Executive Summary / Key Takeaways

• Strategic Portfolio Transformation: Centerspace is executing a deliberate capital recycling strategy, divesting stable but lower-growth Midwest assets to acquire higher-quality, institutional-grade properties in the Mountain West. This pivot aims to enhance portfolio metrics, boost NOI margins, and improve long-term growth prospects, despite short-term earnings dilution.
• Robust Operational Performance: The company consistently delivers strong operational results, evidenced by a 2.9% year-over-year same-store Net Operating Income (NOI) growth in Q2 2025, driven by 96.1% occupancy and effective expense control. Operational efficiencies are further enhanced by a fully implemented technology stack and centralized property management functions.
• Financial Resilience Amidst Transition: Centerspace maintains a strong balance sheet with $206.3 million in liquidity as of Q2 2025. While capital recycling is expected to cause a $0.04 per share midpoint reduction in 2025 Core FFO guidance, the company still projects a 1.2% year-over-year earnings increase, with net debt to EBITDA targeted to return to the low to mid 7x range by year-end.

• Valuation Disconnect Opportunity: The company's stock currently trades at an implied cap rate in the mid-to-high 7% range, significantly higher than the 4.75% to 5% cap rates observed in recent institutional market transactions. This disconnect, coupled with the strategic repositioning, presents a compelling long-term value proposition for investors.
• Differentiated Competitive Edge: Centerspace leverages its community-focused operational excellence and cost efficiency in regional markets, while its strategic shift aims to capture the higher growth and liquidity characteristics of institutional markets, positioning it to compete more effectively against larger, urban-centric multifamily REITs.

The Strategic Ascent: Reshaping a Midwest Legacy for Growth

Centerspace, a real estate investment trust with roots stretching back to 1970, has long been a foundational player in the multifamily sector. For decades, the company cultivated a portfolio of apartment communities primarily across the Midwest, a strategy that yielded stable cash flows and consistent performance, often benefiting from lower new supply compared to national averages. This historical foundation, built on a commitment to providing quality homes and fostering resident satisfaction, has shaped Centerspace's operational ethos. However, the investment landscape has evolved, prompting a significant strategic pivot to unlock greater shareholder value.

The core investment thesis for Centerspace today revolves around its ongoing portfolio transformation. The company is actively shedding its image as a purely Midwest-focused entity, strategically divesting assets in mature, lower-growth markets to acquire higher-quality, institutional-grade properties in the dynamic Mountain West. This capital recycling initiative is not merely about growth; it is a calculated move to enhance portfolio metrics, increase exposure to more liquid institutional markets, and ultimately elevate the company's long-term growth profile. This strategic shift is a direct response to a persistent valuation disconnect, where the market has historically undervalued the stable cash flows from its tertiary markets, trading at an implied cap rate significantly higher than observed private market transactions.

Centerspace's competitive positioning, traditionally rooted in its regional focus and community-centric operations, is now being recalibrated. While its Midwest portfolio still provides a stable base, offering cost efficiency and strong customer loyalty in less competitive areas, the company acknowledges that larger, urban-focused peers like Equity Residential (EQR), AvalonBay Communities (AVB), Essex Property Trust (ESS), and UDR Inc. (UDR) benefit from broader market reach and often higher valuations. The strategic move into the Mountain West, particularly Salt Lake City and Denver, aims to bridge this gap, allowing Centerspace to compete more directly in markets characterized by robust job growth, diverse economies, and greater institutional investor interest.

A key differentiator underpinning Centerspace's operational effectiveness, and crucial to its competitive standing, is its fully implemented technology stack. This isn't about a proprietary building material, but rather a sophisticated suite of operational technologies designed to drive efficiency and enhance the resident experience. The company has completed the implementation of its core technology stack, which, from an expense perspective, is now fully integrated. A significant value-add component is the "Smart Rent" implementation, which has been deployed in approximately 70% of the portfolio, with plans for additional properties in 2025. This technology aims to improve operational efficiencies, enhance resident convenience, and potentially contribute to higher retention rates. Furthermore, Centerspace has centralized certain property management functions, such as assistant community managers, into regional remote positions. This strategic use of technology and organizational restructuring is expected to yield a "true full year of savings from staffing model implementations" in the coming year, contributing to lower controllable expenses and improved profitability margins. This operational agility, driven by technology, allows Centerspace to maintain a competitive edge in managing its diverse portfolio and integrating new acquisitions efficiently.

Financial Performance and Strategic Execution

Centerspace's recent financial performance underscores its operational strength and the early impacts of its strategic transformation. For the second quarter ended June 30, 2025, the company reported robust same-store portfolio results, with revenues increasing by 2.7% year-over-year, driving a 2.9% year-over-year growth in NOI. This NOI expansion was fueled by a 60 basis point increase in occupancy and a 2.1% rise in average monthly revenue per occupied home. Overall, total revenue for the quarter reached $68.5 million, a 5.4% increase from Q2 2024.

The first quarter of 2025 also demonstrated strong operational execution, with same-store revenues increasing by 3.5% year-over-year, benefiting from a 120 basis point improvement in weighted average occupancy to 95.8%. While expense growth was observed, primarily due to challenging prior-year property tax comps and increased assessments in some jurisdictions like Denver, overall expenses remained in line with expectations due to offsetting savings from controllable areas. Full-year 2024 results further highlight this consistency, with same-store revenue growth of 3.3% and Core FFO of $4.88 per share, exceeding initial guidance by 2.75%.

The capital recycling strategy, while strategically beneficial, did introduce some short-term financial impacts. In Q2 2025, Centerspace recorded a $14.5 million impairment charge related to five apartment communities reclassified as held for sale. This GAAP-based charge, excluded from non-GAAP metrics like FFO, reflects the company's commitment to repositioning its portfolio. The planned dispositions of 12 communities in Minnesota (5 in St. Cloud, 7 in Minneapolis) are expected to reduce Minneapolis NOI exposure by 300 basis points, while recent acquisitions like Sugarmont in Salt Lake City and Railway Flats in Loveland, CO, are projected to improve portfolio quality, increasing pro forma average portfolio rent by $50 versus Q1 2025 levels and boosting year-one NOI margins on acquisitions to 65-70% (compared to low 50% for disposition communities).

Liquidity and balance sheet management remain central to Centerspace's strategy. As of June 30, 2025, total liquidity stood at approximately $206.3 million, including $194 million available on lines of credit. The company proactively expanded its Unsecured Credit Facility by $150 million to $400 million in May 2025 to fund recent acquisitions, with plans to pay down the facility as dispositions close. Pro forma for recent transactions, the debt profile is well-laddered, with a weighted average rate of 3.6% and a weighted average time to maturity of 7.3 years. Centerspace aims to reduce its net debt to EBITDA to the low to mid 7x level by year-end 2025, with a long-term target of the 5x range, achieved through a combination of excess sale proceeds and organic growth.

Outlook and Strategic Trajectory

Centerspace's updated full-year 2025 guidance reflects its strategic direction and operational confidence. The company anticipates Core FFO per diluted share to be between $4.88 and $5.00, with the midpoint lowered by $0.04 due to the expected impact of capital recycling activities. Despite this short-term dilution, the midpoint of $4.94 per share still represents a 1.2% increase over the prior year, signaling continued earnings growth. Same-store NOI growth is projected to be between 2.5% and 3.5%, with a midpoint of 3%, a 70 basis point increase from previous expectations, driven by a maintained revenue growth midpoint of 2.5% and anticipated 1-2.5% same-store expense growth.

The outlook for key markets is nuanced. While Denver continues to face challenges from record recent supply, leading to delayed expectations for pricing power, management remains optimistic, anticipating a supply drop-off and a pickup in job growth into 2026-2027 to create future tailwinds. Conversely, Midwest markets like North Dakota, Omaha, and Minneapolis are expected to continue their strong performance, benefiting from low new supply and healthy regional economies. Overall, the company expects to sustain its occupancy momentum, projecting an average occupancy of around 95% for the full year, despite current levels being higher.

Capital expenditures for 2025 include $16-18 million for value-add initiatives and $1,150 per unit for recurring CapEx. Value-add spending has been tempered due to softer market rents and a higher cost of capital, reflecting a disciplined approach to investment. The company's commitment to ESG is also evident, with the recent publication of its sixth annual ESG Report and inaugural TCFD report, highlighting its focus on sustainable business practices.

Competitive Landscape and Differentiated Approach

Centerspace operates in a competitive multifamily REIT landscape, where it differentiates itself through a unique blend of regional focus, operational excellence, and a strategic pivot towards institutional markets. Compared to larger, more diversified peers like Equity Residential (EQR) and AvalonBay (AVB), which command premium pricing in high-demand urban and coastal markets, Centerspace has historically focused on more affordable, community-oriented housing in the Midwest. This has allowed for potentially lower operating costs and stronger local customer loyalty, particularly in markets like North Dakota and Omaha, which consistently deliver strong rent growth due to limited new supply.

However, this regional concentration also presents vulnerabilities. Smaller markets, while stable, can be more susceptible to localized economic shifts or a modest influx of new supply, as seen with the rationale behind the St. Cloud dispositions. The company's move into Salt Lake City and expansion in Colorado directly addresses this, aiming to capture the robust economic growth and higher liquidity of institutional markets. While recent acquisitions in these areas carry higher unlevered cap rates (e.g., Sugarmont at 4.65-4.7%, Railway Flats at 4.8%), they are strategically chosen for their long-term growth potential and the ability to leverage existing operational platforms for synergies. The assumption of attractive long-term debt, as with Railway Flats, further enhances the accretive profile of these acquisitions.

The current market environment, characterized by interest rate volatility and a bid-ask spread, has muted transaction volumes across the industry. However, Centerspace is actively pursuing opportunities, including off-market acquisitions and operating partnership (OP) unit transactions, to advance its strategic plan. The company's ability to issue OP units at a premium to its stock price, as demonstrated with The Lydian acquisition, highlights its creative financing capabilities. This strategic nimbleness, combined with a focus on operational efficiencies driven by technology and centralized management, positions Centerspace to compete effectively. While it may not match the sheer scale or innovation speed of some larger rivals, its disciplined capital allocation and resident-centric approach provide a distinct competitive edge in its chosen markets.

Conclusion

Centerspace is in the midst of a compelling strategic transformation, evolving from a stable, Midwest-focused operator to a growth-oriented multifamily REIT with increasing exposure to institutional markets. This deliberate capital recycling, marked by recent acquisitions in the Mountain West and planned dispositions in the Midwest, is designed to enhance portfolio quality, improve NOI margins, and drive long-term shareholder value. The company's consistent operational excellence, underpinned by a robust technology stack and disciplined expense management, provides a solid foundation for this pivot.

Despite short-term earnings dilution from the transition, Centerspace projects continued earnings growth in 2025, supported by strong occupancy and a favorable debt profile. The current disconnect between its public market valuation and private market transaction cap rates presents a significant opportunity, which management is actively addressing through strategic capital allocation. For investors, Centerspace offers a unique blend of a stable, income-generating core, coupled with a clear and actionable strategy to unlock growth and improve its competitive standing within the dynamic multifamily sector. The successful execution of this portfolio transformation, alongside sustained operational outperformance and prudent balance sheet management, will be key to realizing its full potential.