Centerspace, a real estate investment trust (REIT) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities, has established itself as a premier provider of apartment homes and vibrant communities in the Midwest and Mountain West regions of the United States. With a portfolio of 70 apartment communities consisting of 12,880 apartment homes as of September 30, 2024, Centerspace has demonstrated its ability to navigate the challenges of the multifamily market and deliver consistent earnings growth for its investors.
Business Overview and History
Centerspace was founded in 1971 as Investors Real Estate Trust, a North Dakota-based REIT. Initially focusing on investing in and managing apartment communities in North Dakota and the surrounding Midwest region, the company steadily grew its portfolio over the years. Centerspace expanded its geographic footprint to include the Mountain West region, acquiring properties in Colorado and Montana. This diversification strategy helped mitigate risks and capitalize on growth opportunities in new markets.
The company faced a significant challenge in 2015 when a decline in oil prices impacted the North Dakota economy and put pressure on Centerspace's portfolio. In response, the company shifted its strategy to focus more on high-growth, diversified markets, making strategic acquisitions in areas like Minneapolis and Denver while selectively disposing of properties in more volatile regions. This repositioning of the portfolio helped Centerspace weather the storm and emerge as a stronger, more resilient real estate company.
Throughout its history, Centerspace has maintained a strong commitment to financial discipline and a robust balance sheet. The company has accessed capital markets judiciously, using equity and debt financing to fund growth and manage liabilities. Centerspace has also consistently paid quarterly dividends to its shareholders, demonstrating its commitment to providing stable returns.
In 2019, the company rebranded from Investors Real Estate Trust to Centerspace, reflecting its focus on building and maintaining vibrant apartment communities that cater to the needs of its residents. This rebranding marked a new chapter in the company's evolution, emphasizing its commitment to operational excellence, capital allocation, and risk management.
In March 2023, Centerspace entered into a separation agreement with former CEO Mark Decker Jr., incurring $3.2 million in severance and transition-related costs. This change in leadership marked a significant event in the company's recent history.
Financials and Liquidity Financial Snapshot
As of September 30, 2024, Centerspace reported total assets of $1.89 billion, with a net debt to total capitalization ratio of 0.66. The company's liquidity position remains strong, with $235.5 million in total liquidity, including $221 million available on its unsecured lines of credit and $14.5 million in cash and cash equivalents.
For the fiscal year 2023, Centerspace reported revenue of $261.31 million, net income of $41.97 million, and operating cash flow of $89.52 million. In the third quarter of 2024, the company reported revenue of $65.03 million, representing a 0.7% increase compared to Q3 2023. This growth was driven by higher same-store and non-same-store revenue, offset by decreased revenue from dispositions. However, net income decreased from $9.17 million in Q3 2023 to a loss of $888,000 in Q3 2024, primarily due to increased expenses, lower gain on sale of real estate, and the redemption of the Series C preferred shares.
Centerspace's debt-to-equity ratio stood at 1.26x as of September 30, 2024, with $14.45 million in cash and a $250 million unsecured revolving credit facility, of which $211 million was available. The company's current ratio and quick ratio were both 0.43x.
In the third quarter of 2024, Centerspace reported core funds from operations (Core FFO) of $1.18 per diluted share, driven by a 2.8% year-over-year increase in same-store net operating income (NOI). The company's same-store revenue grew by 3% during the quarter, while same-store expenses increased by 3.2%, primarily due to higher non-controllable expenses such as insurance premiums and real estate taxes.
For the nine months ended September 30, 2024, Centerspace reported NOI of $117.66 million, up 1.0% compared to the same period in 2023. FFO applicable to common shares and units was $61.75 million, an increase of 8.0% compared to the same period in 2023. Core FFO applicable to common shares and units was $66.82 million, up 3.5% year-over-year.
Operational Highlights Occupancy and Resident Satisfaction
Centerspace's focus on maintaining high occupancy levels and resident satisfaction has been a key driver of its success. In the third quarter of 2024, the company's same-store weighted average occupancy rate was 95.3%, a 70 basis point improvement year-over-year. Resident retention also remained elevated at over 58% for the quarter, further bolstering the company's blended leasing spreads during the seasonally slower months. For the nine months ended September 30, 2024, the weighted average occupancy for same-store apartment communities was 95.1%, compared to 94.9% for the same period in 2023.
Market Performance
The company's largest market, Minneapolis, has continued to perform well, with Centerspace recognizing 1.2% blended rent increases in the third quarter. The Minneapolis market, once again ranked among the strongest absorption markets nationally, has benefited from lower supply and a favorable demand environment. Centerspace's other key markets, including North Dakota and Nebraska, also delivered strong results, with blended rent increases of 5.4% and 3.3%, respectively.
Centerspace's operations are primarily focused in the Midwest and Mountain West regions of the United States, with the largest markets being Minneapolis, Minnesota and Denver, Colorado. These two markets account for over 33% of the company's NOI.
Acquisition and Disposition Activity
In October 2024, Centerspace completed the acquisition of The Lydian, a 129-home apartment community in Denver, Colorado, that also includes 23,000 square feet of fully leased office and street-level retail space. The acquisition was funded through the assumption of attractive long-term mortgage debt and the issuance of common operating partnership units, aligning the transaction with Centerspace's strategic priorities.
During the first nine months of 2024, Centerspace disposed of two apartment communities located in Minnesota for an aggregate sales price of $19 million. The company has remained disciplined in its approach to portfolio management, selectively divesting assets to fund growth opportunities that align with its long-term strategic objectives.
Guidance and Outlook
Centerspace has updated its full-year 2024 guidance, raising the midpoint of its core FFO guidance by $0.01 to $4.86 per share. While the company's revenue growth expectations have been slightly lowered due to softer-than-expected market rents, Centerspace has been able to offset this through expense control initiatives and operational efficiencies.
The company is maintaining the midpoint of year-over-year same-store NOI growth guidance at 3.5%. However, Centerspace has lowered its expectations for both revenue growth and expense growth. Same-store revenues are now projected to increase 3% to 3.5% for the year, down from previous expectations. Same-store expenses are now projected to increase by 2.5% to 3.25%, lower than previous expectations.
G&A and property management expenses for the year are expected to range between $26.5 million to $27 million. Interest expense is expected to range between $37.3 million to $37.6 million, primarily driven by the debt assumed in the Lydian acquisition.
Looking ahead, the company remains well-positioned to capitalize on growth opportunities in its target markets. The Midwest and Mountain West regions continue to demonstrate robust demand for apartment homes, with Centerspace benefiting from lower supply levels and a favorable macroeconomic environment.
Risks and Challenges
As with any real estate investment trust, Centerspace faces various risks and challenges, including exposure to changes in economic conditions, interest rate fluctuations, and competition from other multifamily operators. The company also remains susceptible to regulatory changes, such as potential modifications to rent control laws or housing policies, which could impact its operating environment.
Additionally, Centerspace's concentration in the Midwest and Mountain West regions, while a strength, also exposes the company to potential regional economic downturns or natural disasters that could adversely affect its portfolio. The company's ability to effectively manage its development and redevelopment pipeline, as well as its capital deployment strategies, will also be critical to its long-term success.
The multifamily REIT sector has seen strong demand and occupancy levels in recent years, driven by favorable demographics and limited new supply in many of Centerspace's core markets. However, the industry is facing headwinds from rising interest rates and inflationary pressures impacting operating costs, which could pose challenges for Centerspace and its peers in the coming years.
Conclusion
Centerspace has established itself as a leading player in the Midwest and Mountain West apartment markets, leveraging its expertise in operations, acquisitions, and portfolio management to deliver consistent earnings growth for its investors. With a strong balance sheet, a focus on maintaining high occupancy and resident satisfaction, and a strategic approach to portfolio optimization, Centerspace appears well-positioned to continue its trajectory of sustainable growth in the years ahead.
The company's recent financial performance, including the increase in core FFO and same-store NOI, demonstrates its ability to navigate challenging market conditions. While Centerspace has slightly lowered its revenue growth expectations for 2024, its proactive approach to expense management and operational efficiencies should help maintain its financial stability and growth trajectory.
As Centerspace continues to execute its strategy of focusing on high-growth markets and optimizing its portfolio, investors should closely monitor the company's ability to maintain its occupancy rates, control expenses, and capitalize on acquisition opportunities. With its strong market position and disciplined approach to capital allocation, Centerspace remains an attractive investment option for those seeking exposure to the multifamily real estate sector in the Midwest and Mountain West regions.