EDGAR 10-K Filing

Company CIK: 798359
Filing Year: 2021
Filename: 798359_10-K_2021_0001628280-21-002665.json

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ITEM 1. BUSINESS
Item 1. Business
OVERVIEW
Investors Real Estate Trust doing business as Centerspace (“we,” “us,” “our,” “Centerspace,” or the “Company”) is a real estate investment trust (“REIT”) organized under the laws of North Dakota, that is focused on the ownership, management, acquisition, development, and redevelopment of apartment communities. Over the past several years, we have extensively repositioned our portfolio from a diversified, multi-segment collection of properties into a single segment concentrated on apartment communities. Our current emphasis is on making operational enhancements that will improve our residents’ experience, redeveloping some of our existing apartment communities to meet current market demands, and acquiring new apartment communities in the Minneapolis/St. Paul and Denver metropolitan areas. On December 9, 2020, we announced a new name, Centerspace, and brand platform that reflects both transformation of the Company and our vision for the future.
We focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of December 31, 2020, we owned interests in 67 apartment communities, containing 11,910 homes and having a total real estate investment amount, net of accumulated depreciation, of $1.4 billion. Our corporate headquarters is located in Minot, North Dakota. We also have a corporate office in Minneapolis, Minnesota.
Effective January 1, 2019, we changed our fiscal year end from April 30 to December 31. As a result of this change, we filed a transition report on Form 10-KT for the eight-month transition period ended December 31, 2018, in accordance with SEC rules and regulations. The references in this Report to the terms listed below reflect the respective period noted (all other reporting periods defined separately):
Term Financial Reporting Period
Year ended December 31, 2020 January 1, 2020 through December 31, 2020
Year ended December 31, 2019 January 1, 2019 through December 31, 2019
Year ended December 31, 2018 January 1, 2018 through December 31, 2018
Transition period ended December 31, 2018 May 1, 2018 through December 31, 2018
Fiscal year ended April 30, 2018 May 1, 2017 through April 30, 2018
Website and Available Information
Our internet address is www.centerspacehomes.com. We make available, free of charge, through the “SEC filings” tab under the Investors section of our website, our Transition Report on Form 10-KT, annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports, and proxy statements for our Annual Meetings of Shareholders, filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after
such reports are filed with or furnished to the SEC. These reports are also available at www.sec.gov. We also make press releases, investor presentations, and certain supplemental information available on our website. Current copies of our Code of Conduct; Code of Ethics for Senior Financial Officers; and Charters for the Audit, Compensation, and Nominating and Governance Committees of our Board of Trustees are also available on our website under the “Corporate Governance” tab under the Investors section of our website. Copies of these documents are also available free of charge to shareholders upon request addressed to the Secretary at Centerspace, P.O. Box 1988, Minot, North Dakota 58702-1988. Information on our website does not constitute part of this Report.
STRUCTURE
We were organized under the laws of North Dakota on July 31, 1970, and have operated as a REIT under Sections 856-858 of the Internal Revenue Code since our formation. On February 1, 1997, we were restructured as an Umbrella Partnership Real Estate Investment Trust (“UPREIT”), and we conduct our daily business operations primarily through our operating partnership, Centerspace, LP (the “Operating Partnership”). The sole general partner of Centerspace, LP is Centerspace, Inc., a North Dakota corporation and our wholly owned subsidiary. All of our assets and liabilities have been contributed to Centerspace, LP, through Centerspace, Inc., in exchange for the sole general partnership interest in Centerspace, LP. Centerspace, LP holds substantially all of the assets of the Company. Centerspace, LP conducts the operations of the business and is structured as a partnership with no publicly traded equity. Contributions of properties to the Company can be structured as tax-deferred transactions through the issuance of OP Units, which is one of the reasons the Company is structured in this manner. As of December 31, 2020, Centerspace, Inc. owned a 93.0% interest in Centerspace, LP. The remaining interest in Centerspace, LP is held by individual limited partners.
BUSINESS STRATEGIES
Our business is focused on our mission - to provide a great home - for our residents, our employees and our investors. We fulfill this mission by providing renters well-located options that range from workforce to lifestyle housing. While fulfilling our mission, we are seeking consistent earnings growth through exceptional operations, disciplined capital allocation, and market knowledge and efficiencies. Our operations and investment strategies are the foundation for fulfilling our mission.
Operations Strategy
We manage our apartment communities with a focus on providing an exceptional resident experience and maximizing our property financial results. Our initiatives to optimize our operations include:
•Providing excellent customer service to enhance resident satisfaction and retention;
•Employing new technologies that make our communities more efficient and more accessible to residents;
•Optimizing revenues;
•Controlling operating costs; and
•Unlocking value within the portfolio through redevelopment and enhancement of existing assets.
Investment Strategy
Our business objective under our current strategic plan is to employ an investment strategy that includes the following elements:
•Investing in income-producing apartment communities that grow distributable cash flow and are located in key geographic markets with populations ranking in the top 50 U.S. metropolitan statistical areas, including expansion in the Minneapolis and Denver markets and our planned entrance into the Nashville market;
•Selecting markets with favorable market characteristics, including strong growth prospects and employment forecasts, high occupancy rates, strong rent growth potential, and institutional liquidity;
•Leveraging our portfolio to take advantage of our heightened market knowledge and regional experience;
•Building a strong market presence in new markets; and
•Reducing our exposure to tertiary markets.
FINANCING AND DISTRIBUTIONS
To fund our investment and capital activities, we rely on a combination of issuance of common shares, preferred shares, OP Units in exchange for property, and borrowed funds. We regularly issue dividends to our shareholders. Each of these is described below.
At-the-Market Offering
In November 2019, we entered into an equity distribution agreement in connection with an at-the-market offering (“2019 ATM Program”) through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times that we determine. The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general corporate purposes, which may include the funding of future acquisitions and the repayment of indebtedness. During the year ended December 31, 2020, we issued 829,078 common shares under the 2019 ATM Program at an average price of $71.39 per share, net of commissions. Total consideration, net of commissions and issuance costs, was approximately $59.2 million. As of December 31, 2020, we had common shares having an aggregate offering price of up to $68.5 million remaining available under the 2019 ATM Program.
Issuance of Senior Securities
On October 2, 2017, we issued 4,118,460 shares of 6.625% Series C Cumulative Redeemable Preferred Shares of Beneficial Interest (the “Series C preferred shares”). As of December 31, 2020, 3,881,453 shares remained outstanding. Depending on future interest rates and market conditions, we may issue additional preferred shares or other senior securities which would have dividend and liquidation preference over our common shares.
Bank Financing and Other Debt
As of December 31, 2020, we owned 47 apartment communities that were not encumbered by mortgages, with 34 of these properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility (“unsecured credit facility”) is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in the unencumbered asset pool (“UAP”). As of December 31, 2020, the additional borrowing availability was $97.1 million beyond the $152.9 million drawn, including the balance on our operating line of credit (discussed below), priced at an interest rate of 2.85%, including the impact of our interest rate swap. This credit facility matures on August 31, 2022, with one 12-month option to extend the maturity date at our election.
Under our primary unsecured credit facility, we also have a $70.0 million unsecured term loan, which matures on January 15, 2024, and a $75.0 million unsecured term loan, which matures on August 31, 2025.
We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes (“unsecured senior notes”). Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029 bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028 bearing interest at a rate of 3.69% annually. As of December 31, 2020, we had $25.0 million remaining available under the private shelf agreement.
As of December 31, 2020, we owned 20 apartment communities that served as collateral for mortgage loans. All of these mortgages payable were non-recourse to us other than for standard carve-out obligations.
We also have a $6.0 million operating line of credit, which is designed to enhance treasury management activities and more effectively manage cash balances. As of December 31, 2020, our ratio of total indebtedness to total gross real estate investments was 39.3%.
Issuance of Securities in Exchange for Property
Our organizational structure allows us to issue shares and limited partnership units (or “OP Units”) of Centerspace, LP in exchange for real estate. The OP Units generally are redeemable, at our option for cash or common shares on a one-for-one basis. Generally, OP Units receive the same per unit cash distributions as the per share dividends paid on common shares.
Our Declaration of Trust, as amended (our “Declaration of Trust”), does not contain any restrictions on our ability to offer limited partnership units of Centerspace, LP in exchange for property. As a result, any decision to do so is vested solely in our Board of Trustees. On February 26, 2019, we issued 165,600 newly created Series D preferred units as partial consideration for the acquisition of SouthFork Townhomes. 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 issue price. Each Series D preferred unit is convertible, at the holder’s option, into 1.37931 Units, representing a conversion exchange rate of $72.50 per unit. The holders of the Series D preferred units do not have any voting rights. For the years ended December 31, 2020 and 2019, the transition period ended December 31, 2018 and the fiscal year ended April 30, 2018, we did not issue any regular OP Units of Centerspace, LP in exchange for properties.
Distributions to Shareholders
The Internal Revenue Code requires a REIT to distribute 90% of its net taxable income, excluding net capital gains, to its shareholders, and a separate requirement to distribute 100% net capital gains or pay a corporate level tax in lieu thereof. We have distributed, and intend to continue to distribute, enough of our taxable income to satisfy these requirements. Our general practice has been to target cash distributions to our common shareholders and the holders of limited partnership units of approximately 65% to 90% of our funds from operations and to use the remaining funds for capital improvements or the reduction of debt. Distributions to our common shareholders and unitholders in the years ended December 31, 2020 and 2019 totaled approximately 81% and 69%, respectively, on a per share and unit basis of our funds from operations.
For additional information on our sources of liquidity and funds from operations, see Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations -- Liquidity and Capital Resources.”
HUMAN CAPITAL
We strive to be a great place to work and offer competitive benefits and training programs to our team members. Our objective is to attract and reward individuals with the talent and skills to help support our business objectives and make our communities home for our residents. Our total rewards program includes competitive compensation, paid leave, paid holidays, volunteer time, health and dental benefits, discounted rental rates on our apartments, employee assistance program, life insurance, 401(k) plan, and more.
As of December 31, 2020, we had 365 employees (340 full-time and 25 part-time) across six states. Training is important, and we facilitate that through a learning management system which allows us to provide custom training as well as utilize a library of multifamily focused courses specializing in customer service, sales, leadership, diversity, and fair housing.
We take great pride in our pay for performance strategy where team members are aligned with overall company performance as well as specific performance metrics based on roles. Our annual performance management process invites team members to complete a self-review along with their manager's assessment. The results of these assessments are a component of the merit increase and pay for performance strategy.
As part of our Environmental, Social, and Governance (ESG) initiatives, we publish an annual ESG report detailing our efforts related to furthering our mission - through providing corporate sponsorship in the communities which we serve, offering paid time off for team members to volunteer, training and compensation programs, and our commitment to diversity, equity, and inclusion. As of December 31, 2020:
•The average tenure of our team members is 3.6 years;
•53% of our total team members, 46% of our senior management, and 37% of our Board of Trustees are female;
•We have over 200 custom courses on our learning management system;
•Over 10,000 training courses were completed by team members;
•Our online reputation management scores increased from 504 to 605;
•76.5% of our team members participated in our engagement management survey; and
•648 volunteer hours were completed by team members.
INSURANCE
We purchase general liability and property insurance coverage for each of our properties. We also purchase limited terrorism, environmental, and flood insurance as well as other types of insurance coverage related to a variety of risks and exposures. There are certain types of losses that may not be covered or could exceed coverage limits. Due to changing market conditions, our insurance policies are also subject to increasing deductibles and coverage limits. Based on market conditions, we may change or potentially eliminate insurance coverages or face higher deductibles or other costs. Although we believe that we have adequate insurance coverage on our properties, we may incur losses, which could be material, due to uninsured risks, deductibles and/or losses in excess of coverage limits, any of which could have a material adverse effect on our business.
COMPETITION
There are numerous housing alternatives that compete with our apartment communities in attracting residents. Our apartment communities compete directly with other apartment communities, condominiums, and single-family homes in the areas in which our properties are located. If the demand for our apartment communities is reduced or competitors develop or acquire competing housing, rental and occupancy rates may decrease, which could have a material adverse effect on our business. Additionally, we compete with other real estate investors, including REITs, to acquire properties. This competition affects our ability to acquire properties we want to add to our portfolio and the cost of those acquisitions.
GOVERNMENT REGULATION
See the discussion under the caption “Risks Related to Our Properties and Operations -- We may be responsible for potential liabilities under environmental laws” in Item 1A, Risk Factors, for information concerning the potential effects of environmental matters on our business, “Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs and investment strategies” in Item 1A, Risk Factors, for information concerning the potential effects of compliance with disabled persons and other safety regulations on our business, “Changes in federal or state laws and regulations relating to climate change could result in increased costs to our business, including capital expenditures to improve the energy efficiency of our existing communities or new development communities without a corresponding increase in revenue” in Item 1A, Risk Factors, for information concerning the potential effects of climate change regulation on our business, “Complying with zoning and permitting law may affect our acquisition, redevelopment, and development costs” in Item 1A. Risk Factors, for information concerning the potential costs associated with zoning and permitting regulations, and “The current pandemic of COVID-19 and the potential future outbreak of other highly infectious or contagious diseases may materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our equityholders” in Item 1A Risk Factors, for information concerning the potential effects of regulations related to the COVID-19 pandemic, which discussions thereunder are incorporated by reference into this Item 1.

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ITEM 1A. RISK FACTORS
Item 1A. Risk Factors
We face certain risks related to our ownership of apartment communities and operation of our business. Set forth below are the risks that we believe are material to our shareholders and unitholders. You should carefully consider the following risks in evaluating our properties, business, and operations. Our business, financial condition, cash flows, results of operations, value of our real estate assets and/or the value of an investment in our stock or units are subject to various risks and uncertainties, including those set forth below, any of which could cause our actual operating results to vary materially from our recent results or from our anticipated future results.
Risks Related to Our Properties and Operations
The current pandemic of COVID-19 and the potential future outbreak of other highly infectious or contagious diseases may materially and adversely impact and disrupt our business, income, cash flow, results of operations, financial condition, liquidity, prospects and ability to service our debt obligations, and our ability to pay dividends and other distributions to our equityholders. One of the most significant risk factors is the continuing adverse effects of the COVID-19 pandemic and its associated potential economic impact on our financial condition, results of operations, and cash flows as well as the adverse effects on our residents and commercial tenants, the real estate market, and the global economy and financial markets generally. The extent to which COVID-19 continues to impact us and our residents and commercial tenants will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the scope, severity, and duration of the pandemic, the actions taken to contain the pandemic or mitigate its impact, and the direct and indirect economic effects of the pandemic and containment measures. Moreover, you should interpret many of the other risks identified in this Report, as well as the risks set forth below, as being heightened as a result of the ongoing and numerous adverse impacts of COVID-19.
Moreover, the ongoing COVID-19 pandemic and continuing restrictions intended to prevent and mitigate its spread could have
additional adverse effects on our business, including with regards to:
•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 operations;
•deteriorating economic conditions and rising unemployment rates in the markets where we own apartment communities or in which we may invest in the future;
•government actions or regulations arising out of the COVID-19 pandemic that limit economic and consumer activity or affect the operation of our properties;
•rental conditions in our markets, including occupancy levels and rental rates, our 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; and
•changes in operating costs, including real estate taxes, utilities, insurance costs, healthcare costs, and expenses related to complying with COVID-19 restrictions or otherwise responding to the COVID-19 pandemic.
Our financial performance is subject to risks associated with the real estate industry and ownership of apartment communities. Our financial performance risks include, but are not limited to, the following:
•downturns in national, regional, and local economic conditions (particularly increases in unemployment);
•competition from other apartment communities;
•local real estate market conditions, including an oversupply of apartments or other housing, or a reduction in demand for apartment communities;
•the attractiveness of our apartment communities to residents as well as residents’ perceptions of the safety, convenience, and attractiveness of our apartment communities and the areas in which they are located;
•changes in interest rates and availability of attractive financing that might make other housing options, like home ownership, more attractive;
•our ability to collect rents from our residents;
•vacancies, changes in rental rates, and the periodic need to repair, renovate, and redevelop our apartment communities;
•increases in operating costs, including real estate taxes, state and local taxes, insurance expenses, utilities, and security costs, many of which are not reduced significantly when circumstances cause a reduction in revenues from a property;
•increases in compensation costs due to the tight labor market in many of the markets in which we operate;
•our ability to provide adequate maintenance for our apartment communities;
•our ability to provide adequate insurance on our apartment communities; and
•changes in tax laws and other government regulations that could affect the value of REITs generally or our business in particular.
Our property acquisition activities may not produce the cash flows expected and could subject us to various risks that could adversely affect our operating results. We have acquired and intend to continue to pursue the acquisition of apartment communities, but the success of our acquisition activities is subject to numerous risks, including the following:
•acquisition agreements are subject to customary closing conditions, including completion of due diligence investigations, and we may be unable to complete an acquisition after making a non-refundable deposit and incurring other acquisition-related costs;
•expected occupancy, rental rates, and operating expenses of acquired apartment communities may differ from the actual results, or from those of our existing apartment communities;
•we may be unable to obtain financing for acquisitions on favorable terms, or at all;
•competition for these properties could cause us to pay higher prices or prevent us from purchasing a desired property at all;
•we may be subject to unknown liabilities from acquired properties, with either no recourse or limited recourse against prior owners or other third parties with respect to these unknown liabilities; and
•we may be unable to quickly and efficiently integrate new acquisitions into our existing operations.
We may be unable to acquire or develop properties and expand our operations into new or existing markets successfully. We intend to explore acquisitions or developments of properties in new and existing geographic markets. Acquiring or developing new properties and expanding into new markets introduces several risks, including but not limited to the following:
•we may not be successful in identifying suitable properties or other assets that meet our acquisition or development criteria or in consummating acquisitions or developments on satisfactory terms, or at all;
•we may be unable to maintain consistent standards, controls, policies, and procedures, or realize the anticipated benefits of the acquisitions within the anticipated time frame, or at all;
•acquisitions and divestitures could divert our attention from our existing properties and could cause us to lose key employees or be unable to attract highly qualified new employees;
•unfamiliarity with the dynamics and prevailing market conditions or local government or permitting procedures of any new geographic markets could adversely affect our ability to successfully expand into or operate within those markets or cause us to become more dependent on third parties in new markets due to our inability to directly and efficiently manage and otherwise monitor new properties in new markets;
•we may make assumptions regarding the expected future performance of acquired properties, including expected occupancy, rental rates, and cash flows, that prove to be inaccurate; and
•we may improperly estimate the costs of repositioning or redeveloping an acquired property.
We also may abandon opportunities to enter new markets that we have begun to explore for any reason and may, as a result, fail to recover expenses already incurred.
Our current or future insurance may not protect us against possible losses. We carry comprehensive liability, fire, extended coverage, and other insurance with respect to our properties at levels that we believe to be adequate and comparable to coverage customarily obtained by owners of similar properties. However, the coverage limits of our current or future policies may be insufficient to cover the full cost of repair or replacement of all potential losses, or our level of coverage may not continue to be available in the future or, if available, may be available only at unacceptable cost or with unacceptable terms. We also do not maintain coverage for certain catastrophic events like hurricanes and earthquakes because the cost of such insurance is deemed by management to be higher than the risk of loss due to the location of our properties. In most cases, we have to renew our insurance policies on an annual basis and negotiate acceptable terms for coverage, exposing us to the volatility of the insurance
markets, including the possibility of rate increases. In addition, a reduction of the number of insurance providers or the unwillingness of existing insurance providers to write insurance for multifamily properties may reduce the potential availability and/or cost for obtaining insurance on our properties. Any material increases in insurance rates or decrease in available coverage in the future could adversely affect our results of operations.
Catastrophic weather, natural events, and climate change could adversely affect our business. Some of our apartment communities are located in areas that may experience catastrophic weather and other natural events from time to time, including snow or ice storms, flooding, tornadoes, or other severe or inclement weather. During the year ended December 31, 2020, many of our markets were impacted by a series of adverse weather-related events. These events included extreme cold, record-setting snowfall, extensive hail storms in certain markets, and tornadoes, which caused excess ice and snow accumulation, water and hail damage, and other weather-related damage to some of our apartment communities. Although most of these losses were covered by insurance, these or other adverse and natural events could cause damage or losses that may be greater than insured levels. In the event of a loss in excess of insured limits, we could lose all or a portion of our investment in an affected property as well as additional revenue from that apartment community. We may continue to be obligated to repay mortgage indebtedness or other obligations related to an affected apartment community.
To the extent that we experience any significant changes in the climate in areas where our apartment communities are located, we may experience extreme weather conditions and prolonged changes in precipitation and temperature, all of which could result in physical damage to, and/or a decrease in demand for, our apartment communities located in these areas. If the impact of any such climate change were to be material, or occur for a lengthy period of time, our business may be adversely affected.
Changes in federal or state laws and regulations relating to climate change could result in increased costs to our business, including capital expenditures to improve the energy efficiency of our existing communities or new development communities without a corresponding increase in revenue. Among other things, “green” building codes may seek to reduce emissions through the imposition of standards for design, construction materials, water and energy usage and efficiency and waste management. The imposition of such requirements in the future, including the imposition of new energy efficiency standards or requirements relating to resistance to inclement weather, could increase the costs of maintaining or improving our properties without a corresponding increase in revenue, thereby having an adverse effect on our financial condition or results of operation. The impact of climate change also may increase the cost of, or make unavailable, property insurance or other hazard insurance on terms we find acceptable or necessary to adequately protect our properties.
We are dependent on a concentration of our investments in a single asset class, making our results of operations more vulnerable to a downturn or slowdown in the sector or other economic factors. Since April 30, 2018, substantially all of our investments have been concentrated in the multifamily sector. As a result, we will be subject to risks inherent in investments in a single type of property. A downturn or slowdown in the demand for multifamily housing may have more pronounced effects on our business and results of operations or on the value of our assets than if we had continued to be more diversified in our investments into more than one asset class.
Our operations are concentrated in certain regions of the United States, and we are subject to general economic conditions in the regions in which we operate. Our overall operations are concentrated in the Midwest region and portions of the West region of the United States. Our performance could be adversely affected by economic conditions in, and other factors relating to, these geographic areas, including supply and demand for apartments in these areas, zoning and other regulatory conditions, and competition from other communities and alternative forms of housing. In particular, our performance is influenced by job growth and unemployment rates in the areas in which we operate. To the extent the economic conditions, job growth and unemployment in any of these markets deteriorate or any of these areas experience natural disasters or more pronounced effects of climate change, the value of our portfolio, our results of operations, and our ability to make payments on our debt and to make distributions could be adversely affected.
Our business depends on our ability to continue to provide high quality housing and consistent operation of our apartment communities, the failure of which could adversely affect our business and results of operations. Our business depends on providing our residents with quality housing and reliable services (including utilities), along with the consistent operation of our communities and their associated amenities, including covered parking, swimming pools, clubhouses with fitness facilities, playground areas, and other similar features. We may be required to undertake significant capital expenditures to renovate or reconfigure our communities in order to attract new residents and retain existing residents. The delayed delivery, material reduction, or prolonged interruption in any of these services may cause our residents to terminate their leases, may result in the reduction of rents and/or may result in an increase in our costs. In addition, we may fail to provide quality housing and continuous access to amenities as a result of other factors, including mechanical failure, power failure, inclement weather, physical or electronic security breaches, vandalism or acts of terrorism, or other similar events. Any of these issues could cause our residents to terminate or fail to renew their leases, could expose us to additional costs or liability claims, and could damage
our reputation, any of which could impact our ability to provide quality housing and consistent operation of our apartment communities, which in turn could materially affect our business and results of operations.
Competition may negatively impact our earnings. We compete with many kinds of institutions, including other REITs, private partnerships, individuals, pension funds, and banks in attracting residents and finding investment opportunities. Many of these institutions are active in the markets in which we invest and have greater financial and other resources than we do, including access to capital on more favorable terms. Our apartment communities compete directly with other multifamily apartment communities, single-family homes, condominiums, and other short-term rentals.
Short-term leases could expose us to the effects of declining market rents. Our apartment leases are generally for a term of 12 months or less. Because these leases generally allow residents to leave at the expiration of the lease term without penalty, our rental revenues are impacted by declines in market rents more quickly than if our leases were for longer terms.
Because real estate investments are relatively illiquid and various other factors limit our ability to dispose of assets, we may not be able to sell properties when appropriate. We may have limited ability to change our portfolio of properties quickly in response to our strategic plan and changes in economic or other conditions, and the prohibitions under the federal income tax laws on REITs holding property for sale and related regulations may affect our ability to sell properties. Under certain circumstances, the Internal Revenue Code (the “Code”) imposes penalties on a REIT that sells property held for less than two years and limits the number of properties it can sell in a given year. Our ability to dispose of assets also may be limited by constraints on our ability to use disposition proceeds to make acquisitions on financially attractive terms. Some of our properties were acquired using limited partnership units of Centerspace, LP, our operating partnership, and are subject to certain tax-protection agreements that restrict our ability to sell these properties in transactions that would create current taxable income to the former owners. As a result, we are motivated to structure the sale of these assets as tax-free exchanges, the requirements of which are technical and may be difficult to achieve.
Inability to manage growth effectively may adversely affect our operating results. We have experienced significant growth at various times in the past and may do so in the future, principally through the acquisition of additional real estate properties. Effective management of rapid growth presents challenges, including:
•the need to expand our management team and staff;
•the need to enhance internal operating systems and controls; and
•the ability to consistently achieve targeted returns on individual properties.
We may not be able to maintain similar rates of growth in the future or manage our growth effectively.
Adverse changes in taxes and other laws may affect our liabilities relating to our properties and operations. Increases in real estate taxes, including recent property tax increases in several of the markets in which we operate, and service and transfer taxes may adversely affect our cash available for distributions and our ability to pay amounts due on our debt. Similarly, changes in laws that increase the potential liability for environmental conditions or that affect development, construction, and safety requirements may result in significant unanticipated costs. Future enactment of rent control or rent stabilization laws or other laws regulating apartment communities may reduce rental revenues or increase operating costs.
We may be unable to retain or attract qualified management. We are dependent upon our senior officers for essentially all aspects of our business operations. Our senior officers have experience in the real estate industry, and the loss of them would likely have a material adverse effect on our operations and could adversely impact our relationships with lenders and industry personnel. We do not have employment contracts with any of our senior officers. As a result, any senior officer may terminate his or her relationship with us at any time, without providing advance notice. If we fail to effectively manage a transition to new personnel, or if we fail to attract and retain qualified and experienced personnel on acceptable terms, it could adversely affect our business.
We may not be able to attract and retain qualified employees. Strong economic growth in recent years has created a tight labor market in many of the markets in which we operate, and we are dependent on employees at our apartment communities to provide attractive homes for our residents. The loss of key personnel at these apartment communities, or the inability or cost of replacing such personnel at such communities, could have an adverse impact on our business and results of operations.
We face risks associated with security breaches through cyber-attacks, cyber intrusions, or otherwise, which could pose a risk to our systems, networks, and services. We face risks associated with security breaches or disruptions, whether through cyber-attacks or cyber intrusions over the Internet, malware, computer viruses, attachments to emails, or persons inside our organization. The risk of a security breach or disruption, particularly through cyber-attacks or cyber intrusion, including by
computer hackers, foreign governments and cyber terrorists, has generally increased as the number, intensity, and sophistication of attempted attacks and intrusions around the world have increased. In the normal course of business, we and our service providers (including service providers engaged in providing web hosting, property management, leasing, accounting and/or payroll software/services) collect and retain certain personal information provided by our residents, employees, and vendors. We also rely extensively on computer systems to process transactions and manage our business. While we and our service providers employ a variety of data security measures to protect confidential information on our systems and periodically review and improve our data security measures, we cannot provide assurance that we or our service providers will be able to prevent unauthorized access to this personal information, that our efforts to maintain the security and integrity of the information that we and our service providers collect will be effective, or that attempted security breaches or disruptions would not be successful or damaging. Even the most well-protected information, networks, systems, and facilities remain potentially vulnerable because the techniques used in such attempted security breaches evolve and generally are not recognized until launched against a target. In some cases, these breaches are designed not to be detected and, in fact, may not be detected. Accordingly, we and our service providers may be unable to anticipate these techniques or to implement adequate security barriers or other preventative measures, thereby making it impossible to entirely mitigate this risk. The risk of a breach or security failure, particularly through cyber-attacks or cyber-intrusion, has generally increased due to the rise in new technologies and the increased sophistication and activities of the perpetrators of attempted attacks and intrusions. A security breach or other significant disruption involving computer networks and related systems could cause substantial costs and other negative effects, including litigation, remediation costs, costs to deploy additional protection strategies, compromising of confidential information, and reputational damage adversely affecting investor confidence.
We may be responsible for potential liabilities under environmental laws. Under various federal, state, and local laws, ordinances and regulations, we, as a current or previous owner or operator of real estate, may be liable for the costs of removal or remediation of hazardous or toxic substances in, on, around, or under that property. These laws may impose liability without regard to whether we knew of, or were responsible for, the presence of the hazardous or toxic substances. The presence of these substances, or the failure to properly remediate any property containing these substances, may adversely affect our ability to sell or rent the affected property or to borrow funds using the property as collateral. In arranging for the disposal or treatment of hazardous or toxic substances, we also may be liable for the costs of removal of, or remediation of, these substances at that disposal or treatment facility, whether or not we own or operate the facility. In connection with our current or former ownership (direct or indirect), operation, management, development, and/or control of real properties, we may be potentially liable for removal or remediation costs with respect to hazardous or toxic substances at those properties, as well as certain other costs, including governmental fines and claims for injuries to persons and property. Although we are not aware of any such claims associated with our existing properties that would have a material adverse effect on our business, potential future costs and damage claims may be substantial and could exceed any insurance coverage we may have for such events or such coverage may not exist. The presence of such substances, or the failure to properly remediate any such impacts, may adversely affect our ability to borrow against, develop, sell, or rent the affected property. Some environmental laws create or allow a government agency to impose a lien on the impacted property in favor of the government for damages and costs it incurs as a result of responding to hazardous or toxic substances.
Environmental laws also govern the presence, maintenance, and removal of asbestos, and require that owners or operators of buildings containing asbestos properly manage and maintain the asbestos; notify and train those who may come into contact with asbestos; and undertake special precautions if asbestos would be disturbed during renovation or demolition of a building. Indoor air quality issues may also necessitate special investigation and remediation. These air quality issues can result from inadequate ventilation, chemical contaminants from indoor or outdoor sources, or biological contaminants such as molds, pollen, viruses and bacteria. Asbestos or air quality remediation programs could be costly, necessitate the temporary relocation of some or all of the property’s residents, or require rehabilitation of an affected property.
It is generally our policy to obtain a Phase I environmental study on each property that we seek to acquire. A Phase I environmental study generally includes a visual inspection of the property and the surrounding areas, an examination of current and historical uses of the property and the surrounding areas, and a review of relevant state and federal documents but does not involve invasive techniques such as soil and ground water sampling. If the Phase I indicates any possible environmental problems, our policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances. However, Phase I and Phase II environmental studies, or any other environmental studies undertaken with respect to any of our current or future properties, may not reveal the full extent of potential environmental liabilities. We currently do not carry insurance for environmental liabilities.
Expanding social media usage could present new risks. The use of social media could cause us to suffer broad reputational damage. Negative posts or comments about us through social media, whether by residents or prospective residents, could damage our reputation or that of our apartment communities, whether or not such claims or posts are valid, which in turn could adversely affect our business and results of operations. Similarly, disclosure of any non-public sensitive information relating to
our business or our residents or prospective residents could damage our reputation, our business, or our results of operations. The continuing evolution of social media will present us with new and ongoing challenges and risks.
Litigation risks could affect our business. As a publicly traded owner, manager, and developer of apartment communities, we may incur liability based on various conditions at our properties and the buildings thereon. In the past, we have been, and in the future may become, involved in legal proceedings, including consumer, employment, tort, or commercial litigation, any of which if decided adversely to us or settled by us and not adequately covered by insurance, could result in liability that could be material to our results of operations.
Risks related to properties under development, redevelopment, or newly developed properties may adversely affect our financial performance. We may be unable to obtain, or may suffer delays in obtaining, necessary zoning, land-use, building, occupancy, and other required governmental permits and authorizations, which could lead to increased costs or abandonment of projects. We may not be able to obtain financing on favorable terms, or at all, and we may not be able to complete lease-up of a property on schedule. The resulting time required for development, redevelopment, and lease-up means that we may have to wait years for significant cash returns.
Complying with zoning and permitting law may affect our acquisition, redevelopment, and development costs. We face risks associated with zoning and permitting of our communities, the majority of which are governed by municipal, county, and state regulations. We may be liable for costs associated with bringing communities into compliance and additionally may face costs or delays when seeking approvals for redevelopment or development projects within our portfolio.Some regulations related to zoning or permitting allow governmental entities to discontinue operations if violations are left uncured, which would significantly impact our business. We are not aware of any non-compliance at our communities that would have a material adverse effect on our business.
Future cash flows may not be sufficient to ensure recoverability of the carrying value of our real estate assets. We periodically evaluate the recoverability of the carrying value of our real estate assets under United States generally accepted accounting principles (“GAAP”). Factors considered in evaluating impairment of our real estate assets held for investment include recurring net operating losses and other significant adverse changes in general market conditions that are considered permanent in nature. Generally, a real estate asset held for investment is not considered impaired if the estimated undiscounted future cash flows of the asset over its estimated holding period are in excess of the asset’s net book value at the balance sheet date. Assumptions used to estimate annual and residual cash flow and the estimated holding period of these assets require the judgment of management.
Complying with laws benefiting disabled persons or other safety regulations and requirements may affect our costs and investment strategies. Federal, state, and local laws and regulations designed to improve disabled persons’ access to and use of buildings, including the Americans with Disabilities Act of 1990, may require modifications to, or restrict renovations of, existing buildings that may require unexpected expenditures. These laws and regulations may require that structural features be added to buildings under construction. Legislation or regulations that may be adopted in the future may impose further burdens or restrictions on us with respect to improved access to, and use of these buildings by, disabled persons. Noncompliance could result in the imposition of fines by government authorities or the award of damages to private litigants. The costs of complying with these laws and regulations may be substantial, and limits or restrictions on construction, or the completion of required renovations, may limit the implementation of our investment strategy or reduce overall returns on our investments.
Risks related to joint ventures may adversely affect our financial performance and results of operations. We have entered into, and may continue in the future to enter into, partnerships or joint ventures with other persons or entities. Joint venture investments involve risks that may not be present with other methods of ownership, based on the financial condition and business interests of our partners, which are beyond our control and which may conflict with our interests.
In some instances, we and/or our partner may have the right to trigger a buy-sell arrangement, which could cause us to sell our interest, or acquire our partner’s interest, at a time when we otherwise would not have initiated such a transaction. Our ability to acquire our partner’s interest may be limited if we do not have sufficient cash, available borrowing capacity, or other capital resources. In such event, we may be forced to sell our interest in the joint venture when we would otherwise prefer to retain it. Joint ventures may require us to share decision-making authority with our partners, which could limit our ability to control the properties in the joint ventures. Even when we have a controlling interest, certain major decisions may require partner approval, such as the sale, acquisition, or financing of a property.
A terrorism attack, other geopolitical crisis, or widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, could negatively affect various aspects of our business, including our workforce and supply chains, and could make it more difficult and expensive to meet our obligations to our residents. Our operations are susceptible to
national or international events, including acts or threats of war or terrorism, political instability, natural disasters, and health epidemics or pandemics. These risks include a widespread outbreak of an illness or other health issue, such as the COVID-19 pandemic, resulting in a worldwide pandemic that has affected hundreds of countries around the world, including the U.S. The COVID-19 pandemic has resulted in travel bans, quarantines, and work restrictions that prohibit many employees from going to work. As a result of pandemics, including COVID-19, businesses can be shut down, supply chains can be interrupted, slowed, or rendered inoperable, and individuals can become ill, quarantined, or otherwise unable to work and/or travel due to health reasons or governmental restrictions. Governmental mandates may require dramatic changes at our apartment communities or could impact the availability of goods or services from many of our suppliers for extended or indefinite periods of time.
Potential changes to the financial condition of Fannie Mae and Freddie Mac and in government support for apartment communities may adversely affect our business. Historically, we have depended on the Federal National Mortgage Association (“Fannie Mae”) and the Federal Home Loan Mortgage Corporation (“Freddie Mac”) to provide financing for certain apartment communities. Although Fannie Mae and Freddie Mac have a mandate to support multifamily housing through their financing activities, government proposals relating to the future of agency mortgage finance in the U.S. could involve the phase-out of Fannie Mae and Freddie Mac. Although we believe that Fannie Mae and Freddie Mac will continue to provide liquidity to the multifamily sector, any phase-out of Fannie Mae and Freddie Mac, change in their mandate, or reduction in government support for apartment communities generally could result in adverse changes to interest rates, capital availability, development of additional apartment communities, and the value of these communities.
Employee theft or fraud could result in loss. Certain employees have access to, or signature authority with respect to, our bank accounts or assets, which exposes us to the risk of fraud or theft. Certain employees also have access to key information technology (“IT”) infrastructure and to resident and other information that may be commercially valuable. If any employee were to compromise our IT systems, or misappropriate resident or other information, we could incur losses, including potentially significant financial or reputational harm. We may not have insurance that covers any losses in full or covers losses from particular criminal acts.
Risks Related to Our Indebtedness and Financings
Our inability to renew, repay, or refinance our debt may result in losses. We incur a significant amount of debt in the ordinary course of our business and in connection with acquisitions of real properties. Because we have a limited ability to retain earnings as a result of the REIT distribution requirements, we will generally be required to refinance debt that matures with additional debt or equity. We are subject to the normal risks associated with debt financing, including the risks that:
•our cash flow will be insufficient to meet required payments of principal and interest, particularly if net operating income is reduced significantly due to the effects of the COVID-19 pandemic;
•we will not be able to renew, refinance, or repay our indebtedness when due; and
•the terms of any renewal or refinancing are at terms less favorable than the terms of our current indebtedness.
These risks increase when credit markets are tight, as they may be during the COVID-19 pandemic. In general, when the credit markets are tight, we may encounter resistance from lenders when we seek financing or refinancing for properties or proposed acquisitions, and the terms of such financing or refinancing are likely to be less favorable to us than the terms of our current indebtedness.
We anticipate that we will need to refinance a significant portion of our outstanding debt as it matures. We cannot guarantee that any refinancing of debt with other debt will be possible on terms that are favorable or acceptable to us. If we cannot refinance, extend, or pay principal payments due at maturity with the proceeds of other capital transactions, our cash flows may not be sufficient in all years to repay debt as it matures. If we are unable to refinance our indebtedness on acceptable terms, or at all, we may be forced to dispose of one or more properties on disadvantageous terms, which may result in losses. These losses could have a material adverse effect on our business, our ability to make distributions to our shareholders, and our ability to pay amounts due on our debt. If a property is mortgaged to secure payment of indebtedness and we are unable to meet mortgage payments or refinance the debt at maturity, the mortgagor could foreclose upon the property, appoint a receiver, and receive an assignment of rents and leases or pursue other remedies, including taking ownership of the property, all with a consequent loss of revenues and asset value. Foreclosures also could affect our ability to obtain new debt and could create taxable income without accompanying cash proceeds, thereby hindering our ability to meet the REIT distribution requirements of the Code and impeding our ability to obtain financing for our other properties.
Restrictive covenants in our debt agreements may limit our operating and financial flexibility, and our inability to comply with these covenants could have significant implications. Our indebtedness, which at December 31, 2020 totaled outstanding borrowings of approximately $721.3 million, contains a number of significant restrictions and covenants. These restrictions and covenants include financial covenants relating to fixed charge coverage ratios, maximum secured debt, maintenance of
unencumbered asset value, and total debt to total asset value, among others and certain non-financial covenants. These may limit our ability to make future investments and dispositions, add incremental secured and recourse debt, and add overall leverage. Our ability to comply with these covenants will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with these covenants would be an event of default. An event of default under the terms of our indebtedness would permit the lenders to accelerate indebtedness under effected agreements, which would include agreements that contain cross-acceleration provisions with respect to other indebtedness.
Rising interest rates may affect our cost of capital and financing activities. The potential for rising interest rates could limit our ability to refinance portions of our fixed-rate indebtedness when it matures and would increase our interest costs. We also have an unsecured credit facility that bears interest at variable rates based on amounts drawn. As a result, any increase in interest rates could increase our interest expense on our variable rate debt, increase our interest rates when refinancing fixed-rate debt, increase the cost of issuing new debt, and reduce the cash available for distribution to shareholders.
Interest rate hedging arrangements may result in losses. From time to time, we use interest rate swaps and other hedging instruments to manage our interest rate risks. Although these arrangements may partially protect us against rising interest rates, they also may reduce the benefits to us if interest rates decline. If a hedging arrangement is not indexed to the same rate as the indebtedness that is hedged, we may be exposed to losses to the extent that the rate governing the indebtedness and the rate governing the hedging arrangement change independently of each other, and nonperformance by the other party to the hedging arrangement also may subject us to increased credit risks. In order to minimize any counterparty credit risk, we enter into hedging arrangements only with investment grade financial institutions.
Potential changes to LIBOR could affect our financing covenants. LIBOR has been used as a primary benchmark for short-term interest rates, including under our credit facility. The U.K. Financial Conduct Authority (FCA), which regulates LIBOR, has announced it has commitments from panel banks to continue to contribute to LIBOR through the end of 2021, but it will not use its powers to compel contributions beyond such date. The ICE Benchmark Administration, in its capacity as administrator of USD LIBOR, has announced it plans to extend publication of USD LIBOR (excluding one-week and two-month tenor) by 18 months to June 2023. However, a joint statement by key regulatory authorities calls on banks to cease entering into new contracts that use USD LIBOR as a reference rate by no later than December 31, 2021. The Alternative References Rates Committee, a steering committee comprised of large U.S. financial institutions, has proposed replacing USD LIBOR with a new index calculated by short-term repurchase agreements - Secured Overnight Financing Rate (SOFR). At this time, no consensus exists as to what rate or rates may become accepted alternatives to LIBOR, and it is impossible to predict whether and to what extent banks will continue to provide LIBOR submissions to the administrator of LIBOR, whether LIBOR rates will cease to be published or supported before or after 2021 or whether any additional reforms to LIBOR may be enacted in the United Kingdom or elsewhere. Although the full impact of such reforms and actions, together with any transition away from LIBOR, including the potential or actual discontinuance of LIBOR publication, remains unclear, these changes may have a material adverse impact on the availability of financing. In addition, as it relates to future and derivatives contracts, ISDA master agreements between counterparties may need to be amended or replaced, including derivative contracts in which we are invested. There can be no assurance that a new global standard will be agreed upon or that any new rate will be reflective of the original interest rate and credit risk included within LIBOR, any of which could have a material adverse effect on our financing costs as well as our business and results of operations.
Risks Related to Our Shares
Our stock price may fluctuate significantly. The market price and trading volume of our common shares are subject to fluctuation due to general market conditions, the risks discussed in this report, and several other factors, including the following:
•regional, national, and global economic and business conditions;
•actual or anticipated changes in our quarterly operating results or dividends;
•changes in our estimates of funds from operations or earnings;
•investor interest in our property portfolio;
•the market perception and performance of REITs in general and apartment REITs in particular;
•the market perception or trading volume of REITs relative to other investment opportunities;
•the market perception of our financial condition, performance, distributions, and growth potential;
•general stock and bond market conditions, including potential increases in interest rates that could lead investors to seek higher annual yields from dividends;
•shifts in our investor base to a higher concentration of passive investors, including exchange-traded funds and index funds, that could have an adverse effect on our ability to communicate with our shareholders;
•our ability to access capital markets, which could impact our cost of capital;
•a change in our credit rating or analyst ratings;
•changes in minimum dividend requirements;
•terrorism or other factors that adversely impact the markets in which our stock trades; and
•changes in tax laws or government regulations that could affect the attractiveness of our stock.
Rising interest rates could have an adverse effect on our share price. If interest rates increase, this could cause holders of our common shares and other investors to seek higher dividends on our shares or higher yields through other investments, which could adversely affect the market price of our shares.
Low trading volume on the NYSE may prevent the timely sale or resale of our shares. Although our common shares are listed on the NYSE, the daily trading volume of our shares may be lower than the trading volume for other companies. As a result of lower trading volume, an owner of our common shares may encounter difficulty in selling our shares in a timely manner and may incur a substantial loss.
Failure to generate sufficient revenue or other liquidity needs could limit cash flow available for distributions to our shareholders. A decrease in rental revenue, an increase in funding to support our acquisition and development needs, or other unmet liquidity needs could have an adverse effect on our ability to pay distributions to our shareholders or the Operating Partnership’s unitholders.
Payment of distributions on our common shares is not guaranteed. Our Board of Trustees must approve any stock distributions and may elect at any time, or from time to time, and for an indefinite duration, to reduce or not pay the distributions payable on our common shares. Our Board may reduce distributions for a variety of reasons, including but not limited to the following:
•operating and financial results cannot support the current distribution payment;
•unanticipated costs, capital requirements, or cash requirements;
•annual distribution requirements under the REIT provisions of the Code;
•a conclusion that the payment of distributions would cause us to breach the terms of certain agreements or contracts, such as financial ratio covenants in our debt financing documents; or
•other factors the Board of Trustees may consider relevant.
Our future growth depends, in part, on our ability to raise additional equity capital, which will have the effect of diluting the interests of our common shareholders. Our future growth depends upon, among other things, our ability to raise equity capital and issue limited partnership units of Centerspace, LP. Sales of substantial amounts of our common or preferred shares in the public market, or the perception that such sales or issuances might occur, may dilute the interests of the current common shareholders and could adversely affect the market price of our common shares. In addition, as a REIT, we are required to make distributions to holders of our equity securities of at least 90% of our REIT taxable income, determined before a deduction for dividends paid and excluding any net capital gain. This limits our ability to retain cash or earnings to fund future growth and makes us more dependent on raising funds through other means, which may include raising additional equity capital.
We may issue additional classes or series of our shares of beneficial interest with rights and preferences that are superior to the rights and preferences of our common shares. Our Declaration of Trust provides for an unlimited number of shares of beneficial interest. Without the approval of our common shareholders, our Board of Trustees may establish additional classes or series of our shares of beneficial interest, and such classes or series may have dividend rights, conversion rights, voting rights, terms of redemption, redemption prices, liquidation preferences, or other rights and preferences that are superior to the rights of the holders of our common shares. In that regard, in September 2017, we filed a shelf registration statement with the SEC that enables us to sell an undetermined number of equity and debt securities as defined in the prospectus, including under the 2019 ATM Program. Future sales of common shares, preferred shares, or convertible debt securities may dilute current shareholders and could have an adverse impact on the market price of our common shares.
Any material weaknesses identified in our internal control over financial reporting could adversely affect our stock price. Section 404 of the Sarbanes-Oxley Act of 2002 requires us to evaluate and report on our internal control over financial reporting. If we were to identify one or more material weaknesses in our internal control over financial reporting, we could lose
investor confidence in our financial reporting and results of operations, which in turn could have an adverse effect on our stock price.
Certain provisions of our Declaration of Trust may limit a change in control and deter a takeover. In order to maintain our qualification as a REIT, among other things, our Declaration of Trust provides that any transaction that would result in our disqualification as a REIT under Section 856 of the Code will be void, including any transaction that would result in the following:
•less than 100 Persons owning our shares;
•our being “closely held” within the meaning of Section 856(h) of the Code; or
•50% or more of the fair market value of our shares being held by Persons other than “United States persons,” for federal income tax purposes.
If the transaction is not void, then the shares in violation of the foregoing conditions will automatically be exchanged for an equal number of excess shares, and these excess shares will be transferred to an excess share trustee for the exclusive benefit of the charitable beneficiaries named by our Board of Trustees. The Trust’s Declaration of Trust also provides a limit on a Person owning in excess of the ownership limit of 9.8%, in number or value, of the Trust’s outstanding shares, although the Board of Trustees retains the ability to make exceptions to this ownership threshold. These limitations may have the effect of preventing a change in control or takeover of us by a third party, even if the change in control or takeover would be in the best interests of our shareholders.
Risks Related to Tax Matters
We may incur tax liabilities as a consequence of failing to qualify as a REIT, which could force us to borrow funds during unfavorable market conditions. We have elected to be taxed as a REIT under the Code. Qualification as a REIT involves the application of highly technical and complex Code provisions, including income, asset, and distribution tests, for which there are only limited judicial or administrative interpretations. Even a technical or inadvertent mistake could endanger our REIT status. The determination that we qualify as a REIT requires an ongoing analysis of various factual matters and circumstances, some of which may not be within our control. For example, in order to qualify as a REIT, at least 95% of our gross income in any year must come from certain passive sources that are itemized in the REIT tax laws, and we are prohibited from owning specified amounts of debt or equity securities of some issuers. Thus, to the extent revenues from non-qualifying sources, such as income from third-party management services, represent more than 5% of our gross income in any taxable year, we will not satisfy the 95% income test and may fail to qualify as a REIT, unless certain relief provisions contained in the Code apply. Even if relief provisions apply, however, a tax would be imposed with respect to excess net income. We are also required to make distributions to the holders of our securities of at least 90% of our REIT taxable income, determined before a deduction for dividends paid and excluding any net capital gain. To the extent that we satisfy the 90% test but distribute less than 100% of our REIT taxable income, we will be subject to corporate income tax on such undistributed income and could be subject to an additional 4% excise tax. Because we need to meet these tests to maintain our qualification as a REIT, it could cause us to have to forgo certain business opportunities and potentially require us to liquidate otherwise attractive investments. The fact that we hold substantially all of our assets (except for qualified REIT subsidiaries) through Centerspace, LP, our operating partnership, and its subsidiaries, and our ongoing reliance on factual determinations, such as determinations related to the valuation of our assets, further complicates the application of the REIT requirements for us. If Centerspace, LP or one or more of our subsidiaries is determined to be taxable as a corporation, we may fail to qualify as a REIT. Either our failure to qualify as a REIT, for any reason, or the imposition of taxes on excess net income from non-qualifying sources, could adversely affect our business and our ability to make distributions to our shareholders and pay amounts due on our debt. New legislation, regulations, administrative interpretations or court decisions could change the tax laws with respect to our qualification as a REIT or the federal income tax consequences of our qualification.
If we were to fail to qualify as a REIT, we would be subject to federal income tax on our taxable income at regular corporate rates, could be subject to increased state and local taxes and, unless entitled to relief under applicable statutory provisions, would be disqualified from treatment as a REIT for the four taxable years following the year during which we lost our qualification, which would likely have a material adverse effect on us, our ability to make distributions to our shareholders, and our ability to pay amounts due on our debt. This treatment would reduce funds available for investment or distributions to the holders of our securities due to the additional tax liability to us for the year or years involved, and we would no longer be able to deduct, and would not be required to make, distributions to our shareholders. To the extent that distributions to the holders of our securities had been made in anticipation of qualifying as a REIT, we may need short-term debt or long-term debt or proceeds from asset sales or sales of common shares to fund required distributions as a result of differences in timing between the actual receipt of income and the recognition of income for federal income tax purposes, or the effect of non-deductible
capital expenditures, the creation of reserves or required debt or amortization payments. The inability of our cash flows to cover our distribution requirements could have an adverse impact on our ability to raise short and long-term debt or sell equity securities in order to fund distributions required to maintain our REIT status.
Failure of our operating partnership to qualify as a partnership would result in corporate taxation and significantly reduce the amount of cash available for distribution. We believe that Centerspace, LP, our operating partnership, qualifies as a partnership for federal income tax purposes. However, we can provide no assurance that the IRS will not challenge its status as a partnership for federal income tax purposes or that a court would not sustain such a challenge. If the IRS were to be successful in treating Centerspace, LP as an entity taxable as a corporation (such as a publicly traded partnership taxable as a corporation), we would cease to qualify as a REIT because the value of our ownership interest in Centerspace, LP would exceed 5% of our assets and because we would be considered to hold more than 10% of the voting securities and value of the outstanding securities of another corporation. The imposition of a corporate tax on Centerspace, LP would significantly reduce the amount of cash available for distribution.
Legislative or regulatory actions affecting REITs could have an adverse effect on us or our shareholders. Changes to tax laws or regulations may adversely impact our shareholders and our business and financial results. The REIT rules are constantly under review by persons involved in the legislative process and by the Internal Revenue Service and the U.S. Treasury Department, which may result in revisions to regulations and interpretations as well as statutory changes.
We cannot predict whether, when, or to what extent the Tax Cuts and Jobs Act of 2017 and any new U.S. federal tax laws, regulations, interpretations, or rulings will impact the real estate investment industry or REITs. Prospective investors are urged to consult their tax advisers regarding the effect of the Tax Cuts and Jobs Act of 2017 and potential future changes to the federal tax laws of an investment in our shares or Units.
Dividends payable by REITs may be taxed at higher rates than dividends of non-REIT corporations, which could reduce the net cash received by our shareholders and may be detrimental to our ability to raise additional funds through any future sale of our stock. Dividends paid by REITs to U.S. shareholders that are individuals, trusts, or estates are generally not eligible for the reduced tax rate applicable to qualified dividends received from non-REIT corporations but, under the 2017 Tax Cuts and Jobs Act, U.S. shareholders that are individuals, trusts, and estates generally may deduct 20% of ordinary dividends from a REIT (for taxable years beginning after December 31, 2017 and before January 1, 2026). Although this deduction reduces the effective tax rate applicable to certain dividends paid by REITs, such tax rate is still higher than the tax rate applicable to regular corporate qualified dividends. This may cause investors to view REIT investments as less attractive than investments in non-REIT corporations, which in turn may adversely affect the value of stock in REITs, including our stock. Investors should consult with their tax advisers regarding the U.S. tax consequences of an investment in our stock or Units.
We may face risks in connection with Section 1031 exchanges. From time to time, we dispose of properties in transactions intended to qualify as “like-kind exchanges” under Section 1031 of the Code. If a transaction intended to qualify as a Section 1031 exchange is later determined to be taxable, we may face adverse consequences, and if the laws applicable to such transactions are amended or repealed, we may not be able to dispose of properties on a tax-deferred basis. If we are unable to meet the technical requirements of a desired Section 1031 exchange, we may be required to make a special dividend payment to our shareholders if we are unable to mitigate the taxable gains realized. The failure to reinvest proceeds from sales of properties into tax-deferred exchanges could necessitate payments to unitholders with tax protection agreements.
We have tax protection agreements in place on twenty properties. If these properties are sold in a taxable transaction, we must make the unitholders associated with these particular properties whole through the payment of their related tax. We dispose of properties in transactions intended to qualify as “like-kind exchanges” under Section 1031 of the Code whenever possible. If we are not able to satisfy all of the technical requirements of Section 1031, or if Section 1031 is repealed, selling a property with a tax protection agreement could trigger a material obligation to make the associated unitholders whole.
Complying with REIT requirements may force us to forgo otherwise attractive opportunities or liquidate otherwise attractive investments. To qualify and maintain our status as a REIT, we must satisfy certain requirements with respect to the character of our assets. If we fail to comply with these requirements at the end of any quarter, we must correct such failure within 30 days after the end of the quarter (by, possibly, selling assets notwithstanding their prospects as an investment) to avoid losing our REIT status. This could include potentially selling otherwise attractive assets or liquidating or foregoing otherwise attractive investments. These actions could reduce our income and amounts available for distribution to our shareholders.
Even if we qualify as a REIT, we may face other tax liabilities that reduce our cash flows. Even if we qualify as a REIT under the U.S. tax code, we may be subject to certain federal, state, and local taxes on our income and assets, including taxes on any undistributed income, tax on income from some activities conducted as a result of a foreclosure, and state or local income,
property, and transfer taxes, such as mortgage recording taxes. Any of these taxes would decrease cash available for distribution to our shareholders.
The tax imposed on REITs engaging in prohibited transactions and our agreements entered into with certain contributors of our properties may limit our ability to engage in transactions that would be treated as sales for federal income tax purposes. The federal income tax provisions applicable to REITs provide that any gain realized by a REIT on the sale of property held as inventory or other property held primarily for sale to customers in the ordinary course of business is treated as income from a “prohibited transaction” that is subject to a 100% penalty tax. Under current law, unless a sale of real property qualifies for a safe harbor, the question of whether the sale of a property constitutes the sale of property held primarily for sale to customers is generally a question of the facts and circumstances regarding a particular transaction. We may make sales that do not satisfy the requirements of the safe harbors, or the IRS may successfully assert that one or more of our sales are prohibited transactions and, as a result, we may be required to pay a penalty tax. To avert this penalty tax, we may hold some of our assets through a taxable REIT subsidiary (“TRS”). While the TRS structure would allow the economic benefits of ownership to flow to us, a TRS is subject to tax on its income at the federal and state level. We have entered into agreements with certain contributors of our properties that contain limitations on our ability to dispose of certain properties in taxable transactions. The restrictions on taxable dispositions are effective for varying periods. Such agreements may require that we make a payment to the contributor in the event that we dispose of a covered property in a taxable sale during the restriction period.
Our ownership of TRSs is limited, and our transactions with TRSs will cause us to be subject to a 100% penalty tax on certain income or deductions if those transactions are not conducted on arm’s-length terms. A REIT may own up to 100% of the stock of one or more TRSs. A TRS may hold assets and earn income that would not be qualifying assets or income if held or earned directly by a REIT. Our TRS is subject to applicable federal, state, and local income tax on any taxable income. TRS rules also impose a 100% excise tax on certain transactions between a TRS and its parent REIT that are not conducted on an arm’s-length basis. We scrutinize transactions with our TRS to ensure that they are entered into on arm's-length terms to avoid incurring the 100% excise tax described above.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
Item 1B. Unresolved Staff Comments
None.

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ITEM 2. PROPERTIES
Item 2. Properties
Communities
We are organized as a REIT under Sections 856-858 of the Code and are structured as an UPREIT, which allows us to accept the contribution of real estate to our Operating Partnership in exchange for OP Units. Our business is focused on the ownership, management, acquisition, redevelopment, and development of apartment communities, which we own and operate through our Operating Partnership. We are a fully integrated owner-operator of apartment communities.
Certain Lending Requirements
In certain instances, in connection with the financing of investment properties, the lender may require, as a condition of the loan, that the properties be owned by a “single asset entity.” Accordingly, we have organized a number of wholly owned subsidiary entities for the purpose of holding title in an entity that complies with such lending conditions. All financial statements of these subsidiaries are consolidated into our financial statements.
Management and Leasing of Our Real Estate Assets
We conduct our corporate operations from offices in Minot, North Dakota and Minneapolis, Minnesota. The day-to-day management of our properties is generally carried out by our own employees. When properties acquired have effective pre-existing property management in place or when particular properties are, in our judgment, not attractive candidates for self-management, we may utilize third-party professional management companies for day-to-day management. However, all decisions relating to purchase, sale, insurance coverage, major capital improvements, annual operating budgets, and major renovations are made exclusively by our employees and implemented by the third-party management companies. Generally, our third-party management contracts are for terms of one year or less and provide for compensation ranging from 2.5% to 5.0% of gross rent collections and, typically, we may terminate these contracts upon 60 days or less notice for cause or upon the property manager’s failure to meet certain specified financial performance goals.
Summary of Communities Owned as of December 31, 2020
The following table presents information regarding our 67 apartment communities and two other properties held for investment, as of December 31, 2020. We provide certain information on a same-store and non-same-store basis. Same-store communities are owned or in service for substantially all of the periods being compared, and, in the case of development 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 the performance of existing apartment communities. “Other” includes non-multifamily properties and non-multifamily components of mixed use properties. We own the following interests in real estate either through our wholly-owned subsidiaries or by ownership of a controlling interest in an entity owning the real estate. We account for these interests on a consolidated basis. Additional information is included in Schedule III to our financial statements included in this Report.
(in thousands)
Investment Physical
Number of (initial cost plus Occupancy
Apartment improvements less as of
Community Name and Location Homes impairment) December 31, 2020
SAME-STORE
71 France - Edina, MN (1)
241 $ 66,929 93.8 %
Alps Park - Rapid City, SD 71 6,263 100.0 %
Arcata - Golden Valley, MN (2)
165 33,480 95.2 %
Ashland - Grand Forks, ND (1)
84 8,656 92.9 %
Avalon Cove - Rochester, MN 187 36,336 95.7 %
Boulder Court - Eagan, MN (2)
115 9,870 96.5 %
Canyon Lake - Rapid City, SD (1)
109 6,529 99.1 %
Cardinal Point - Grand Forks, ND (2)
251 35,288 96.0 %
Cascade Shores - Rochester, MN (1)
90 18,444 100.0 %
Castlerock - Billings, MT (2)
166 8,138 100.0 %
Chateau - Minot, ND (2)
104 21,453 95.2 %
Cimarron Hills - Omaha, NE (1)
234 15,508 95.7 %
Colonial Villa - Burnsville, MN (2)
239 29,511 93.3 %
Colony - Lincoln, NE (1)
232 20,376 97.8 %
Commons and Landing at Southgate - Minot, ND (2)
341 55,516 93.0 %
Cottonwood - Bismarck, ND (2)
268 24,481 95.5 %
Country Meadows - Billings, MT (2)
133 10,145 94.7 %
Crystal Bay - Rochester, MN 76 12,218 97.4 %
Cypress Court - St. Cloud, MN (1) (3)
196 20,936 95.9 %
Deer Ridge - Jamestown, ND (2)
163 25,162 95.7 %
Dylan - Denver, CO (2) (4) (5)
274 90,400 96.4 %
Evergreen - Isanti, MN (2)
72 7,222 98.6 %
French Creek - Rochester, MN 40 5,192 100.0 %
Gardens - Grand Forks, ND (2)
74 9,352 94.6 %
Grand Gateway - St. Cloud, MN (2)
116 9,964 95.7 %
GrandeVille at Cascade Lake - Rochester, MN (1)
276 57,455 96.0 %
Greenfield - Omaha, NE (2)
96 7,352 86.5 %
Heritage Manor - Rochester, MN 182 11,112 95.1 %
Homestead Garden - Rapid City, SD 152 15,334 98.0 %
Lakeside Village - Lincoln, NE (1)
208 18,902 96.6 %
Legacy - Grand Forks, ND (1)
360 34,133 96.9 %
Legacy Heights - Bismarck, ND (2)
119 15,206 96.6 %
Meadows - Jamestown, ND (2)
81 7,196 98.8 %
Monticello Crossings - Monticello, MN (2)
202 32,246 96.0 %
Monticello Village - Monticello, MN (2)
60 5,480 95.0 %
Northridge - Bismarck, ND (2)
68 8,677 97.1 %
Olympic Village - Billings, MT (2)
274 15,780 97.8 %
Olympik Village - Rochester, MN 140 10,602 85.7 %
Oxbo - St Paul, MN (2) (4) (5)
191 57,609 97.4 %
Park Meadows - Waite Park, MN 360 20,519 92.8 %
Park Place - Plymouth, MN (2) (5)
500 101,823 92.2 %
Plaza - Minot, ND (2)
71 16,779 91.5 %
(in thousands)
Investment Physical
Number of (initial cost plus Occupancy
Apartment improvements less as of
Community Name and Location Homes impairment) December 31, 2020
Pointe West - Rapid City, SD (2)
90 5,963 98.9 %
Ponds at Heritage Place - Sartell, MN (2)
58 5,469 93.1 %
Quarry Ridge - Rochester, MN (1)
313 34,634 94.9 %
Red 20 - Minneapolis, MN (1)
130 26,413 96.9 %
Regency Park Estates - St. Cloud, MN (1)
147 14,237 94.6 %
Rimrock West - Billings, MT (2)
78 5,976 96.2 %
River Ridge - Bismarck, ND (2)
146 26,338 95.2 %
Rocky Meadows - Billings, MT (2)
98 8,127 99.0 %
Rum River - Isanti, MN (1)
72 6,210 97.2 %
Silver Springs - Rapid City, SD (1)
52 4,112 100.0 %
South Pointe - Minot, ND (2)
196 16,088 93.9 %
Southpoint - Grand Forks, ND (2)
96 10,705 96.9 %
Sunset Trail - Rochester, MN 146 16,710 95.2 %
Thomasbrook - Lincoln, NE (1)
264 16,592 96.2 %
Village Green - Rochester, MN 36 3,613 100.0 %
West Stonehill - Waite Park, MN (1)
313 19,277 96.8 %
Westend - Denver, CO (2) (4) (5)
390 128,310 95.9 %
Whispering Ridge - Omaha, NE (1)
336 30,555 93.2 %
Winchester - Rochester, MN 115 9,410 93.0 %
Woodridge - Rochester, MN (1)
110 11,896 94.5 %
TOTAL SAME-STORE 10,567 $ 1,424,209 95.0 %
NON-SAME-STORE
FreightYard Townhomes & Flats - Minneapolis, MN (4)
96 $ 26,382 86.5 %
Ironwood - Minneapolis, MN 182 39,123 97.3 %
Lugano at Cherry Creek - Denver, CO (4)
328 96,080 95.7 %
Parkhouse - Thornton, CO (2)
465 142,807 93.5 %
SouthFork Townhomes - Lakeville, MN (1) (4)
272 50,777 91.5 %
TOTAL NON-SAME-STORE 1,343 $ 355,169 92.3 %
TOTAL MULTIFAMILY 11,910 $ 1,779,378
(in thousands)
Investment Physical
Net Rentable (initial cost plus Occupancy
Square improvements less as of
Property Name and Location Footage impairment) December 31, 2020
OTHER - MIXED USE COMMERCIAL
71 France - Edina, MN (1)
20,955 $ 6,746 88.1 %
Lugano at Cherry Creek - Denver, CO 13,295 1,806 47.8 %
Oxbo - St Paul, MN (2)
11,477 3,526 100.0 %
Plaza - Minot, ND (2)
50,610 9,678 100.0 %
Red 20 - Minneapolis, MN (1)
10,508 2,944 89.6 %
TOTAL OTHER - MIXED USE COMMERCIAL 106,845 $ 24,700
OTHER - COMMERCIAL
3100 10th St SW - Minot, ND(6)
9,690 $ 2,111 -
Minot IPS - Minot, ND 27,698 6,368 -
TOTAL OTHER - COMMERCIAL 37,388 $ 8,479
TOTAL SQUARE FOOTAGE - OTHER 144,233
TOTAL GROSS REAL ESTATE INVESTMENTS, EXCLUDING MORTGAGE NOTES RECEIVABLE $ 1,812,557
(1)Encumbered by mortgage debt.
(2)Pledged as credit support on unencumbered asset pool for our line of credit.
(3)Owned by a joint venture entity and consolidated in our financial statements. We have an approximately 86.1% ownership in Cypress Court.
(4)Non-same-store for the comparison of the year ended December 31, 2019 to the year ended December 31, 2018.
(5)Non-same-store for the comparison of the eight months ended December 31, 2018 to the eight months ended December 31, 2017.
(6)This is our Minot corporate office building.
Properties by State
The following table presents, as of December 31, 2020, the total amount of property owned, net of accumulated depreciation, by state:
(in thousands)
State Multifamily Other Total % of Total
Minnesota $ 623,324 $ 10,946 $ 634,270 44.9 %
Colorado 433,389 1,733 435,122 30.8 %
North Dakota 216,040 9,240 225,280 15.9 %
Nebraska 71,946 - 71,946 5.1 %
South Dakota 25,155 - 25,155 1.8 %
Montana 21,535 - 21,535 1.5 %
Total $ 1,391,389 $ 21,919 $ 1,413,308 100.0 %

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ITEM 3. LEGAL PROCEEDINGS
Item 3. Legal Proceedings
In the ordinary course of our operations, we become involved in litigation. At this time, we know of no material pending or threatened legal proceedings, or other proceedings contemplated by governmental authorities, that would have a material impact upon us.

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ITEM 4. MINE SAFETY DISCLOSURE
Item 4. Mine Safety Disclosures
Not Applicable.
PART II

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters, and Issuer Purchases of Equity Securities
Market Information
Our Common Shares of Beneficial Interest, no par value, are traded on the New York Stock Exchange under the symbol “CSR”.
Shareholders
As of February 15, 2021, there were approximately 2,573 common shareholders of record.
Unregistered Sales of Shares
Under the terms of Centerspace, LP’s Agreement of Limited Partnership, limited partners have the right to require Centerspace, LP to redeem their limited partnership units any time following the first anniversary of the date they acquired such Units (“Exchange Right”). When a limited partner exercises the Exchange Right, we have the right, in our sole discretion, to redeem such Units by either making a cash payment or exchanging the Units for our common shares, on a one-for-one basis. The Exchange Right is subject to certain conditions and limitations, including that the limited partner may not exercise the Exchange Right more than two times during a calendar year and the limited partner may not exercise for less than 100 Units, or, if such limited partner holds less than 100 Units, for less than all of the Units held by such limited partner. Centerspace, LP and some limited partners have contractually agreed to a holding period of greater than one year, a greater number of redemptions during a calendar year, or other modifications to their Exchange Right.
During three months ended December 31, 2020, we issued an aggregate of 24,698 unregistered common shares to limited partners of Centerspace, LP upon exercise of their Exchange Rights for an equal number of Units. All such issuances of our common shares were exempt from registration as private placements under Section 4(a)(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the resale of such common shares under the Securities Act.
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(3)
October 1 - 31, 2020 30 $ 70.01 - $ 44,371,557
November 1 - 30, 2020 - - - 44,371,557
December 1 - 31, 2020 - - - -
Total 30 $ 70.01 -
(1)Includes a total of 30 Units redeemed for cash pursuant to the exercise of exchange rights.
(2)Amount includes commissions paid.
(3)On December 5, 2019, the board authorized a new $50,000,000 repurchase program which expired on December 5, 2020.
Comparative Stock Performance
The information contained in this Comparative Stock Performance section shall not be deemed to be “soliciting material” or “filed” or “incorporated by reference” into our future filings with the SEC, or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that we specifically incorporate it by reference into a document filed under the Securities Act or the Exchange Act.
Set forth below is a graph that compares, for the five years commencing December 31, 2015 and ending December 31, 2020, the cumulative total returns for our common shares with the comparable cumulative total return of three indices, the Standard & Poor’s 500 Index (“S&P 500”), the FTSE Nareit Equity REITs Index, and the SNL U.S. REIT Multifamily Index, the latter of which is an index prepared by the FTSE Group for the National Association of Real Estate Investment Trusts, which includes all tax-qualified equity REITs listed on the NYSE and the NASDAQ Market. The performance graph assumes that, at the close
of trading on December 31, 2015, $100 was invested in our common shares and in each of the indices. The comparison assumes the reinvestment of all distributions.
Period Ending
Index 12/31/2015 12/31/2016 12/31/2017 12/31/2018 12/31/2019 12/31/2020
Centerspace 100.00 101.67 84.91 77.36 119.31 121.46
S&P 500 Index 100.00 113.51 138.29 132.23 173.86 205.85
FTSE Nareit Equity REITs 100.00 110.83 115.15 110.70 137.65 124.44
SNL U.S. REIT Multifamily 100.00 120.45 127.12 130.70 165.73 138.54
Source: S&P Global Market Intelligence

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ITEM 6. SELECTED FINANCIAL DATA
Item 6. Selected Financial Data
Set forth below is selected financial data on a historical basis for the years ended December 31, 2020 and 2019, the eight months ended December 31, 2018, and the three most recent fiscal years ended April 30, 2018. This information should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this Report.
(in thousands, except per share and apartment community data)
Year Ended December 31, Eight Months Ended Fiscal Year Ended April 30,
2020 2019 December 31, 2018 2018 2017 2016
Consolidated Statement of Operations Data
Revenue $ 177,994 $ 185,755 $ 121,871 $ 169,745 $ 160,104 $ 145,500
Impairment of real estate investments in continuing and discontinued operations - - 1,221 18,065 57,028 5,983
Gain (loss) on sale of discontinued operations and real estate and other investments 25,503 97,624 10,277 183,687 74,847 33,422
Income (loss) from continuing operations 4,743 84,822 (5,890) (37,194) (46,228) 9,182
Income (loss) from discontinued operations - - 570 164,823 76,753 67,420
Net income (loss) 4,743 84,822 (5,320) 127,629 30,525 76,602
Net income (loss) attributable to controlling interests 4,441 78,669 (4,398) 116,788 43,347 72,006
Net income (loss) available to common shareholders (1,790) 71,848 (8,945) 104,562 31,366 60,492
Consolidated Balance Sheet Data
Total real estate investments 1,437,969 1,311,472 1,289,476 1,380,245 1,121,385 1,204,654
Total assets 1,464,183 1,392,418 1,335,997 1,426,658 1,474,514 1,755,022
Revolving lines of credit 152,871 50,079 57,500 124,000 57,050 17,500
Notes payable 269,246 269,058 143,991 69,514 - -
Mortgages payable 297,074 329,664 444,197 509,919 565,978 648,173
Total shareholders’ equity 618,207 619,053 568,786 605,663 553,721 618,758
Consolidated Per Common Share Data (basic and diluted)
Earnings (loss) from continuing operations - basic $ (0.15) $ 6.06 $ (0.79) $ (3.54) $ (3.01) -
Earnings (loss) from discontinued operations - basic - - $ 0.04 $ 12.25 $ 5.59 $ 4.91
Net income (loss) per common share - basic $ (0.15) $ 6.06 $ (0.75) $ 8.71 $ 2.58 $ 4.91
Earnings (loss) from continuing operations - diluted $ (0.15) $ 6.00 $ (0.79) $ (3.54) $ (3.01) -
Earnings (loss) from discontinued operations - diluted - - $ 0.04 $ 12.25 $ 5.59 $ 4.91
Net income (loss) per common share - diluted $ (0.15) $ 6.00 $ (0.75) $ 8.71 $ 2.58 $ 4.91
Distributions $ 2.80 $ 2.80 $ 2.10 $ 2.80 $ 4.60 $ 5.20
Other Data
Total apartment communities 67 69 87 90 87 99
Total homes 11,910 11,953 13,702 14,176 13,212 12,974
Funds from operations applicable to common shares and units $ 47,356 $ 52,866 $ 30,559 $ 38,941 $ 55,207 $ 103,874
CALENDAR YEAR 2020 2019 2018 2017 2016 2015
Tax status of distributions
Capital gain 13.62 % 38.53 % 100.00 % 48.87 % 87.57 % 11.99 %
Ordinary income 7.91 % 23.43 % - 14.59 % 12.43 % 36.28 %
Return of capital 78.47 % 38.04 % - 36.54 % - 51.73 %

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis should be read in conjunction with the consolidated financial statements and notes appearing elsewhere in this report. Historical results and trends which might appear in the consolidated financial statements should not be interpreted as being indicative of future operations.
We are presenting our result of operations for the years ended December 31, 2020 and 2019. For additional comparison of results of operations for the years ended December 31, 2019 and December 31, 2018, please refer to our Annual Report on Form 10-K filed with the SEC on February 19, 2020. For additional comparison of results of operations for the eight months ended December 31, 2018 and 2017, and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019.
This 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 Exchange Act, with respect to our 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.
Executive Summary
We own, manage, acquire, redevelop, and develop apartment communities. We primarily focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of December 31, 2020, we owned interests in 67 apartment communities consisting of 11,910 homes as detailed in Item 2 - Properties. Property owned, as presented in the consolidated balance sheet, was $1.8 billion at December 31, 2020, compared to $1.6 billion at December 31, 2019.
Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and developing and training team members to create vibrant apartment communities through resident-centered operations. We believe that delivering superior resident experiences will drive consistent profitability for our shareholders. We have paid quarterly distributions every quarter since our first distribution in 1971.
COVID-19 Developments
The COVID-19 pandemic has had an impact on our business since March 2020, when it spread to many of the markets in which we own properties. Our first priority continues to be the health and well-being of our residents, team members, and the communities we serve. We enhanced cleaning protocols at our communities and offices, implemented physical distancing in community common spaces, and instituted remote work guidelines for our team members, all in accordance with state and local guidelines. We are utilizing technology to allow our property teams to interact remotely with prospective residents through virtual leasing. We have provided rent deferrals to residents and rent abatement to commercial tenants who were financially impacted by the COVID-19 pandemic. To support our team members working on-site, we have provided additional COVID-19 paid time off and enhanced flextime arrangements.
Certain states and cities, including some of those in which our apartment communities are located, have reacted to the COVID-19 pandemic by instituting quarantines, restrictions on travel, shelter-in-place or stay-at-home directives, restrictions on types of businesses that may continue to operate, and restrictions on the types of construction projects that may continue. We cannot predict when restrictions currently in place will expire or whether additional restrictions will be imposed in the future. We implemented a plan to safely re-open common spaces in several of our communities while adhering to state and local guidelines, but we recognize that an increase in COVID-19 cases in these markets could cause us to close common spaces or take other preventive measures.
Financial Impact of the COVID-19 Pandemic
Many companies, especially in urban areas, have extended directives for employees to work from home during the COVID-19 pandemic. These extended directives have resulted in decreased traffic to businesses and, in some cases, closures of businesses in urban areas, which has resulted in lower demand and lower rent increases for our five urban based apartment communities. The COVID-19 pandemic and these directives have affected our operations and the conduct of business at our apartment communities and offices, but did not have a material impact on our financial condition, operating results, or cash flows for the twelve months ended December 31, 2020.
Absent the ability to contain or treat the COVID-19 virus, with a corresponding re-opening of the economy, the ongoing COVID-19 pandemic may have adverse financial and economic impacts that include, but are not limited to, the following:
•cause our residents or commercial tenants to defer or stop rental payments, and abandon or fail to renew leases, which would reduce our primary source of net operating income and cash flows;
•cause the capital markets generally to become restricted or unavailable, thereby limiting our access to any needed debt or equity capital financing;
•impact the business of, or cause the loss of, certain critical third-party suppliers or other service providers;
•restrict our ability to continue to pay dividends on a quarterly basis at the current rate;
•impair the value of our tangible or intangible assets;
•require us to record loss contingencies and incur additional expenses related to our COVID-19 response; or
•cause the U.S. economy to suffer an extended economic slowdown, which could lead to a prolonged recession or even economic depression, which in turn would affect the demand for our apartment communities and could have an adverse impact on our business and operating results.
We have taken the following actions in order to protect our residents and employees, manage expenses and preserve cash flow during the COVID-19 pandemic:
•we eliminated the majority of travel for our team members during 2020 and reduced planned travel through 2021;
•left vacant positions unfilled;
•used onsite team members to perform work normally contracted to third parties; and
•we have moved the meetings of our Board of Trustees to virtual meetings, thereby limiting the expense associated with in-person meetings.
Despite our efforts to manage our response to the effects of the COVID-19 pandemic, the ultimate impact of the COVID-19 pandemic on our rental revenue in future years cannot be determined at present. The situation surrounding the COVID-19 pandemic remains fluid, and we are actively managing our response in collaboration with residents, commercial tenants, government officials, and business partners and assessing potential impacts to our financial position and operating results, as well as potential adverse impacts on our business. Our management remains committed to ensuring the safety of our team members, residents, and communities, and to maintaining the financial stability of our business enterprise for the duration of the COVID-19 pandemic.
Significant Transactions and Events for the Year Ended December 31, 2020
Highlights. For the year ended December 31, 2020, our highlights included the following:
•Net Loss was $0.15 per diluted share for the year ended December 31, 2020, compared to Net Income of $6.00 per diluted share for the year ended December 31, 2019;
•Same-store year-over-year revenue growth of 2.1%, driven by 1.7% growth in rental revenue and 0.4% growth in occupancy;
•Same-store net operating income growth of 1.8%;
•Funded $18.5 million of multifamily construction loans;
•Announced Nashville as one of our target markets; and
•Rebranded the Company as Centerspace to reflect both the transformation of the company and its vision for the future.
Acquisitions and Dispositions. During the year ended December 31, 2020, we completed the following transactions in furtherance of our strategic plan:
•Continued our focus on key growth markets, expanding in Minneapolis, Minnesota and Denver, Colorado, acquiring a total of two apartment communities in these markets, consisting of 647 homes, for an aggregate purchase price of $191.0 million;
•Acquired the remaining noncontrolling interest in 71 France for $12.2 million;
•Disposed of four apartment communities in Grand Forks, North Dakota, a commercial property, and a parcel of unimproved land for an aggregate sale price of $44.3 million.
Financing Transactions. During the year ended December 31, 2020, we completed the following financing transactions:
•We issued 829,078 common shares under the 2019 ATM Program for total consideration, net of commissions and issuance costs, of approximately $59.2 million.
Outlook
We intend to continue our focus on maximizing the financial performance of the communities in our existing portfolio. To accomplish this, we have introduced initiatives to expand our operating margin by enhancing the resident experience, making value-add investments, and implementing technology solutions and expense controls. We will actively manage our existing portfolio and strategically pursue acquisitions of multifamily communities in our target markets of Minneapolis, Minnesota and Denver, Colorado as opportunities arise and market conditions allow. We will explore potential new markets and acquisition opportunities, including in Nashville, Tennessee, as market conditions allow. Our continued management of a strong balance sheet should provide us with flexibility to pursue both internal and external growth.
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”), which is defined below.
(in thousands, except percentages)
Year Ended December 31,
2020 2019 $ Change % Change
Operating income (loss) $ 8,340 $ 11,417 $ (3,077) (27.0) %
Adjustments:
Property management expenses 5,801 6,186 (385) (6.2) %
Casualty loss 1,662 1,116 546 48.9 %
Depreciation and amortization 75,593 74,271 1,322 1.8 %
General and administrative expenses 13,440 14,450 (1,010) (7.0) %
Net operating income $ 104,836 $ 107,440 $ (2,604) (2.4) %
Consolidated Results of Operations
The following consolidated results of operations cover the years ended December 31, 2020 and 2019.
(in thousands)
Year Ended December 31,
2020 2019 $ Change % Change
Revenue
Same-store $ 152,790 $ 149,615 $ 3,175 2.1 %
Non-same-store
18,441 6,020 12,421 206.3 %
Other properties and dispositions 6,763 30,120 (23,357) (77.5) %
Total 177,994 185,755 (7,761) (4.2) %
Property operating expenses, including real estate taxes
Same-store 63,227 61,622 1,605 2.6 %
Non-same-store
6,817 2,287 4,530 198.1 %
Other properties and dispositions 3,114 14,406 (11,292) (78.4) %
Total 73,158 78,315 (5,157) (6.6) %
Net operating income
Same-store 89,563 87,993 1,570 1.8 %
Non-same-store
11,624 3,733 7,891 211.4 %
Other properties and dispositions 3,649 15,714 (12,065) (76.8) %
Total $ 104,836 $ 107,440 $ (2,604) (2.4) %
Property management expense (5,801) (6,186) (385) (6.2) %
Casualty loss (1,662) (1,116) 546 48.9 %
Depreciation and amortization (75,593) (74,271) 1,322 1.8 %
General and administrative expenses (13,440) (14,450) (1,010) (7.0) %
Interest expense (27,525) (30,537) (3,012) (9.9) %
Loss on extinguishment of debt (23) (2,360) (2,337) (99.0) %
Interest and other income (loss) (1,552) 2,092 (3,644) (174.2) %
Income (loss) before gain (loss) on sale of real estate and other investments, and gain (loss) on litigation settlement (20,760) (19,388) (1,372) (7.1) %
Gain (loss) on sale of real estate and other investments 25,503 97,624 (72,121) (73.9) %
Gain (loss) on litigation settlement - 6,586 (6,586) (100.0) %
NET INCOME (LOSS) $ 4,743 $ 84,822 $ (80,079) (94.4) %
Dividends to preferred unitholders (640) (537) (103) 19.2 %
Net (income) loss attributable to noncontrolling interests - Operating Partnership 212 (6,752) 6,964 (103.1) %
Net (income) loss attributable to noncontrolling interests - consolidated real estate entities 126 1,136 (1,010) (88.9) %
Net income (loss) attributable to controlling interests 4,441 78,669 (74,228) (94.4) %
Dividends to preferred shareholders (6,528) (6,821) 293 (4.3) %
Redemption of preferred shares 297 - 297 100.0 %
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS $ (1,790) $ 71,848 $ (73,638) (102.5) %
Year Ended December 31,
Weighted Average Occupancy (1)
2020 2019
Same-store 94.8 % 94.4 %
Non-same-store 93.2 % 94.8 %
Total 94.7 % 94.4 %
(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 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. The currently offered effective rates on new leases at the community are used as the starting point in determination of the market rates of vacant homes. We believe that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at is estimated market rate. Weighted average occupancy may not completely reflect short-term trends in physical occupancy, and our calculation of weighted average occupancy may not be comparable to that disclosed by other real estate companies.
December 31,
Number of Homes 2020 2019
Same-store 10,567 10,567
Non-same-store 1,343 696
Total 11,910 11,263
Net operating income. NOI is a non-GAAP financial measure which we define as total real estate revenues less property operating expenses, including real estate taxes, which is reconciled to operating income (loss) in the table above. We believe 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, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.
Throughout this Report, we have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for substantially all of the periods being compared and, in the case of development 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 the performance of existing apartment communities and their contribution to net income. Management believes that measuring performance on a same-store basis is useful to investors because it enables evaluation of how our communities are performing year-over-year. Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing residents, controlling operating costs, and making prudent capital improvements. The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store communities are due to the addition of those properties to our real estate portfolio, and accordingly provide less useful information for evaluating the ongoing operational performance of our real estate portfolio.
For the comparison of the twelve months ended December 31, 2020 and 2019, 62 apartment communities were classified as same-store and five apartment communities were non-same-store. See Item 2 - Properties for the list of communities classified as same-store and non-same-store. Sold communities are included in “Other” for the periods prior to the sale, which also includes non-multifamily properties and the non-multifamily components of mixed-use properties.
Revenue. Total revenue decreased by 4.2% to $178.0 million for the year ended December 31, 2020 compared to $185.8 million in the year ended December 31, 2019. A decrease of $23.4 million from dispositions and other properties was offset by an increase of $12.4 million from five non-same-store apartment communities. Revenue from same-store communities increased by 2.1% or $3.2 million in the year ended December 31, 2020, compared to the same period in the prior year. Approximately 1.7% of the increase was attributable to growth in average rental revenue, which was impacted by $450,000 of additional ratio utility billings ("RUBs") revenue as a result of the acceleration of our billing cycle after transitioning to a new RUBs service provider during the fourth quarter. Approximately 0.4% of the increase was due to higher occupancy as weighted average occupancy increased from 94.4% to 94.8% for the years ended December 31, 2019 and 2020, respectively.
Property operating expenses, including real estate taxes. Total property operating expenses, including real estate taxes, decreased by 6.6% to $73.2 million in the year ended December 31, 2020 compared to $78.3 million in the year ended December 31, 2019. A total of $11.3 million of the decrease was attributable to other properties, primarily due to dispositions, but was partially offset by an increase of $4.5 million from non-same-store apartment communities. Property operating expenses at same-store communities increased by 2.6% or $1.6 million in the year ended December 31, 2020, compared to the
same period in the prior year. Insurance and real estate taxes comprised $1.2 million and $1.6 million of the increase, respectively. The increase in real estate taxes was primarily due to increases in Rochester, Minneapolis, and Denver. The increase in non-controllable expenses was offset by a $1.2 million decrease in controllable operating expenses, primarily due to decreased snow removal costs, utilities, and cost containment efforts related to the COVID-19 pandemic.
Net operating income. NOI decreased by 2.4% to $104.8 million in the year ended December 31, 2020 compared to $107.4 million in the year ended December 31, 2019.
Property management expense. Property management expense, consisting of property management overhead and property management fees paid to third parties, was $5.8 million in the year ended December 31, 2020 and $6.2 million in the year ended December 31, 2019. The decrease was primarily driven by compensation costs, reduced travel, and advertising.
Casualty gain (loss). Casualty loss increased by 48.9% to $1.7 million in the year ended December 31, 2020, compared to $1.1 million in the year ended December 31, 2019. The increase was primarily due to hail losses that were historically insured at lower deductibles, but beginning in 2020 our carriers limited coverage and increased deductibles for hail and wind-related losses. We also incurred losses at one property due to plumbing failures. Related to the 2020 hail losses, in the fourth quarter of 2020 we also incurred $754,000 in capitalized asset replacement costs, with an additional $1.3 million expected to be incurred in 2021.
Depreciation and amortization. Depreciation and amortization increased by 1.8% to $75.6 million in the year ended December 31, 2020, compared to $74.3 million in the year ended December 31, 2019. This increase was primarily due to non-same-store properties and offset by decreases from sold properties.
General and administrative expenses. General and administrative expenses decreased by 7.0% to $13.4 million in the year ended December 31, 2020, compared to $14.5 million in the year ended December 31, 2019, primarily attributable to decreases of $680,000 in compensation costs, $178,000 in severance-related costs, $381,000 in consulting costs, $277,000 in legal costs related to our pursuit of a construction defect claim which was resolved in the prior year, and $238,000 in decreased travel due to the COVID-19 pandemic. These decreases were partially offset by an increase of $402,000 in rebranding costs and $137,000 due to incentive compensation related to higher share award valuations compared to previous awards in the long-term incentive plan.
Operating income. Operating income decreased by 27.0% to $8.3 million in the year ended December 31, 2020, compared to a gain of $11.4 million in the year ended December 31, 2019.
Interest expense. Interest expense decreased 9.9% to $27.5 million in the year ended December 31, 2020, compared to $30.5 million in the year ended December 31, 2019, primarily due to the replacement of maturing debt with lower interest rate debt and lower interest rates on our line of credit.
Loss on extinguishment of debt. We recorded loss on extinguishment of debt in the years ended December 31, 2020 and 2019 of $23,000 and $2.4 million, respectively, primarily due to prepayment penalties associated with the disposal of assets and the write-off of unamortized loan costs.
Interest and other income (loss). We recorded a loss of $1.6 million in interest and other income (loss) in the year ended December 31, 2020, compared to income of $2.1 million in the prior year. The decrease was primarily due to a $3.4 million loss from certain marketable securities.
Gain (loss) on sale of real estate and other investments. In the years ended December 31, 2020 and 2019, we recorded gains on sale of real estate and other investments in continuing operations of $25.5 million and $97.6 million, respectively, primarily related to increased dispositions in 2019.
Gain (loss) on litigation settlement. In the year ended December 31, 2019, we recorded a gain on litigation settlement of $6.6 million from the settlement of a construction defect claim.
Funds from Operations
We believe that Funds from Operations (“FFO”), which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our 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 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 our 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 the definition. We believe all such interpretations not specifically provided for in the Nareit definition are consistent with the 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 cash needs, including the ability to service indebtedness or make distributions to shareholders.
Net loss available to common shareholders for the year ended December 31, 2020 decreased to $1.8 million compared to net income of $71.8 million for the year ended December 31, 2019. FFO applicable to common shares and Units for the year ended December 31, 2020, decreased to $47.4 million compared to $52.9 million for the year ended December 31, 2019, a change of 10.4%, primarily due to a $6.6 million gain on litigation settlement in the prior year which did not recur in the current year, as well as decreased NOI from sold properties and increased loss on marketable securities in the current year. The decrease in FFO was partially offset by increases in NOI from same-store and non-same-store communities and reductions in interest expense and prepayment penalties. For a comparison of FFO applicable to common shares and Units for the years ended December 31, 2019 and 2018, refer to our Annual Report on Form 10-K filed with the SEC on February 19, 2020. For a comparison of FFO applicable to common shares and Units for the eight months ended December 31, 2018 and 2017 and the fiscal years ended April 30, 2018 and 2017, please refer to our Transition Report on from 10-KT filed with the SEC on February 27, 2019.
Reconciliation of Net Income Available to Common Shareholders to Funds from Operations
(in thousands, except per share and unit amounts)
Year Ended December 31,
2020 2019
Net income (loss) available to common shareholders $ (1,790) $ 71,848
Adjustments:
Noncontrolling interests - Operating Partnership (212) 6,752
Depreciation and amortization 75,593 74,271
Less depreciation - non real estate (353) (322)
Less depreciation - partially owned entities (379) (2,059)
(Gain) loss on sale of real estate (25,503) (97,624)
Funds from operations applicable to common shares and Units $ 47,356 $ 52,866
Funds from operations applicable to common shares and Units $ 47,356 $ 52,866
Dividends to preferred unitholders 640 537
Funds from operations applicable to common shares and Units - diluted $ 47,996 $ 53,403
Per Share Data
Earnings (loss) per common share - diluted $ (0.15) $ 6.00
FFO per share and Unit - diluted $ 3.47 $ 4.05
Weighted average shares and Units - diluted 13,835 13,182
Liquidity and Capital Resources
Overview
Our primary sources of liquidity are cash and cash equivalents on hand and cash flows generated from operations. Other sources include availability under our unsecured lines of credit, proceeds from property dispositions, including restricted cash related to net tax deferred proceeds, offerings of preferred and common shares under our shelf registration statement, including offerings of common shares under our 2019 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 our communities, distributions to the holders of our preferred shares, common shares, Series D preferred units, and Units, value-add redevelopment, common and preferred share buybacks and Unit redemptions, and acquisition of additional communities.
We intend to maintain a strong balance sheet and preserve our financial flexibility, which we believe should enhance our ability to capitalize on appropriate investment opportunities as they may arise. We intend to maintain our capital structure by taking certain actions, including:
•extending and sequencing our debt maturity dates;
•managing interest rate exposure through the appropriate use of a mix of fixed and floating debt and utilizing our lines of credit and senior notes as appropriate;
•maintaining adequate coverage ratios on our debt obligations; and
•where appropriate, accessing the equity markets through our 2019 ATM Program and other offerings under our shelf registration statement.
We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities and, from time to time, through draws on our lines of credit. We believe our ability to generate cash from property operating activities and draws on our lines of credit to be adequate to meet all expected operating requirements and to make distributions to our shareholders in accordance with the REIT provisions of the Internal Revenue Code. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are also generally expected to be funded from existing cash on hand, cash flow generated from property operations, draws on our lines of credit and/or new borrowings, and we believe we will have sufficient liquidity to meet our commitments over the next twelve months.
To maintain our qualification as a REIT, we must pay dividends to our shareholders aggregating annually at least 90% of our REIT taxable income, excluding net capital gains. Under a separate requirement, we must distribute 100% of net capital gains or pay a corporate level tax in lieu thereof. While we have historically satisfied this distribution requirement by making cash distributions to our shareholders, we may choose to satisfy this requirement by making distributions of other property, including, in limited circumstances, our own common shares. As a result of this distribution requirement, our Operating Partnership cannot rely on retained earnings to fund ongoing operations. We pay dividends from cash available for distribution. Until it is distributed, cash available for distribution is typically invested in investment grade securities or is used to reduce balances outstanding under our line of credit. In the event of deterioration in property operating results, we may need to consider additional cash preservation alternatives, including reducing development activities, capital improvements, and renovations. For the year ended December 31, 2020, we declared cash distributions of $38.5 million to common shareholders and unitholders of Centerspace, LP, as compared to net cash provided by operating activities of $61.2 million and FFO of $47.4 million.
Factors that could increase or decrease our future liquidity include, but are not limited to, changes in interest rates or sources of financing, general volatility in capital and credit markets, changes in minimum REIT dividend requirements, and our ability to access the capital markets on favorable terms, or at all. As a result of the foregoing conditions or general economic conditions in our markets that affect our ability to attract and retain residents, we may not generate sufficient cash flow from operations. If we are unable to obtain capital from other sources, we may not be able to pay the distribution required to maintain our status as a REIT, make required principal and interest payments, make strategic acquisitions or make necessary routine capital improvements or undertake value add renovation opportunities with respect to our existing portfolio of operating assets.
As of December 31, 2020, we had total liquidity of approximately $97.5 million, which included $97.1 million available on our line of credit based on the value of properties contained in our unencumbered asset pool (“UAP”) and $392,000 of cash and cash equivalents. As of December 31, 2019, we had total liquidity of approximately $226.5 million, which included $199.9 million available on our line of credit based on the UAP and $26.6 million of cash and cash equivalents.
COVID-19-Related Impacts on Liquidity
We anticipate that our primary sources of liquidity will continue to be cash and cash equivalents on hand, cash flows generated from operations and availability under our unsecured lines of credit. Although cash flows may be reduced as a result of lower monthly collections of rent as well as the potential for lower occupancy or reduced rental rates during and after the COVID-19 pandemic, we have other available sources of liquidity such as proceeds from property dispositions, including offerings of preferred and common shares under our shelf registration statement, offerings of common shares under our 2019 ATM Program; and long term unsecured term loans and secured mortgages. We have the following contractual obligations over the next twelve months:
•$26.1 million of debt maturities in 2021; and
•$20.6 million remaining to fund, under construction and mezzanine loans we originated for the development of a multifamily community in Minneapolis, Minnesota.
Potential Impact of COVID-19-Related Effects on Continuing Debt Availability
Although we are in compliance with our covenants under all of our debt facilities and currently expect to continue to remain in compliance with these covenants, there can be no assurance that we will remain in compliance with those covenants or be able to access these funds depending on the length of the COVID-19 pandemic and the breadth of its impact on the U.S. economy generally and the credit markets in particular. Under the terms of our credit facility, we may be unable to obtain advances under our credit facility if:
•we are unable to make certain representations and warranties, including a certification that, since April 30, 2018, there has been no adverse change in our business, financial condition, operations, performance or properties, taken as a whole, which would reasonably be expected to have a material adverse effect;
•changes in our consolidated property NOI or capitalization rates applicable to the properties in our borrowing base reduce or eliminate availability under our credit facility; or
•changes in the nature and composition (including occupancy rate) of the properties in our borrowing base cause these properties to become ineligible to be part of our borrowing base, and if we are not able to replace such properties with other qualifying properties, such ineligibility could reduce or eliminate the availability under our credit facility.
Even if we remain in compliance with the foregoing representations, warranties, and covenants, we may be unable to access the full amount available under our credit facilities if our lenders fail to fund their commitments, which could occur if:
•credit market deterioration or overall economic conditions affect the ability of one or more of our lenders to meet their funding commitments under our revolving credit facility. If a lender fails to fund its commitment under the revolving credit facility, that portion of the credit facility will be unavailable if the lender’s commitment is not replaced by a new commitment from an alternate lender;
•distressed market conditions cause our lenders to transfer their commitments to other institutions, which could result in committed funds not being available, particularly if consolidation of the commitments under our credit facility or among its lenders were to occur; or
•we are unable to obtain additional letters of credit due to a default by any lender in meeting its funding obligations.
As of the date of this filing, we have not experienced any restrictions or limitations on the availability of credit in our markets or with our lenders, although there can be no assurance that we will continue to be able to access the credit markets generally or our credit facility in the future.
Debt
We have an unsecured credit facility for $395.0 million, with the commitment allocated to a revolving line of credit for $250.0 million and the remaining $145.0 million allocated between two term loans: a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million term loan that matures on August 31, 2025.
As of December 31, 2020, our line of credit had total commitments and borrowing capacity of $250.0 million, based on the value of properties contained in the UAP. As December 31, 2020, the additional borrowing availability was $97.1 million beyond the $152.9 million drawn, including the balance on our operating line of credit (discussed below). At December 31, 2019, the line of credit borrowing capacity was $250.0 million based on the UAP, of which $50.1 million was drawn on the line. The multi-bank line of credit bears interest either at the lender’s base rate plus a margin ranging from 35 to 85 basis points, or LIBOR, plus a margin ranging from 135 to 190 basis points based on our consolidated leverage. The line of credit is utilized to refinance existing indebtedness, to finance property acquisitions, to finance capital expenditures, and for general corporate purposes.This credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.
We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes. Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually, under this facility. An additional $25.0 million remains available under this agreement. Subsequent to December 31, 2020, we issued $50.0 million of 2.7% unsecured Series C notes, due June 6, 2030. In concert with this issuance, we amended and expanded our Note Purchase Private Shelf Agreement (the "Agreement") with Prudential to increase the aggregate amount available under the Agreement from $150.0 million to $225.0 million. After the issuance of Series C notes, we have $50.0 million remaining under the Agreement.
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 August 1, 2021, with pricing based on a market spread plus the one-month LIBOR index rate.
Mortgage loan indebtedness was $298.4 million on December 31, 2020 and $331.4 million on December 31, 2019. As of December 31, 2020, the weighted average rate of interest on our mortgage debt was 3.93%, compared to 4.02% on December 31, 2019. Refer to Note 6 of our consolidated financial statements contained in this Report for the principal payments due on our mortgage indebtedness and other tabular information.
All of our term debt is at fixed rates of interest, with staggered maturities. This reduces the exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on our results of operations and cash flows.
Equity
In November 2019, we entered into an equity distribution agreement in connection with the 2019 ATM Program through which we may offer and sell common shares having an aggregate gross sales price of up to $150.0 million, in amounts and at times that we determine. The proceeds from the sale of common shares under the 2019 ATM Program are intended to be used for general corporate purposes, which may include the funding of future acquisitions and the repayment of indebtedness. During
the year ended December 31, 2020, we issued 829,078 common shares under the 2019 ATM Program at an average price of $71.39 per share, net of commissions. Total consideration, net of commissions and issuance costs, was approximately $59.2 million. As of December 31, 2020, common shares having an aggregate offering price of up to $68.5 million remained available under the 2019 ATM Program.
On December 5, 2019, our Board of Trustees authorized a new share purchase program to repurchase up to $50 million of our common shares or preferred shares over a one-year period. Under this repurchase program, we could repurchase common shares or preferred shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. This program expired on December 5, 2020. During the year ended December 31, 2020, we repurchased and retired approximately 237,000 Series C preferred shares for an aggregate cost of $5.6 million, including commissions, at an average price per share of $23.75. During the year ended December 31, 2019, we repurchased and retired approximately 329,000 common shares for an aggregate cost of $18.0 million, including commissions, at an average price per share of $54.69.
As of December 31, 2020 and 2019, we had 3.9 million and 4.1 million Series C preferred shares outstanding, respectively.
Changes in Cash, Cash Equivalents, and Restricted Cash
As of December 31, 2020, we had restricted cash consisting of $1.9 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $5.0 million in deposits for real estate acquisitions. As of December 31, 2019, we had restricted cash consisting of $2.3 million of escrows held by lenders for real estate taxes, insurance, and capital additions and $17.2 million in net tax-deferred exchange proceeds remaining from a portion of our dispositions.
The following discussion relates to changes in consolidated cash, cash equivalents, and restricted cash which are presented in our consolidated statements of cash flows in Item 15 of this report.
In addition to cash flows from operations, during the year ended December 31, 2020, we generated capital from various activities, including:
•Receipt of $59.2 million from the issuance of 829,078 common shares under our 2019 ATM Program;
•Disposition of four apartment communities in Grand Forks, North Dakota, one commercial property, and one parcel of unimproved land for an aggregate sale price of $44.3 million;
•Receipt of $10.0 million from repayment of a mortgage receivable;
•Draws of $102.8 million on our line of credit; and
•Sale of $3.9 million of marketable securities.
During the year ended December 31, 2020, we used capital for various activities, including:
•Acquisition of Ironwood Apartments, a 182-home apartment community located in New Hope, Minnesota, an inner-ring suburb of Minneapolis, for an aggregate purchase price of $46.3 million, of which $28.6 million was paid in cash and $17.7 million from payoff of a note receivable and accrued interest;
•Acquisition of Parkhouse Apartment Homes, a 465-home apartment community located in Thornton, Colorado, a suburb of Denver, for an aggregate purchase price of $144.8 million;
•Acquisition of the remaining noncontrolling interest in 71 France for $12.2 million;
•Funding $18.5 million of mezzanine/construction loans;
•Repaying approximately $32.9 million of mortgage principal;
•Repurchasing 237,000 Series C preferred shares for an aggregate cost of approximately $5.6 million;
•Paying distributions on common shares and Units of $35.0 million; and
•Funding capital improvements for apartment communities of approximately $30.3 million.
Contractual Obligations and Other Commitments
Our primary contractual obligations relate to borrowings under our lines of credit, term loans, unsecured senior notes, and mortgages payable. The primary line of credit had a $153.0 million balance outstanding at December 31, 2020 and matures in August 2022, with a 12-month option to extend the maturity date, subject to customary conditions. We also had two term loans with an aggregate balance of $145.0 million at December 31, 2020: a $70.0 million term loan that matures in January 2024 and a $75.0 million term loan that matures in August 2025.
In addition, we had unsecured senior notes with an aggregate balance of $125.0 million at December 31, 2020. The $75.0 million of Series A senior notes mature on September 13, 2029 and the $50.0 million of Series B senior notes mature on September 30, 2028.
(in thousands)
Less than More than
Total 1 Year 1-3 Years 3-5 Years 5 Years
Mortgages payable (principal and interest) $ 356,659 $ 37,042 $ 100,155 $ 49,756 $ 169,706
Lines of credit (principal and interest)(1)
$ 160,440 $ 10,263 $ 150,177 - -
Notes payable (principal and interest) $ 198,574 $ 10,902 $ 21,804 $ 161,077 $ 4,791
Total $ 715,673 $ 58,207 $ 272,136 $ 210,833 $ 174,497
(1)The future interest payments on the lines of credit were estimated using the outstanding principal balance and interest rate in effect as of December 31, 2020.
Inflation
Our apartment leases generally have terms of one year or less, which means that, in an inflationary environment, we would have the ability to increase rents upon the commencement of new leases or renewal of existing leases, thereby minimizing the risk of inflation. 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.
Off-Balance-Sheet Arrangements
As of December 31, 2020, we had no significant off-balance-sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.
Critical Accounting Policies
Set forth below is a summary of the accounting policies that management believes are critical to the preparation of the consolidated financial statements included in this Report.
Real Estate. Real estate is carried at cost, net of accumulated depreciation, less an adjustment for impairment, if any. Depreciation requires an estimate by management of the useful life of each asset as well as an allocation of the costs associated with a property to its various components. As described further below, the process of allocating property costs to its components involves a considerable amount of subjective judgments to be made by management. If we do not allocate these costs appropriately or incorrectly estimate the useful lives of our real estate, depreciation expense may be misstated. Depreciation is computed on a straight-line basis over the estimated useful lives of the assets. We use a 10-37 year estimated life for buildings and improvements and a 5-10 year estimated life for furniture, fixtures, and equipment. Maintenance and repairs are charged to operations as incurred. Renovations and improvements that improve and/or extend the useful life of the asset are capitalized over their estimated useful life, generally five to twenty years.
Property sales or dispositions are recorded when control of the assets are transferred to the buyer and we have no significant continuing involvement with the property sold. The gain or loss on disposal is recognized net of certain closing and other costs associated with the disposition.
Acquisition of Investments in Real Estate. Upon acquisitions of real estate, we assess the fair value of acquired tangible assets (including land, buildings and personal property), which is determined by valuing the property as if it were vacant, and consider whether there were significant intangible assets acquired (for example, above-and below-market leases, the value of acquired in-place leases and resident relationships) and assumed liabilities, and allocate the purchase price based on these assessments. The as-if-vacant value is allocated to land, buildings, and personal property based on our determination of the relative fair value
of these assets. Techniques used to estimate fair value include discounted cash flow analysis and reference to recent sales of comparable properties. Estimates of future cash flows are based on a number of factors, including the historical operating results, known trends, and market/economic conditions that may affect the property. Land value is assigned based on the purchase price if land is acquired separately or based on a relative fair value allocation if acquired in a portfolio acquisition.
Other intangible assets acquired include amounts for in-place lease values that are based upon our evaluation of the specific characteristics of the leases. Factors considered in the fair value analysis include an estimate of carrying costs and foregone rental income during hypothetical expected lease-up periods, consideration of current market conditions, and costs to execute similar leases. We also consider information about each property obtained during our pre-acquisition due diligence, marketing and leasing activities in estimating the relative fair value of the tangible and intangible assets acquired.
Capitalization of Costs. We follow the real estate project costs guidance in ASC 970, Real Estate - General, in accounting for the costs of re-development projects. As real estate is undergoing re-development, all project costs directly associated with and attributable to the construction of a project are capitalized to the cost of the real property. The capitalization period begins when re-development activities and expenditures begin and ends upon completion, which is when the asset is ready for its intended use. Generally, rental property is considered substantially complete upon issuance of a certificate of occupancy.
Impairment. We periodically evaluate our long-lived assets, including our investments in real estate, for impairment indicators. 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, we compare 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 our anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our 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. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses.
Recent Accounting Pronouncements
For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to our consolidated financial statements appearing elsewhere in this Report.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is primarily related to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations. We currently use interest rate swaps to offset the impact of interest rate fluctuations on our $70.0 million and $75.0 million variable-rate term loans and a portion of our line of credit. The swap on our $70.0 million term loan has a notional amount of $70.0 million and an average pay rate of 2.16%. The swap on our $75.0 million term loan has a notional amount of $75.0 million and an average pay rate of 2.81%. The swap on our line of credit has a notional amount of $50.0 million and an average pay rate of 2.02%. The aggregate fair value of our interest rate swaps is a liability of $15.9 million, as of December 31, 2020. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparty under the terms of the agreement.
We have a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes (“unsecured senior notes”). Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually.
As of December 31, 2020, we had no variable-rate mortgage debt outstanding and $297.9 million of variable-rate borrowings under our line of credit and term loans, of which $195.0 million is fixed through interest rate swaps. We estimate that an increase in 30-day LIBOR of 100 basis points with constant risk spreads would result in our net income being reduced by approximately $1.0 million on an annual basis. We estimate that a decrease in 30-day LIBOR of 100 basis points would increase the amount of net income by a similar amount.
Mortgage loan indebtedness decreased by $32.9 million as of December 31, 2020, compared to December 31, 2019, primarily due to loan maturities and prepayments. As of December 31, 2020 and 2019, 100.0% of our $298.4 million of mortgage debt was at fixed rates of interest, with staggered maturities. As of December 31, 2020, the weighted average rate of interest on our
mortgage debt was 3.93%, compared to 4.02% on December 31, 2019. Even though our goal is to maintain a fairly low exposure to interest rate risk, we may become vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt or future debt.
The following table provides information about our financial instruments that are sensitive to changes in interest rates. For debt obligations, the table presents principal cash flows and related weighted average interest rates by expected maturity dates. Average variable rates are based on rates in effect at the reporting date.
Future Principal Payments (in thousands, except percentages)
Fair
Debt 2021 2022 2023 2024 2025 Thereafter Total Value
Fixed Rate $ 25,665 $ 37,219 $ 45,068 $ 3,777 $ 32,505 $ 279,211 $ 423,445 $ 439,851
Average Interest Rate(1)
4.23 % 3.99 % 3.79 % 3.75 % 3.75 % 3.74 % 3.89 %
Variable Rate(2)
$ 5,871 $ 147,000 - $ 70,000 $ 75,000 - $ 297,871 $ 297,871
Average Interest Rate(1)
3.64 % 2.85 % - 3.65 % 4.63 % - 3.23 %
(1)Interest rate is annualized and includes the effect of our interest rate swaps.
(2)Includes $152.9 million under our line of credit and $145.0 million on our term loans, of which $195.0 million is synthetically fixed with interest rate swaps.

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ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Item 8. Financial Statements and Supplementary Data
Our consolidated financial statements and related notes, together with the Report of the Independent Registered Public Accounting Firm, are set forth beginning on page of this Report and are incorporated herein by reference.

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.

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ITEM 9A. CONTROLS AND PROCEDURES
Item 9A. Controls and Procedures
Disclosure Controls and Procedures: As of December 31, 2020, the end of the period covered by this Report, our management carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
Changes in Internal Control Over Financial Reporting: There have been no changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the fourth quarter of the year to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
Management’s Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting and for performing an assessment of the effectiveness of internal control over financial reporting as of December 31, 2020. Our internal control over financial reporting is a process designed under the supervision of our principal executive and principal financial officers to provide reasonable assurance regarding the reliability of financial reporting and the preparation of our financial statements for external reporting purposes in accordance with GAAP.
As of December 31, 2020, management conducted an assessment of the effectiveness of our internal control over financial reporting, based on the framework established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on this assessment, management has determined that our internal control over financial reporting as of December 31, 2020, was effective.
Our internal control over financial reporting includes policies and procedures that:
•pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect transactions, acquisitions and dispositions of assets;
•provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures are being made only in accordance with authorizations of our management and the trustees; and
•provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on our financial statements.
Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate due to changes in conditions or deterioration in the degree of compliance with the policies or procedures.
Our internal control over financial reporting as of December 31, 2020 has been audited by Grant Thornton LLP, an independent registered public accounting firm, as stated in their report on page of our consolidated financial statements contained in our Annual Report on Form 10-K, which expresses an unqualified opinion on the effectiveness of our internal control over financial reporting as of December 31, 2020.

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ITEM 9B. OTHER INFORMATION
Item 9B. Other Information
None.
PART III

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ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Item 10. Trustees, Executive Officers and Corporate Governance
The information required by this Item regarding Trustees is incorporated by reference to the information under “Election of Trustees,” “Information About Our Executive Officers,” “Code of Conduct and Code of Ethics for Senior Financial Officers,” and “Board Committees” in our definitive proxy statement for our 2021 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Report.

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ITEM 11. EXECUTIVE COMPENSATION
Item 11. Executive Compensation
The information required by this Item is incorporated by reference to the information under “Trustee Compensation,” “Compensation Discussion and Analysis” and “Executive Officer Compensation Tables” in our definitive proxy statement for our 2021 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Report.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
The information required by this Item is incorporated by reference to the information under “Securities Authorized for Issuance Under Equity Compensation Plans” and “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement for our 2021 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Report.

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ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Item 13. Certain Relationships and Related Transactions, and Trustee Independence
The information required by this Item is incorporated by reference to the information under “Relationships and Related Party Transactions” and “Corporate Governance and Board Matters” in our definitive proxy statement for our 2021 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Report.

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ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Item 14. Principal Accounting Fees and Services
The information required by this Item is incorporated by reference to the information under “Accounting and Audit Committee Matters” in our definitive proxy statement for our 2021 Annual Meeting of Shareholders to be filed with the SEC no later than 120 days after the end of the year covered by this Report.
PART IV

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ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
Item 15. Exhibits, Financial Statement Schedules
The following documents are filed as part of this report:
1. Financial Statements
See the “Table of Contents” to our consolidated financial statements on page of this Report.
2. Financial Statement Schedules
See the “Table of Contents” to our consolidated financial statements on page of this Report.
The following financial statement schedules should be read in conjunction with the financial statements referenced in Part II, Item 8 of this Report: Schedule III Real Estate and Accumulated Depreciation
3. Exhibits
See the Exhibit Index set forth in part (b) below.
The Exhibit Index below lists the exhibits to this Report. We will furnish a printed copy of any exhibit listed below to any security holder who requests it upon payment of a fee of 15 cents per page. All Exhibits are either contained in this Report or are incorporated by reference as indicated below.