheets from period to period. The holders of the Series D preferred units do not have voting rights. Distributions to Series D unitholders are presented in the Condensed Consolidated Statements of Equity within net income (loss) attributable to controlling interests and noncontrolling interests.

NOTE 5 • DEBT

The following is a summary of our secured and unsecured debt at September 30, 2022 and December 31, 2021.


	(in thousands)
	September 30, 2022				December 31, 2021
	Carrying Amount		Weighted Average Interest Rate		Carrying Amount		Weighted Average Interest Rate		Weighted Average Maturity in Years at September 30, 2022
Lines of credit (1)	$	171,500	3.28	%	$	76,000	2.74	%	3.00

Unsecured senior notes (2)(5)	300,000		3.12	%	300,000		3.12	%	7.88
Unsecured debt	471,500				376,000				6.11
Mortgages payable - Fannie Mae credit facility (5)	198,850		2.78	%	198,850		2.78	%	8.82
Mortgages payable - other (3)(5)	300,956		3.85	%	284,934		3.81	%	5.03
Total debt (4)	$	971,306	3.45	%	$	859,784	3.26	%	6.33

(1)The interest rate swap was terminated in February 2022. Refer to Note 6 - Derivative Instruments for additional information. Interest rates on lines of credit are variable.

(2)Included within notes payable on the Condensed Consolidated Balance Sheets.

(3)Represents apartment communities encumbered by mortgages; 15 at September 30, 2022 and 14 at December 31, 2021.

(4)Excludes deferred financing costs and premiums or discounts.

(5)Interest rate is fixed.

As of September 30, 2022, 53 apartment communities were not encumbered by mortgages and were available to provide credit support for the unsecured borrowings. The Company’s primary unsecured credit facility (“unsecured credit facility”) is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. The line of credit has total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties. As of September 30, 2022, the additional borrowing availability was $78.5 million beyond the $171.5 million drawn. This unsecured credit facility was amended on September 30, 2021 to extend the maturity date to September 2025 and to provide for an accordion option to increase borrowing capacity up to $400.0 million.

The interest rates on the line of credit is based, at the Company’s option, on either the lender’s base rate plus a margin, ranging from 25-80 basis points, or the London Interbank Offered Rate (“LIBOR”), plus a margin that ranges from 125-180 basis points based on the consolidated leverage ratio, as defined under the Third Amended and Restated Credit Agreement. The unsecured credit facility and unsecured senior notes are subject to customary financial covenants and limitations. The Company believes that it was in compliance with all such financial covenants and limitations as of September 30, 2022.

In January 2021, Centerspace amended and expanded its private shelf agreement with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. (collectively, “PGIM”) to increase the aggregate amount available for issuance of unsecured senior promissory notes (“unsecured senior notes”) to $225.0 million. In September 2021, the Company entered into a note purchase agreement for the issuance of $125.0 million senior unsecured promissory notes, of which $25.0 million was issued under the private shelf agreement with PGIM. Under the private shelf agreement with PGIM, the Company has issued $200.0 million unsecured senior notes with $25.0 million remaining available as of September 30, 2022. The following table shows the notes issued under both private shelf agreements.


	(in thousands)
	Amount		Maturity Date	Interest Rate
Series A	$	75,000	September 13, 2029	3.84	%
Series B	$	50,000	September 30, 2028	3.69	%
Series C	$	50,000	June 6, 2030	2.70	%
Series 2021-A	$	35,000	September 17, 2030	2.50	%
Series 2021-B	$	50,000	September 17, 2031	2.62	%
Series 2021-C	$	25,000	September 17, 2032	2.68	%
Series 2021-D	$	15,000	September 17, 2034	2.78	%

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In September 2021, Centerspace entered into a $198.9 million Fannie Mae Credit Facility Agreement (the “FMCF”) for the acquisition of 16 apartment communities. The FMCF is currently secured by mortgages on those apartment communities. The notes are interest-only, with varying maturity dates of 7, 10, and 12 years, and a blended, weighted average interest rate of 2.78%. As of September 30, 2022 and December 31, 2021, the FMCF had a balance of $198.9 million. The FMCF is included within mortgages payable on the Condensed Consolidated Balance Sheets.

As of September 30, 2022, Centerspace owned 15 apartment communities that served as collateral for mortgage loans, in addition to the apartment communities secured by the FMCF. All of these mortgage loans were non-recourse to the Company other than for standard carve-out obligations. As of September 30, 2022, the Company believes that there were no material defaults or instances of noncompliance in regards to any of these mortgages payable.

Centerspace also has a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line matures on November 29, 2022, with pricing based on a market spread plus the one-month LIBOR index rate.

The aggregate amount of required future principal payments as of September 30, 2022, was as follows:


	(in thousands)
2022 (remainder)	$	1,413
2023	45,988
2024	5,012
2025	205,350
2026	50,088
Thereafter	663,455
Total payments	$	971,306

NOTE 6 • DERIVATIVE INSTRUMENTS

Centerspace used interest rate derivatives to stabilize interest expense and to manage its exposure to interest rate fluctuations. To accomplish this objective, the Company primarily used interest rate swap contracts to fix variable interest rate debt.

Changes in the fair value of derivatives designated and that qualified as cash flow hedges were recorded in accumulated other comprehensive income (loss) (“OCI”). Amounts recorded in accumulated other comprehensive income will be reclassified to interest expense in the periods in which interest payments are incurred on variable rate debt. During the next twelve months, the Company estimates an additional $724,000 will be reclassified as an increase to interest expense.

In February 2022, the Company paid $3.2 million to terminate its $75.0 million interest rate swap and its $70.0 million forward swap. As of September 30, 2022 the Company had no remaining interest rate swaps.

Derivatives not designated as hedges were not speculative and were used to manage the Company’s exposure to interest rate movements and other identified risks but did not meet the strict hedge accounting requirements. Changes in fair value of derivatives not designated in hedging relationships were recorded directly to earnings within other income (loss) in the Condensed Consolidated Statement of Operations. During the nine months ended September 30, 2022 and 2021, the Company recorded a gain of $582,000 and $60,000, respectively, related to the interest rate swap not designated in a hedging relationship, prior to its termination.

During the three months ended September 30, 2021, the Company paid $3.8 million to terminate its $50.0 million interest rate swap and its $70.0 million interest rate swap. The Company accelerated the reclassification of a $5.4 million loss from OCI into other income (loss) in the Condensed Consolidated Statement of Operations as a result of the hedged transactions becoming probable not to occur.

As of December 31, 2021, Centerspace had one interest rate swap contract designated as a cash flow hedge of interest rate risk with a notional amount of $75.0 million to fix the interest rate on the line of credit. The Company also had one additional interest rate swap with an effective date of January 31, 2023 and a notional amount of $70.0 million which was not designated as a hedge in a qualifying hedging relationship.

The table below presents the fair value of the Company’s derivative financial instruments as well as their classification on the Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021.

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	(in thousands)
		September 30, 2022		December 31, 2021
	Balance Sheet Location	Fair Value		Fair Value
Total derivative instruments designated as hedging instruments - interest rate swaps	Accounts Payable and Accrued Expenses	$	—	$	4,610
Total derivative instruments not designated as hedging instruments - interest rate swaps	Accounts Payable and Accrued Expenses	$	—	$	1,097

The table below presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations as of September 30, 2022 and 2021.


	(in thousands)
	Gain (Loss) Recognized in OCI				Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Gain (Loss) Reclassified from Accumulated OCI into Income
Three months ended September 30,	2022		2021			2022		2021
Total derivatives in cash flow hedging relationships - Interest rate contracts	$	—	$	(70)	Interest expense	$	(204)	$	(940)

Nine months ended September 30,
Total derivatives in cash flow hedging relationships - Interest rate contracts	$	1,581	$	1,555	Interest expense	$	(696)	$	(3,156)

NOTE 7 • FAIR VALUE MEASUREMENTS

Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate line of credit debt that re-prices frequently, fair values are based on carrying values.

In determining the fair value of other financial instruments, Centerspace applies FASB ASC 820, “Fair Value Measurement and Disclosures.” Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.

Fair Value Measurements on a Recurring Basis


	(in thousands)
	Total		Level 1		Level 2	Level 3
September 30, 2022
Assets
Notes receivable	$	5,865	—		—	$	5,865



December 31, 2021
Assets
Mortgages and notes receivable	$	49,484	—		—	$	49,484
Liabilities
Derivative instruments - interest rate swaps	$	5,707	$	—	—	$	5,707

The fair value of the interest rate swaps was determined using the market standard methodology of netting discounted expected variable cash payments and receipts. The variable cash payments and receipts were based on an expectation of future interest rates (a forward curve) derived from observable market interest rate curves. The Company also considered both its own nonperformance risk and the counterparty’s nonperformance risk in the fair value measurement (Level 3).

Centerspace utilizes an income approach with Level 3 inputs based on expected future cash flows to value mortgages and notes receivable. The inputs include market transactions for similar instruments, management estimates of comparable interest rates (range of 3.75% to 10.75%), and instrument specific credit risk (range of 0.5% to 1.0%). Changes in the fair value of these receivables from period to period are reported in interest and other income on the Condensed Consolidated Statements of Operations.

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	(in thousands)
	Fair Value Measurement		Other Gains (Losses)		Interest Income		Total Changes in Fair Value Included in Current-Period Earnings
Nine months ended September 30, 2022
Notes receivable	$	5,865	$	11	$	600	$	611
Nine months ended September 30, 2021
Mortgage loans and notes receivable	$	48,364	$	11	$	1,759	$	1,770

As of September 30, 2022 and December 31, 2021, Centerspace had investments totaling $1.4 million and $903,000, respectively, in real estate technology venture funds consisting of privately held entities that develop technology related to the real estate industry. The investments are measured at net asset value (“NAV”) as a practical expedient under ASC 820. As of September 30, 2022, the Company had total unfunded commitments of $1.6 million.

Fair Value Measurements on a Nonrecurring Basis

There were no non-financial assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2022 and December 31, 2021.

Financial Assets and Liabilities Not Measured at Fair Value

The fair value of unsecured senior notes and mortgages payable are estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates, excluding any prepayment penalties (Level 3).

The estimated fair values of the Company’s financial instruments as of September 30, 2022 and December 31, 2021, respectively, are as follows:


	(in thousands)
	September 30, 2022				December 31, 2021
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash and cash equivalents	$	14,957	$	14,957	$	31,267	$	31,267
Restricted cash	$	1,417	$	1,417	$	7,358	$	7,358

FINANCIAL LIABILITIES
Revolving lines of credit(1)	$	171,500	$	171,500	$	76,000	$	76,000

Unsecured senior notes	$	300,000	$	236,540	$	300,000	$	308,302
Mortgages payable - Fannie Mae	$	198,850	$	161,006	$	198,850	$	198,850
Mortgages payable - other	$	300,956	$	275,060	$	284,934	$	284,546

(1)Excluding the effect of interest rate swap agreements. Refer to Note 6 for discussion on the fair value of the interest rate swap agreements.

NOTE 8 • ACQUISITIONS AND DISPOSITIONS

ACQUISITIONS

Centerspace acquired a new apartment community for $95.0 million during the three months ended September 30, 2022 compared to acquisitions of $359.9 million during the three months ended September 30, 2021. The acquisitions during the nine months ended September 30, 2022 and 2021 are detailed below.

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Nine Months Ended September 30, 2022


	Date Acquired	(in thousands)
		Total Acquisition Cost(1)		Form of Consideration						Investment Allocation
Acquisitions				Cash		Units(2)		Other(3)		Land		Building		Intangible Assets		Other(4)

191 homes - Martin Blu - Minneapolis, MN	January 4, 2022	$	49,825	$	3,031	$	18,885	$	27,909	$	3,547	$	45,212	$	1,813	$	(747)
31 homes - Elements - Minneapolis, MN	January 4, 2022	9,066		1,290		1,748		6,028		941		7,853		335		(63)
45 homes - Zest - Minneapolis, MN	January 4, 2022	11,364		1,429		2,249		7,686		936		10,261		574		(407)
130 homes - Noko Apartments - Minneapolis, MN	January 26, 2022	46,619		3,343		—		43,276		1,915		42,754		1,950		—
215 homes - Lyra Apartments - Centennial, CO	September 30, 2022	95,000		95,000		—		—		6,473		86,149		2,378		—

Total Acquisitions		$	211,874	$	104,093	$	22,882	$	84,899	$	13,812	$	192,229	$	7,050	$	(1,217)

(1)Excludes transaction costs.

(2)Fair value of operating partnership units issued on acquisition.

(3)Assumption of seller's debt upon closing for Martin Blu, Zest, and Elements. Mezzanine and construction loans, financed by Centerspace, exchanged as partial consideration for the acquisition of Noko Apartments.

(4)Debt discount on assumed mortgage.

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Nine Months Ended September 30, 2021


	Date Acquired	(in thousands)
		Total Acquisition Cost(1)		Form of Consideration						Investment Allocation
Acquisitions				Cash		Units(2)		Other(3)		Land		Building		Intangible Assets		Other(4)
256 homes - Union Pointe - Longmont, CO	January 6, 2021	$	76,900	$	76,900	$	—	$	—	$	5,727	$	69,966	$	1,207	$	—
120 homes - Bayberry Place - Minneapolis, MN	September 1, 2021	16,673		898		9,855		5,920		1,807		14,113		753		—
251 homes - Burgandy & Hillsboro Court - Minneapolis, MN	September 1, 2021	35,569		2,092		22,542		10,935		2,834		31,148		1,587		—
97 homes - Venue on Knox - Minneapolis, MN	September 1, 2021	18,896		500		11,375		7,021		3,438		14,743		715		—
120 homes - Gatewood - St. Cloud, MN	September 1, 2021	7,781		378		3,388		4,015		327		6,858		596		—
84 homes - Grove Ridge - Minneapolis, MN	September 1, 2021	12,060		121		8,579		3,360		1,250		10,271		539		—
119 homes - The Legacy - St. Cloud, MN	September 1, 2021	10,560		229		5,714		4,617		412		9,556		592		—
151 homes - New Hope Garden & Village - Minneapolis, MN	September 1, 2021	15,006		1,435		10,812		2,759		1,603		12,578		825		—
330 homes - Palisades - Minneapolis, MN	September 1, 2021	53,354		2,884		30,470		20,000		6,919		46,577		2,211		(2,353)
96 homes - Plymouth Pointe - Minneapolis, MN	September 1, 2021	14,450		370		9,061		5,019		1,042		12,809		599		—
93 homes - Pointe West - St. Cloud, MN	September 1, 2021	7,558		91		3,605		3,862		246		6,849		463		—
301 homes - River Pointe - Minneapolis MN	September 1, 2021	38,348		2,249		21,653		14,446		3,346		33,117		1,885		—
70 homes - Southdale Parc - Minneapolis, MN	September 1, 2021	9,670		165		7,907		1,598		1,569		7,740		361		—
62 homes - Portage - Minneapolis, MN	September 1, 2021	9,171		323		5,588		3,260		2,133		6,685		353		—
200 homes - Windsor Gates - Minneapolis, MN	September 1, 2021	22,231		1,122		12,080		9,029		2,140		18,943		1,148		—
136 homes - Wingate - Minneapolis, MN	September 1, 2021	15,784		723		10,246		4,815		1,480		13,530		774		—
178 homes - Woodhaven - Minneapolis, MN	September 1, 2021	25,009		1,682		15,200		8,127		3,940		20,080		989		—
288 homes - Woodland Pointe - Minneapolis, MN	September 1, 2021	47,796		437		29,438		17,921		5,367		40,422		2,007		—


Total Acquisitions		$	436,816	$	92,599	$	217,513	$	126,704	$	45,580	$	375,985	$	17,604	$	(2,353)

(1)Includes $36.1 million for additional fair value of Series E preferred units for the September 1, 2021 portfolio acquisition

(2)Fair value of Series E preferred units at the acquisition date

(3)Payoff of debt or assumption of seller's debt upon closing

(4)Debt discount on assumed mortgage

DISPOSITIONS

During the nine months ended September 30, 2022, Centerspace did not dispose of any real estate. The dispositions during the nine months ended September 30, 2021 are detailed below.

Nine Months Ended September 30, 2021


		(in thousands)
Dispositions	Date Disposed	Sale Price		Book Value and Sales Cost		Gain/(Loss)

76 homes - Crystal Bay-Rochester, MN	May 25, 2021	$	13,650	$	10,255	$	3,395
40 homes - French Creek-Rochester, MN	May 25, 2021	6,700		4,474		2,226
182 homes - Heritage Manor-Rochester, MN	May 25, 2021	14,125		4,892		9,233
140 homes - Olympik Village-Rochester, MN	May 25, 2021	10,725		6,529		4,196
151 homes-Winchester/Village Green-Rochester, MN	May 25, 2021	14,800		7,010		7,790

Total Dispositions		$	60,000	$	33,160	$	26,840

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NOTE 9 • SEGMENTS

Centerspace operates in a single reportable segment which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of the operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. The chief operating decision-makers evaluate each property’s operating results to make decisions about resources to be allocated and to assess performance and do not group the properties based on geography, size, or type for this purpose. The apartment communities have similar long-term economic characteristics and provide similar products and services to residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, the apartment communities are aggregated into a single reportable segment. “All other” includes non-multifamily components of mixed-use properties and apartment communities the Company has sold.

The members of the executive management team are the chief operating decision-makers. This team measures the performance of the reportable segment based on net operating income (“NOI”), a non-GAAP measure, which the Company defines as total real estate revenues less property operating expenses, including real estate taxes. Centerspace believes that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance.

The following tables present NOI for the three and nine months ended September 30, 2022 and 2021, respectively, along with reconciliations to net income in the Condensed Consolidated Financial Statements. Segment assets are also reconciled to total assets as reported in the Condensed Consolidated Financial Statements.


	(in thousands)
Three Months Ended September 30, 2022	Multifamily		All Other		Total
Revenue	$	64,404	$	1,034	$	65,438
Property operating expenses, including real estate taxes	27,009		320		27,329
Net operating income	$	37,395	$	714	$	38,109
Property management					(2,563)
Casualty gain (loss)					(276)
Depreciation and amortization					(23,720)
General and administrative expenses					(4,519)

Interest expense					(7,871)

Interest and other income					70


Net income (loss)					$	(770)


	(in thousands)
Three Months Ended September 30, 2021	Multifamily		All Other		Total
Revenue	$	49,088	$	1,325	$	50,413
Property operating expenses, including real estate taxes	20,066		284		20,350
Net operating income	$	29,022	$	1,041	$	30,063
Property management					(2,203)
Casualty gain (loss)					10
Depreciation and amortization					(22,447)

General and administrative expenses					(4,279)

Interest expense					(7,302)

Interest and other income					(5,082)




Net income (loss)					$	(11,240)

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	(in thousands)
Nine Months Ended September 30, 2022	Multifamily		All Other		Total
Revenue	$	186,002	$	2,866	$	188,868
Property operating expenses, including real estate taxes	78,539		879		79,418
Net operating income	$	107,463	$	1,987	$	109,450
Property management expenses					(7,537)
Casualty gain (loss)					(1,256)
Depreciation and amortization					(79,489)

General and administrative expenses					(14,240)
Gain (loss) on sale of real estate and other investments					27
Interest expense					(23,147)

Interest and other income					1,116


Net income (loss)					$	(15,076)


	(in thousands)
Nine Months Ended September 30, 2021	Multifamily		All Other		Total
Revenue	$	138,287	$	5,430	$	143,717
Property operating expenses, including real estate taxes	55,907		2,444		58,351
Net operating income	$	82,380	$	2,986	$	85,366
Property management expenses					(6,055)
Casualty gain (loss)					(64)
Depreciation and amortization					(61,747)

General and administrative expenses					(11,982)
Gain (loss) on sale of real estate and other investments					26,840
Interest expense					(21,622)

Interest and other income					(4,032)




Net income (loss)					$	6,704

Segment Assets and Accumulated Depreciation

Segment assets are summarized as follows as of September 30, 2022, and December 31, 2021, respectively, along with reconciliations to the Condensed Consolidated Financial Statements:


	(in thousands)
As of September 30, 2022	Multifamily		All Other		Total
Segment assets
Property owned	$	2,486,836	$	26,634	$	2,513,470
Less accumulated depreciation	(503,038)		(7,962)		(511,000)
Total property owned	$	1,983,798	$	18,672	$	2,002,470


Cash and cash equivalents					14,957
Restricted cash					1,417
Other assets					19,742
Total Assets					$	2,038,586


	(in thousands)
As of December 31, 2021	Multifamily		All Other		Total
Segment assets
Property owned	$	2,244,250	$	26,920	$	2,271,170
Less accumulated depreciation	(436,004)		(7,588)		(443,592)
Total property owned	$	1,808,246	$	19,332	$	1,827,578

Mortgage loans receivable					43,276
Cash and cash equivalents					31,267
Restricted cash					7,358
Other assets					30,582
Total Assets					$	1,940,061

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NOTE 10 • COMMITMENTS AND CONTINGENCIES

Litigation. In the ordinary course of operations, Centerspace becomes involved in litigation. At this time, the Company knows of no material pending or threatened legal proceedings, or other proceedings contemplated by governmental authorities, that would have a material impact on it.

Environmental Matters. Under various federal, state, and local laws, ordinances, and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around, or under the property. While the Company currently has no knowledge of any material violation of environmental laws, ordinances, or regulations at any of the properties, there can be no assurance that areas of contamination will not be identified at any of its properties or that changes in environmental laws, regulations, or cleanup requirements would not result in material costs.

Restrictions on Taxable Dispositions. Thirty-eight properties, consisting of 6,969 apartment homes, are subject to restrictions on taxable dispositions under agreements entered into with certain of the sellers or contributors of the properties and are effective for varying periods. Centerspace does not believe that the agreements materially affect the conduct of its business or its decisions whether to dispose of restricted properties during the restriction period because it generally holds these and other properties for investment purposes rather than for sale. In addition, where the Company deems it to be in the shareholders’ best interests to dispose of such properties, it generally seeks to structure sales of such properties as tax-deferred transactions under Section 1031 of the Internal Revenue Code. Otherwise, the Company may be required to provide tax indemnification payments to the parties to these agreements.

Unfunded Commitments. Centerspace has unfunded commitments of $1.6 million in two real estate technology venture funds. Refer to Note 7 - Fair Value Measurements for additional information regarding these investments.

NOTE 11 • SHARE-BASED COMPENSATION

Share-based awards are provided to officers, non-officer employees, and trustees under the 2015 Incentive Plan approved by shareholders on September 15, 2015, as amended and restated on May 18, 2021 (the “2015 Incentive Plan”) which allows for awards in the form of cash, unrestricted and restricted common shares, stock options, stock appreciation rights, and RSUs up to an aggregate of 775,000 shares over the ten-year period in which the plan is in effect. Under the 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive plan (“LTIP”), which is a forward-looking program that measures long-term performance over the stated performance period. These awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the revised program may vary from year to year.

2022 LTIP Awards

Awards granted to employees on January 1, 2022, consisted of an aggregate of 5,849 time-based RSU awards, 13,407 performance RSUs based on total shareholder return (“TSR”), and 30,002 stock options. The time-based awards vest as to one-third of the shares on each of January 1, 2023, January 1, 2024, and January 1, 2025. The stock options vest as to 25% on each of January 1, 2023, January 1, 2024, January 1, 2025, and January 1, 2026. The fair value of stock options was $17.094 per share and was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:


	2022
Exercise price	$	110.90
Risk-free rate	1.44		%
Expected term	6.25 years
Expected volatility	21.2		%
Dividend yield	2.597		%

The TSR performance RSUs are earned based on the Company’s TSR as compared to the FTSE Nareit Apartment Index over a forward looking three-year period. The maximum number of RSUs eligible to be earned is 26,814 RSUs, which is 200% of the RSUs granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market conditions in addition to service conditions that must be met for the awards to vest. Compensation expense is recognized ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, regardless of whether the market conditions are achieved and the awards ultimately vest. Therefore, previously recorded compensation expense is not adjusted in

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the event that the market conditions are not achieved. The Company based the expected volatility on a weighted average of the historical volatility of the Company’s daily closing share price and a select peer average volatility, the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the award, and the expected term on the performance period of the award. The assumptions used to value the TSR performance RSUs were an expected volatility of 22.40%, a risk-free interest rate of 0.97%, and an expected life of 3 years. The share price at the grant date, January 1, 2022, was $110.90 per share.

Awards granted to employees on February 1, 2022, consist of an aggregate of 1,295 time-based RSU awards which vest as to one-third of the RSUs on each of February 1, 2023, February 1, 2024, and February 1, 2025.

Awards granted to trustees on May 17, 2022 consist of 6,563 time-based RSUs, which vest on May 17, 2023. These awards are classified as equity awards.

Share-Based Compensation Expense

Share-based compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $709,000 and $600,000 for the three months ended September 30, 2022 and 2021, respectively and $1.9 million and $2.1 million for the nine months ended September 30, 2022 and 2021, respectively.

NOTE 12 • SUBSEQUENT EVENTS

Through October 31, 2022, Centerspace repurchased 426,773 common shares for total consideration of $28.7 million and an average of $67.25 per share.

Item 2. Management’s Discussion and Analysis of Financial Conditions and Results of Operations

The following discussion and analysis should be read in conjunction with the unaudited Condensed Consolidated Financial Statements included in this report on Form 10-Q for the quarter ended September 30, 2022 (the “Report”), the audited financial statements for the year ended December 31, 2021, which are included in Form 10-K filed with the SEC on February 28, 2022, and the risk factors in Item 1A, “Risk Factors,” of Form 10-K for the year ended December 31, 2021.

This discussion and analysis, and other sections of this Report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), with respect to the expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” “will,” “assumes,” “may,” “projects,” “outlook,” “future,” and variations of those words and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial condition, or plans expressed or implied by the forward-looking statements. Although we believe the expectations reflected in these forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from actual results and performance.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:

•the COVID-19 pandemic and its ongoing effects on our employees, residents, and commercial tenants, third party vendors and suppliers, and apartment communities, as well as our cash flow, business, financial condition, and results of operation;

•the impact of the Russian invasion of Ukraine, including sanctions imposed on Russia by the U.S. and other countries, on inflation, trade, and general economic conditions;

•deteriorating economic conditions, including rising unemployment rates, energy costs, and inflation, in the markets where we own apartment communities or in which we may invest in the future;

•rental conditions in our markets, including occupancy levels and rental rates, potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors, including the impact of the COVID-19-related governmental rules and regulations relating to rental rates, evictions, and other rental conditions;

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•changes in operating costs, including real estate taxes, utilities, insurance costs, and expenses related to complying with COVID-19 restrictions or otherwise responding to the COVID-19 pandemic;

•timely access to material and labor required to renovate and maintain apartment communities;

•adverse changes in our markets, including future demand for apartment homes in those markets, barriers of entry into new markets, limitations on the ability to increase rental rates, inability to identify and consummate attractive acquisitions and dispositions on favorable terms, inability to reinvest sales proceeds successfully, and inability to accommodate any significant decline in the market value of real estate serving as collateral for mortgage obligations;

•reliance on a single asset class (multifamily) and certain geographic areas of the U.S.;

•inability to expand operations into new or existing markets successfully;

•failure of new acquisitions to achieve anticipated results or be efficiently integrated;

•inability to complete lease-up of projects on schedule and on budget;

•failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and/or tax protection payments;

•inability to fund capital expenditures out of cash flow;

•inability to pay, or need to reduce, dividends on common shares;

•financing risks, including the potential inability to meet existing covenants in existing credit facilities or to obtain new debt or equity financing on favorable terms, or at all;

•level and volatility of interest or capitalization rates or capital market conditions;

•loss contingencies and the availability and cost of casualty insurance for losses;

•inability to continue to satisfy complex rules in order to maintain status as a REIT for federal income tax purposes, inability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax purposes, and the risk of changes in laws affecting REITs;

•inability to attract and retain qualified personnel;

•cyber liability or potential liability for breaches of privacy or information security systems;

•inability to address catastrophic weather, natural events, and climate change;

•inability to comply with laws and regulations applicable to the business and any related investigations or litigation; and

•other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.

New factors may also arise from time to time that could have an adverse effect on our business and results of operations. Except as otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements to reflect events, circumstances, or changes in expectations after the date on which this Report is filed. Readers also should review the risks and uncertainties detailed from time to time in filings with the SEC, including the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our Annual Report on Form 10-K for the year ended December 31, 2021.

Executive Summary

We are a real estate investment trust, or REIT that owns, manages, acquires, redevelops, and develops apartment communities. We primarily focus on investing in markets characterized by stable and growing economies, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for apartment homes and retention of residents. As of September 30, 2022, we owned interests in 84 apartment communities consisting of 15,064 apartment homes. Property owned, as presented in our Condensed Consolidated Balance Sheets at historical cost, was $2.5 billion at September 30, 2022, compared to $2.3 billion at December 31, 2021.

Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes for our residents. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and creating vibrant apartment communities through service-oriented operations. We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for our business and shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.

COVID-19

While the COVID-19 pandemic has affected our business since March 2020, the extent of the impact has generally decreased. We continue to monitor the status of COVID-19 and actively manage our response in collaboration with residents, commercial tenants, government officials, and business partners and assessing potential impacts to financial position and operating results, as well as potential adverse impacts on our business. Despite our efforts to manage our response to the effects of the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on rental revenue for 2022 and in future years cannot be determined at present. Our management remains committed to ensuring the safety of team members, residents, and communities, and to maintaining the financial stability of our business enterprise for the duration of the COVID-19 pandemic.

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Overview of the Three Months Ended September 30, 2022

•On September 30, 2022, we acquired Lyra Apartments, located in Centennial, Colorado, for $95.0 million.

•For the three months ended September 30, 2022, revenue increased by $15.0 million or 29.8% to $65.4 million, compared to $50.4 million for the three months ended September 30, 2021, due to an 11.1% increase from same-store communities and the addition of 24 non-same-store communities.

•Total expenses increased by $9.1 million to $58.4 million for the three months ended September 30, 2022, compared to $49.3 million for the three months ended September 30, 2021 due to increased property operating expenses, real estate taxes, depreciation and amortization, and general and administrative expenses.

•Non-GAAP Funds from Operations (“FFO”) applicable to common shares and Units for the three months ended September 30, 2022 increased by $11.7 million to $21.0 million compared to $9.3 million for the three months ended September 30, 2021. See the description of FFO on page 27 and the reconciliation of net income available to common shareholders to FFO on page 28. This increase was primarily due to increased NOI from same-store and non-same-store communities and a $5.4 million loss related to the termination of interest rate swaps in the same period of the prior year that did not occur in the current year, offset by increased interest, property management, and general and administrative expenses, and decreased interest income. The drivers of these changes are discussed in more detail in the “Results of Operations” section below.

Results of Operations

Reconciliation of Operating Income (Loss) to Net Operating Income

The following table provides a reconciliation of operating income to net operating income (“NOI”) (non-GAAP), which is defined below.


	(in thousands, except percentages)
	Three Months Ended September 30,								Nine Months Ended September 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Operating income (loss)	$	7,031	$	1,144	$	5,887	514.6	%	$	6,955	$	32,358	$	(25,403)	(78.5)	%
Adjustments:
Property management expenses	2,563		2,203		360		16.3	%	7,537		6,055		1,482		24.5	%
Casualty (gain) loss	276		(10)		286		*		1,256		64		1,192		*
Depreciation and amortization	23,720		22,447		1,273		5.7	%	79,489		61,747		17,742		28.7	%

General and administrative expenses	4,519		4,279		240		5.6	%	14,240		11,982		2,258		18.8	%
Gain (loss) on sale of real estate and other investments	—		—		—		—		(27)		(26,840)		26,813		(99.9)	%
Net operating income	$	38,109	$	30,063	$	8,046	26.8	%	$	109,450	$	85,366	$	24,084	28.2	%

* Not a meaningful percentage

Consolidated Results of Operations

The following consolidated results of operations cover the three and nine months ended September 30, 2022 and 2021.

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	(in thousands, except percentages)
	Three Months Ended September 30,								Nine Months Ended September 30,
	2022		2021		$ Change		% Change		2022		2021		$ Change		% Change
Revenue
Same-store	$	50,253	$	45,252	$	5,001	11.1	%	$	146,010	$	132,208	$	13,802	10.4	%
Non-same-store	14,151		3,836		10,315		268.9	%	39,992		6,079		33,913		557.9	%
Other	1,034		848		186		21.9	%	2,866		2,180		686		31.5	%
Dispositions	—		477		(477)		(100.0)	%	—		3,250		(3,250)		(100.0)	%
Total	65,438		50,413		15,025		29.8	%	188,868		143,717		45,151		31.4	%
Property operating expenses, including real estate taxes
Same-store	20,389		18,434		1,955		10.6	%	59,305		53,574		5,731		10.7	%
Non-same-store	6,620		1,632		4,988		305.6	%	19,234		2,333		16,901		724.4	%
Other	317		287		30		10.5	%	876		808		68		8.4	%
Dispositions	3		(3)		6		*		3		1,636		(1,633)		(99.8)	%
Total	27,329		20,350		6,979		34.3	%	79,418		58,351		21,067		36.1	%
Net operating income
Same-store	29,864		26,818		3,046		11.4	%	86,705		78,634		8,071		10.3	%
Non-same-store	7,531		2,204		5,327		241.7	%	20,758		3,746		17,012		454.1	%
Other	717		561		156		27.8	%	1,990		1,372		618		45.0	%
Dispositions	(3)		480		(483)		(100.6)	%	(3)		1,614		(1,617)		(100.2)	%
Total	$	38,109	$	30,063	$	8,046	26.8	%	$	109,450	$	85,366	$	24,084	28.2	%
Property management expenses	(2,563)		(2,203)		360		16.3	%	(7,537)		(6,055)		1,482		24.5	%
Casualty gain (loss)	(276)		10		286		*		(1,256)		(64)		1,192		*
Depreciation and amortization	(23,720)		(22,447)		1,273		5.7	%	(79,489)		(61,747)		17,742		28.7	%

General and administrative expenses	(4,519)		(4,279)		240		5.6	%	(14,240)		(11,982)		2,258		18.8	%
Gain (loss) on sale of real estate and other investments	—		—		—		—		27		26,840		(26,813)		(99.9)	%
Interest expense	(7,871)		(7,302)		569		7.8	%	(23,147)		(21,622)		1,525		7.1	%

Interest and other income (loss)	70		(5,082)		5,152		(101.4)	%	1,116		(4,032)		5,148		(127.7)	%





NET INCOME (LOSS)	$	(770)	$	(11,240)	$	10,470	(93.1)	%	$	(15,076)	$	6,704	$	(21,780)	(324.9)	%
Dividends to Series D preferred unitholders	(160)		(160)		—		—		(480)		(480)		—		—
Net (income) loss attributable to noncontrolling interests – Operating Partnership and Series E preferred units	439		1,930		(1,491)		(77.3)	%	3,546		1,013		2,533		250.0	%

Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	(32)		(22)		(10)		45.5	%	(93)		(58)		(35)		60.3	%
Net income (loss) attributable to controlling interests	(523)		(9,492)		8,969		(94.5)	%	(12,103)		7,179		(19,282)		(268.6)	%
Dividends to preferred shareholders	(1,607)		(1,607)		—		—		(4,821)		(4,821)		—		—

NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	(2,130)	$	(11,099)	$	8,969	(80.8)	%	$	(16,924)	$	2,358	$	(19,282)	(817.7)	%

* Not a meaningful percentage


	Three Months Ended September 30,				Nine Months Ended September 30,
Weighted Average Occupancy(1)	2022		2021		2022		2021
Same-store	94.5	%	94.3	%	94.4	%	94.6	%
Non-same-store	94.6	%	95.0	%	94.7	%	93.8	%
Total	94.5	%	94.4	%	94.5	%	94.6	%

(1)Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental revenue. Scheduled rental revenue represents the value of all apartment homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant homes valued at estimated market rents. When calculating actual rents for occupied homes and market rents for vacant homes, delinquencies, and concessions are not taken into account. Market rates are determined using the currently offered effective rates on new leases at the community and are used as the starting point in determination of the market rates of vacant apartment homes. Centerspace believes that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Weighted average occupancy may not completely reflect short-term trends in physical occupancy, and the calculation of weighted average occupancy may not be comparable to that disclosed by other REITs.


Number of Apartment Homes	September 30, 2022	September 30, 2021
Same-store	11,330	11,330
Non-same-store	3,734	2,946
Total	15,064	14,276

NOI is a non-GAAP financial measure, which we define as total real estate revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate

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because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income (loss), net income (loss) available for common shareholders, or cash flow from operating activities as a measure of financial performance.

We have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the case of newly-constructed properties, have achieved a target level of physical occupancy of 90%. On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate full period-over-period operating comparisons for existing apartment communities and their contribution to net income. We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how a fixed pool of communities are performing year-over-year. We use this measure to assess whether or not we have been successful in increasing NOI, raising average rental revenue, renewing the leases on existing residents, controlling operating costs, and making prudent capital improvements. The discussion below focuses on the main factors affecting real estate revenue and expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store apartment communities are generally due to the addition of those properties to the real estate portfolio, and accordingly provide less useful information for evaluating ongoing operational performance of the real estate portfolio.

For the comparison of the nine months ended September 30, 2022 and 2021, 24 apartment communities were non-same-store. Sold communities are included in “Dispositions,” while “Other” includes non-multifamily properties and the non-multifamily components of mixed-use properties.

Revenue. Revenue increased by 29.8% to $65.4 million for the three months ended September 30, 2022, compared to $50.4 million in the three months ended September 30, 2021. Revenue from non-same-store communities increased by $10.3 million and revenue from other properties increased by $186,000, offset by a decrease of $477,000 from dispositions. Revenue from same-store communities increased 11.1% or $5.0 million in the three months ended September 30, 2022, compared to the same period in the prior year. The increase was attributable to 10.8% growth in average monthly revenue per occupied home for the three months ended September 30, 2022 and an increase of 0.2% in occupancy as weighted average occupancy increased from 94.3% in the three months ended September 30, 2021 to 94.5% for the three months ended September 30, 2022.

Revenue increased by 31.4% to $188.9 million for the nine months ended September 30, 2022, compared to $143.7 million in the nine months ended September 30, 2021. Revenue from non-same-store communities increased by $33.9 million and revenue from other properties increased by $686,000, offset by a decrease of $3.3 million from dispositions. Revenue from same-store communities increased 10.4% or $13.8 million in the nine months ended September 30, 2022, compared to the same period in the prior year. The increase was attributable to 10.7% growth in average monthly revenue per occupied home for the nine months ended September 30, 2022, offset by a decrease of 0.2% in occupancy as weighted average occupancy decreased from 94.6% in the nine months ended September 30, 2021 to 94.4% for the nine months ended September 30, 2022.

Property operating expenses, including real estate taxes. Property operating expenses, including real estate taxes, increased by 34.3% to $27.3 million in the three months ended September 30, 2022, compared to $20.4 million in the same period of the prior year. Property operating expenses, including real estate taxes at non-same-store communities increased by $5.0 million, whereas the same-store communities increased by 10.6% or $2.0 million in the three months ended September 30, 2022, compared to the same period in the prior year. At same-store communities, controllable expenses (which exclude insurance and real estate taxes) increased by $1.8 million, primarily due to increased utilities, repairs and maintenance costs, and on-site compensation. Non-controllable expenses at same-store communities increased by $200,000, primarily due to insurance costs.

Property operating expenses, including real estate taxes, increased by 36.1% to $79.4 million in the nine months ended September 30, 2022, compared to $58.4 million in the same period of the prior year. An increase of $16.9 million at non-same-store communities was offset by a decrease of $1.6 million from dispositions. Property operating expenses, including real estate taxes, at same-store communities increased by 10.7% or $5.7 million in the nine months ended September 30, 2022, compared to the same period in the prior year. At same-store communities, controllable expenses (which exclude insurance and real estate taxes) increased by $5.0 million, primarily due to increased utilities, repairs and maintenance costs, and on-site compensation. Non-controllable expenses at same-store communities increased by $694,000, primarily due to insurance costs.

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Property management expenses. Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 16.3% to $2.6 million in the three months ended September 30, 2022, compared to $2.2 million in the same period of the prior year. The increase is primarily due to $397,000 in compensation costs due to filling open positions, additional staffing, and higher pay rates , offset by a decrease related to technology initiatives.

Property management expense, consisting of property management overhead and property management fees paid to third parties increased by 24.5% to $7.5 million in the nine months ended September 30, 2022, compared to $6.1 million in the same period of the prior year. The increase is primarily due to $1.1 million in compensation costs due to filling open positions, additional staffing, and higher pay rates and $176,000 related to technology initiatives.

Casualty gain (loss). Casualty gain (loss) increased to a loss of $276,000 in the three months ended September 30, 2022, compared to a gain of $10,000 in the same period of the prior year. The increase is due to favorable loss experience in the prior year.

Casualty gain (loss) increased to a loss of $1.3 million in the nine months ended September 30, 2022, compared to a loss of $64,000 in the same period of the prior year. The increase is due to favorable loss experience in the prior year.

Depreciation and amortization. Depreciation and amortization increased by 5.7% to $23.7 million in the three months ended September 30, 2022, compared to $22.4 million in the same period of the prior year, attributable to an increase of $1.7 million from non-same-store properties, offset by decreases from same-store and sold properties.

Depreciation and amortization increased by 28.7% to $79.5 million in the nine months ended September 30, 2022, compared to $61.7 million in the same period of the prior year, attributable to an increase of $20.4 million from non-same-store properties, offset by decreases from same-store and sold properties.

General and administrative expenses. General and administrative expenses increased by 5.6% to $4.5 million in the three months ended September 30, 2022, compared to $4.3 million in the same period of the prior year, primarily attributable to increases in professional and consulting fees and salary related expense, offset by a decrease in technology initiatives.

General and administrative expenses increased by 18.8% to $14.2 million in the nine months ended September 30, 2022, compared to $12.0 million in the same period of the prior year, primarily attributable to $1.2 million from abandoned pursuit costs, $950,000 in compensation costs and $430,000 in professional and consulting fees, offset by decreases related to technology initiatives.

Gain (loss) on sale of real estate and other investments. Gain on sale of real estate and other investments decreased to $27,000 in the nine months ended September 30, 2022, compared to $26.8 million in the same period of the prior year, primarily due to the sale of apartment communities in the prior year that did not occur in the current year.

Interest expense. Interest expense increased by 7.8% to $7.9 million in the three months ended September 30, 2022, compared to $7.3 million in the same period of the prior year, primarily due to the addition of new unsecured senior notes and the Fannie Mae credit facility.

Interest expense increased by 7.1% to $23.1 million in the nine months ended September 30, 2022, compared to $21.6 million in the same period of the prior year, primarily due to the addition of new unsecured senior notes and the Fannie Mae credit facility.

Interest and other income (loss). Interest and other income increased to income of $70,000 in the three months ended September 30, 2022, compared to a loss of $5.1 million in the same period of the prior year. The increase was primarily due to a $5.4 million loss related to the termination of interest rate swaps in the prior year.

Interest and other income increased to income of $1.1 million in the nine months ended September 30, 2022, compared to a loss of $4.0 million in the same period of the prior year. The increase was primarily due to a $5.4 million loss related to the termination of interest rate swaps that occurred in the prior year.

Net income (loss) available to common shareholders. Net loss available to common shareholders improved $9.0 million to a loss of $2.1 million for the three months ended September 30, 2022, compared to $11.1 million in the three months ended September 30, 2021.

Net income (loss) available to common shareholders decreased to a loss of $16.9 million for the nine months ended September 30, 2022, compared to net income of $2.4 million in the nine months ended September 30, 2021.

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Funds from Operations and Core Funds from Operations.

We believe that Funds from Operations (“FFO”), which is a non-GAAP financial measures used as a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding operating performance, primarily because its calculation does not assume the value of real estate assets diminishes predictably over time, as implied by the historical cost convention of GAAP and the recording of depreciation.

We use the definition of Funds from Operations FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”). Nareit defines FFO as net income or loss calculated in accordance with GAAP, excluding:

•depreciation and amortization related to real estate;

•gains and losses from the sale of certain real estate assets; and

•impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

The exclusion in Nareit’s definition of FFO of impairment write-downs and gains and losses from the sale of real estate assets helps to identify the operating results of the long-term assets that form the base of investments, and assists management and investors in comparing those operating results between periods.

Due to limitations of the Nareit FFO definition, we have made certain interpretations in applying this definition. We believe that all such interpretations not specifically provided for in the Nareit definition are consistent with this definition. Nareit’s FFO White Paper 2018 Restatement clarified that impairment write-downs of land related to a REIT’s main business are excluded from FFO and a REIT has the option to exclude impairment write-downs of assets that are incidental to the main business.

While FFO is widely used by us as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income or any other GAAP measurement of performance, but rather should be considered as an additional, supplemental measure. FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all of the our needs, including our ability to service indebtedness or make distributions to shareholders.

Core Funds from Operations (“Core FFO”), a non-GAAP measure, is FFO adjusted for non-routine items or items not considered core to business operations. By further adjusting for items that are not considered part of core business operations, we believe that Core FFO provides investors with additional information to compare core operating and financial performance between periods. Core FFO should not be considered as an alternative to net income or as any other GAAP measurement of performance, but rather should be considered an additional supplemental measure. Core FFO also does not represent cash generated from operating activities in accordance with GAAP, nor is it indicative of funds available to fund all cash needs, including the ability to service indebtedness or make distributions to shareholders. Core FFO is a non-GAAP and non-standardized financial measure that may be calculated differently by other REITs and that should not be considered a substitute for operating results determined in accordance with GAAP.

FFO applicable to common shares and Units for the three months ended September 30, 2022, increased to $21.0 million compared to $9.3 million for the comparable period of the prior year, an increase of 125.9%. This increase was primarily due to increased NOI from same-store and non-same-store communities and a $5.4 million loss related to the termination of interest rate swaps in the same period of the prior year that did not occur in the current year, offset by increased interest, property management, and general and administrative expenses, and decreased interest income.

FFO applicable to common shares and Units for the nine months ended September 30, 2022, increased to $58.7 million compared to $35.9 million for the comparable period of the prior year, an increase of 63.3%. This increase was primarily due to increased NOI from same-store and non-same-store communities and a $5.4 million loss related to the termination of interest rate swaps in the same period of the prior year that did not occur in the current year, offset by increased casualty loss, interest, property management, and general and administrative expenses, and decreased NOI from dispositions.

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Reconciliation of Net Income Available to Common Shareholders to Funds from Operations and Core Funds from Operations


	(in thousands, except per share and unit amounts)
	Three Months Ended September 30,				Nine Months Ended September 30,
	2022		2021		2022		2021
Net income (loss) available to common shareholders	$	(2,130)	$	(11,099)	$	(16,924)	$	2,358
Adjustments:
Noncontrolling interests – Operating Partnership and Series E preferred units	(439)		(1,930)		(3,546)		(1,013)

Depreciation and amortization	23,720		22,447		79,489		61,747
Less depreciation – non real estate	(94)		(80)		(296)		(265)
Less depreciation – partially owned entities	(18)		(24)		(46)		(72)

(Gain) loss on sale of real estate and other investments	—		—		(27)		(26,840)
FFO applicable to common shares and Units	$	21,039	$	9,314	$	58,650	$	35,915

Adjustments to Core FFO:
Non-cash casualty (gain) loss	46		—		234		—
Loss on extinguishment of debt	—		530		5		533
Technology implementation costs(1)	234		625		784		1,485
Commercial lease termination proceeds	—		(450)		—		(450)
Interest rate swap termination, amortization, and mark-to-market	204		5,353		(204)		5,353
Amortization of assumed debt	(116)		(27)		(347)		(27)
Pursuit costs	38		—		1,165		—
Other miscellaneous items	17		137		113		137
Core FFO applicable to common shares and units	$	21,462	$	15,482	$	60,400	$	42,946

FFO applicable to common shares and Units	$	21,039	$	9,314	$	58,650	$	35,915
Dividends to preferred unitholders	160		160		480		480
FFO applicable to common shares and Units - diluted	$	21,199	$	9,474	$	59,130	$	36,395

Core FFO applicable to common shares and units	$	21,462	$	15,482	$	60,400	$	42,946
Dividends to preferred unitholders	160		160		480		480
Core FFO applicable to common shares and Units - diluted	$	21,622	$	15,642	$	60,880	$	43,426

Per Share Data
Net income (loss) per common share - diluted	$	(0.14)	$	(0.79)	$	(1.11)	$	0.12
FFO per share and Unit - diluted	$	1.13	$	0.60	$	3.16	$	2.44
Core FFO per share and Unit - diluted	$	1.15	$	0.98	$	3.25	$	2.91

Weighted average shares - basic	15,373		14,065		15,280		13,501
Effect of redeemable operating partnership units	984		865		980		917
Effect of Series D preferred units	228		228		228		228
Effect of Series E preferred units	2,186		705		2,186		239
Effect of dilutive restricted stock units and stock options	30		59		48		32
Weighted average shares and Units - diluted	18,801		15,922		18,722		14,917

(1)Costs are related to a two-year implementation.

Acquisitions and Dispositions

On September 30, 2022, we acquired Lyra Apartments, located in Centennial, Colorado for an aggregate purchase price of $95.0 million. We had no dispositions during the nine months ended September 30, 2022.

Distributions Declared

Distributions of $0.73 and $2.19 per common share and Unit were declared during the three and nine months ended September 30, 2022, respectively. Distributions of $0.72 and $2.12 per common share and Unit were declared during the three

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and nine months ended September 30, 2021, respectively. Distributions of $0.4140625 and $1.2421875 per Series C preferred share were declared during the three and nine months ended September 30, 2022 and 2021, respectively. Distributions of $0.9655 and $2.8965 per Series D preferred unit were declared during the three and nine months ended September 30, 2022 and 2021, respectively. Distributions of $0.96875 and $2.90625 per Series E preferred unit were declared during the three and nine months ended September 30, 2022, respectively. Distributions of $0.322917 per Series E preferred unit were declared during the three and nine months ended September 30, 2021.

Liquidity and Capital Resources

Overview

We strive to maintain a strong balance sheet and preserve financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise. We intend to continue to focus on core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.

Our primary sources of liquidity are cash and cash equivalents on hand and cash flows generated from operations. Other sources include availability under the unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under the shelf registration statement, including offerings of common shares under the 2021 at-the-market offering (“2021 ATM Program”), and long-term unsecured debt and secured mortgages.

Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to communities, distributions to the holders of preferred shares, common shares, Series D and Series E preferred units, and Units, value-add redevelopment, common and preferred share buybacks and Unit redemptions, and acquisitions of additional communities.

Although we believe that our financial condition and liquidity are sufficient to meet our reasonably anticipated liquidity demands, factors that could impact our future liquidity include, but are not limited to, volatility in capital and credit markets, interest rate increases, the ability to access capital and credit markets, the effects of the COVID-19 pandemic, including its potential impact on our ability to access the capital and credit markets on reasonable terms (or at all), the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

As of September 30, 2022, we had total liquidity of approximately $99.5 million, which included $84.5 million available on the lines of credit and $15.0 million of cash and cash equivalents. As of December 31, 2021, we had total liquidity of approximately $211.3 million, which included $180.0 million on the lines of credit and $31.3 million of cash and cash equivalents.

Debt

On September 30, 2021, we amended and restated our unsecured credit facility. The amended agreement provides for a revolving line of credit for $250.0 million, an accordion option to increase borrowing capacity up to $400.0 million, and extended the maturity date to September 2025. As of September 30, 2022, the line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of unencumbered properties. As of September 30, 2022, the additional borrowing availability was $78.5 million beyond the $171.5 million drawn. At December 31, 2021, the line of credit borrowing capacity was $250.0 million based on the value of unencumbered properties, of which $76.0 million was drawn on the line.

In January 2021, we amended and expanded our private shelf agreement with PGIM, Inc., an affiliate of Prudential Financial, Inc., and certain affiliates of PGIM, Inc. (collectively, “PGIM”) to increase the aggregate amount available for issuance of unsecured senior promissory notes to $225.0 million. In September 2021, we entered into a note purchase agreement for the issuance of $125.0 million of senior unsecured promissory notes, of which $25.0 million was under the private shelf agreement with PGIM. Under the private shelf agreement with PGIM, we have issued $200.0 million unsecured senior notes with $25.0 million remaining available. The following table shows the notes issued under both private shelf agreements.

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	(in thousands)
	Amount		Maturity Date	Interest Rate
Series A	$	75,000	September 13, 2029	3.84	%
Series B	$	50,000	September 30, 2028	3.69	%
Series C	$	50,000	June 6, 2030	2.70	%
Series 2021-A	$	35,000	September 17, 2030	2.50	%
Series 2021-B	$	50,000	September 17, 2031	2.62	%
Series 2021-C	$	25,000	September 17, 2032	2.68	%
Series 2021-D	$	15,000	September 17, 2034	2.78	%

In September 2021, we entered into a $198.9 million Fannie Mae Credit Facility Agreement (the “FMCF”) for the financing of certain apartment communities. The FMCF is currently secured by mortgages on those apartment communities. The notes are interest-only, have varying maturity dates of 7, 10, and 12 years, and a blended, weighted average interest rate of 2.78%. As of September 30, 2022 and December 31, 2021, the FMCF had a balance of $198.9 million. The FMCF is included within mortgages payable on the Condensed Consolidated Balance Sheets.

Mortgage loan indebtedness, excluding the FMCF, was $301.0 million and $284.9 million at September 30, 2022 and December 31, 2021, respectively. All of our mortgage debt is collateralized by apartment communities and is non-recourse at fixed rates of interest, with staggered maturities. This decreases the exposure to changes in interest rates, which reduces the effect of interest rate fluctuations on our results of operations and cash flows. As of September 30, 2022, the weighted average interest rate on mortgage debt was 3.85%, compared to 3.81% as of December 31, 2021.

We also have a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line matures on November 29, 2022, with pricing based on a market spread plus the one-month LIBOR index rate.

Equity

We have an equity distribution agreement in connection with 2021 ATM Program through which we may offer and sell common shares having an aggregate gross sales price of up to $250.0 million, in amounts and at times determined by management. The proceeds from the sale of common shares under the 2021 ATM program may be used for general corporate purposes, including the funding of acquisitions and the repayment of indebtedness. During the nine months ended September 30, 2022, we issued 321,000 common shares under the 2021 ATM program at an average price of $98.89 per share, net of commissions. Total consideration, net of commissions and issuance costs, was $31.7 million. As of September 30, 2022, common shares having an aggregate offering price of up to $126.6 million remained available under the 2021 ATM Program. Further information can be found in Note 4 - Equity and Mezzanine Equity in the Condensed Consolidated notes.

On June 13, 2022, the Board of Trustees approved a new share repurchase program (the “Share Repurchase Program”), providing for the repurchase of up to an aggregate of $50.0 million of the Company's outstanding common shares. Under the Share Repurchase Program, the Company is authorized to repurchase common shares through open market purchases, privately-negotiated transactions, block trades or otherwise in accordance with applicable federal securities laws, including through Rule 10b5-1 trading plans and under Rule 10b-18 of the Securities and Exchange Act of 1934, as amended. The repurchases have no time limit and may be suspended or discontinued completely at any time. The specific timing and amount of repurchases will vary based on available capital resources or other financial and operational performance, market conditions, securities law limitations, and other factors. The table below provides details on the shares repurchased during the three and nine months ended September 30, 2022. As of September 30, 2022, the Company had $49.6 million remaining authorized for purchase under this program.


	(in thousands, except per share amounts)
	Number of Common Shares	Total Consideration(1)		Average Net Price Per Share(1)
Three and Nine Months Ended September 30, 2022	5	$	359	$	65.97

(1)Amount includes commissions.

Changes in Cash, Cash Equivalents, and Restricted Cash

The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in the Condensed Consolidated Statements of Cash Flows in Part I, Item 1 above.

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In addition to cash flow from operations, during the nine months ended September 30, 2022, we generated capital from various activities, including:

•Receiving $31.5 million in net proceeds from the issuance of 321,000 common shares under the 2021 ATM Program;

•Receiving $95.5 million in net proceeds from the line of credit.

During the nine months ended September 30, 2022, we used capital for various activities, including:

•Acquiring four apartment communities in Minneapolis, Minnesota for $9.1 million in cash with the remainder of the purchase price in issuance of Units, assumption of mortgage debt, and the exchange of mortgages receivable which we financed;

•Acquiring Lyra Apartments, a 215 home apartment community located in Centennial, Colorado for $95.0 million;

•Repaying $27.4 million of mortgage principal;

•Paying $3.2 million for the termination of interest rate swaps;

•Repurchased 42,000 operating partnership units for $3.8 million; and

•Funding capital improvements for apartment communities of approximately $33.6 million.

Contractual Obligations and Other Commitments

Contractual obligations and other commitments were disclosed in our Form 10-K for the year ended December 31, 2021. Refer to Note 10 of the Notes to the Condensed Consolidated Financial Statements for additional details. There have been no material changes to our contractual obligations and other commitments since that report was filed.

Inflation and Supply Chain

Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability, subject to market conditions, to increase rents upon the commencement of new leases or renewal of existing leases to manage the impact of inflation on our business. However, the cost to operate and maintain communities could increase at a rate greater than our ability to increase rents, which could adversely affect our results of operations. Extreme escalation of costs could have a negative impact on our residents and their ability to absorb rent increases.

We also continue to monitor pressures surrounding supply chain challenges. Supply chain and inflationary pressures are likely to result in increasing operating expenses, specifically, increases in energy costs, salary related costs, and construction materials for repairs and maintenance or value add projects. A worsening of the current environment could contribute to delays in obtaining construction materials and result in higher than anticipated costs, which could prevent us from obtaining expected returns on value add projects.

We continue to have access to the financial markets; however, a prolonged disruption of the markets or a decline in credit and financing conditions could negatively affect our ability to access capital necessary to fund our operations or refinance maturing debt in the future. Additionally, rising interest rates could negatively impact our borrowing costs for any variable rate borrowings or refinancing activity.

Off-Balance Sheet Arrangements

As of September 30, 2022, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

In preparing the Condensed Consolidated Financial Statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of critical accounting policies is included in our Form 10-K for the year ended December 31, 2021, filed with the SEC on February 28, 2022 under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements in this report for additional information. There have been no other significant changes to the our critical accounting policies during the nine months ended September 30, 2022.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The Company’s future revenue, cash flows, and fair values of certain financial instruments are dependent upon prevailing market rates.

Centerspace’s exposure to market risk is primarily related to fluctuations in the general level of interest rates on the current and future fixed and variable rate debt obligations. The Company has used interest rate swaps to offset the impact of interest rate fluctuations on variable-rate debt; during the nine months ended September 30, 2022, Centerspace terminated its remaining interest rate swaps, which consisted of a swap with a notional amount of $75.0 million and a forward swap with a notional amount of $70.0 million. The Company does not enter into derivative instruments for trading or speculative purposes.

See our Annual Report on Form 10-K for the year ended December 31, 2021 under the heading “Item 7A. Quantitative and Qualitative Disclosures About Market Risk” for a more complete discussion of the Company’s interest rate sensitivity. As of September 30, 2022, the Company has increased its exposure to market risk by terminating interest rate swaps which synthetically fixed the variable rate on the line of credit.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures:

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act), as of the end of the period covered by this Report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of September 30, 2022, such disclosure controls and procedures were effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting:

In connection with the evaluation required by Rule 13a-15(d), management, with the participation of the Chief Executive Officer and Chief Financial Officer, has identified no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended September 30, 2022 and that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

In the ordinary course of the Company’s operations, the Company becomes involved in litigation. At this time, the Company knows of no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which the Company or any of its subsidiaries is a party or of which any of the Company’s property is the subject.

Item 1A. Risk Factors

Inflation and price volatility in the global economy could negatively impact our business and results of operations.

General inflation in the United States has risen to levels not experienced in recent decades, including rising energy prices, prices for consumer goods, interest rates, wages, and currency volatility. These increases and any fiscal or other policy interventions by the U.S. government in reaction to such events could negatively impact our business by increasing our operating costs and our borrowing costs as well as decreasing the capital available to our residents and prospective residents who wish to rent in our communities. Although we expect to be able to increase rent to combat inflation, the cost to operate and maintain communities could increase faster or at a rate greater than our ability to increase rents, which could adversely affect our results of operations.

Other than as described above, there have been no material changes to the Risk Factors previously disclosed in Item 1A in Annual Report on Form 10-K for the year ended December 31, 2021.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Sales of Securities

On September 30, 2022, the Company issued 4,198 unregistered Common Shares to limited partners of the Operating Partnership in exchange for their Units, in reliance on the private offering exemption under Section 4(a)(2) of the Securities Act of 1933, as amended.

Issuer Purchases of Equity Securities


					Maximum Dollar
				Total Number of Shares	Amount of Shares That
	Total Number of	Average Price		Purchased as Part of	May Yet Be Purchased
	Shares and Units	Paid per		Publicly Announced	Under the Plans or
Period	Purchased(1)	Share and Unit(2)		Plans or Programs	Programs
July 1 - 31, 2022	7,474	$	81.18	—	$	50,000,000
August 1 - 31, 2022	—	—		—	50,000,000
September 1 - 30, 2022	5,445	65.97		5,445	49,640,902
Total	12,919	$	74.77	5,445

(1)Includes Units redeemed for cash pursuant to the exercise of exchange rights.

(2)Amount includes commissions paid.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

The following exhibits are filed as part of this Report.

EXHIBIT INDEX


Exhibit No.			Description
3.1			Articles of Amendment and Third Restated Declaration of Trust of Investors Real Estate Trust adopted on September 23, 2003, as amended on September 18, 2007 (incorporated herein by reference to Exhibit 3.1 to the Company’s Annual Report on Form 10-K filed with the Commission on June 30, 2014).
3.2			Seventh Restated Trustee’s Regulations (Bylaws) of Investors Real Estate Trust, adopted on April 27, 2020 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K filed on May 1, 2020).
3.3			Articles Supplementary to the Company’s Articles of Amendment and Third Restated Declaration of Trust designating the Company’s 6.625% Series C Cumulative Redeemable Preferred Shares, no par value per share (incorporated by reference to Exhibit 3.2 of the Company’s Registration Statement on Form 8-A filed with the SEC on September 28, 2017).
31.1*			Section 302 Certification of Chief Executive Officer
31.2*			Section 302 Certification of Executive Vice President and Chief Financial Officer
32.1*			Section 906 Certifications of Chief Executive Officer
32.2*			Section 906 Certifications of Executive Vice President and Chief Financial Officer
101 INS**			INSTANCE DOCUMENT
101 SCH**			SCHEMA DOCUMENT
101 CAL**			CALCULATION LINKBASE DOCUMENT
101 LAB**			LABELS LINKBASE DOCUMENT
101 PRE**			PRESENTATION LINKBASE DOCUMENT
101 DEF**			DEFINITION LINKBASE DOCUMENT
104**			COVER PAGE INTERACTIVE DATA FILE - THE COVER PAGE XBRL TAGS ARE EMBEDDED WITHIN THE INLINE XBRL DOCUMENT

* Filed herewith

** Submitted electronically herewith. Attached as Exhibit 101 are the following materials from Quarterly Report on Form 10-Q for the quarter ended September 30, 2022, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (i) the Condensed Consolidated Balance Sheets; (ii) the Condensed Consolidated Statements of Operations; (ii) the Condensed Consolidated Statements of Equity; (iv) the Condensed Consolidated Statements of Cash Flows; (v) notes to these Condensed Consolidated Financial Statements; and (vi) the Cover Page to Quarterly Report on our Form 10-Q.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Centerspace

(Registrant)


/s/ Mark O. Decker, Jr.
Mark O. Decker, Jr.
President and Chief Executive Officer

/s/ Bhairav Patel
Bhairav Patel
Executive Vice President and Chief Financial Officer

Date: October 31, 2022