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BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES | 6 Months Ended
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Jun. 30, 2024
Accounting Policies [Abstract] |
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES | BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION Centerspace conducts a majority of its business activities through a consolidated operating partnership, Centerspace, LP, a North Dakota limited partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities. The accompanying Condensed Consolidated Financial Statements include the Company’s accounts and the accounts of all its subsidiaries in which it maintains a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation. The Condensed Consolidated Financial Statements also reflect the Operating Partnership’s ownership of a joint venture entity in which the Operating Partnership has a general partner or controlling interest. This entity is consolidated into the Company’s operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses. UNAUDITED INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS Centerspace’s unaudited interim Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments necessary for the fair presentation of financial position, results of operations, and cash flows for the interim periods, have been included. The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim Condensed Consolidated Financial Statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2023, as filed with the SEC on February 20, 2024. USE OF ESTIMATES The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. RECLASSIFICATIONS Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. These reclassifications had no impact on net income (loss) as reported in the Condensed Consolidated Statements of Operations, total assets, liabilities or equity as reported in the Condensed Consolidated Balance Sheets and the classifications within the Condensed Consolidated Statements of Cash Flows. Centerspace reclassified certain items within the disaggregated revenue table included in Note 2. CASH, CASH EQUIVALENTS, AND RESTRICTED CASH Cash and cash equivalents include all cash and highly liquid investments purchased with maturities of three months or less. Cash and cash equivalents consist of bank deposits and deposits in a money market mutual fund. The Company is potentially exposed to credit risk for cash deposited with FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. Although past bank failures have increased the risk of loss in such accounts, the Company has not experienced any losses in such accounts. As of June 30, 2024 and December 31, 2023, restricted cash consisted of $1.1 million and $639,000, respectively, in escrows held by lenders. Escrows include funds deposited with a lender for payment of real estate taxes and insurance and reserves to be used for replacement of structural elements and mechanical equipment at certain communities. The funds are under the control of the lender. Disbursements are made after supplying written documentation to the lender. LEASES As a lessor, Centerspace primarily leases multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. For the three months ended June 30, 2024 and 2023, rental income represented approximately 98.3% and 98.1% of total revenues, respectively, and included gross market rent less adjustments for gain or loss to lease, concessions, vacancy loss, and bad debt. For the three months ended June 30, 2024 and 2023, other property revenues represented the remaining 1.7% and 1.9% of total revenues, respectively, and were primarily driven by other fee income, which is typically recognized when earned, at a point in time. For the six months ended June 30, 2024 and 2023, rental income represented approximately 98.2% and 98.1% of total revenues, respectively. For the six months ended June 30, 2024 and 2023, other property revenues represented the remaining 1.8% and 1.9% of total revenues, respectively. Some of the Company’s apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms. Many of the leases contain non-lease components for utility reimbursement from residents and common area maintenance from commercial tenants. Centerspace has elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842. The aggregate amount of future scheduled lease income on commercial operating leases, excluding any variable lease income and non-lease components, as of June 30, 2024, was as follows:
|  | (in thousands)
2024 (remainder) |  | $ | 952 |
2025 |  | 1,989 |
2026 |  | 1,857 |
2027 |  | 1,575 |
2028 |  | 1,192 |
Thereafter |  | 6,433 |
Total scheduled lease income - commercial operating leases |  | $ | 13,998 |
REVENUES AND GAINS ON SALE OF REAL ESTATE Revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the Company expects to be entitled for those goods and services. Revenue streams that are included in revenues from contracts with customers include other property revenues such as application fees and other miscellaneous items. Centerspace recognizes revenue, for rental related items not included as a component of a lease, as earned. The following table presents the disaggregation of revenue streams for the three and six months ended June 30, 2024 and 2023:
|  |  | (in thousands)
|  |  | Three Months Ended June 30, |  | Six Months Ended June 30,
Revenue Stream | Applicable Standard |  | 2024 | 2023 |  | 2024 | 2023
Fixed lease income - operating leases | Leases |  | $ | 60,394 |  | $ | 60,528 |  |  | $ | 120,428 |  | $ | 123,701 |
Variable lease income - operating leases | Leases |  | 3,558 |  | 3,017 |  |  | 6,845 |  | 6,517 |
Other property revenue | Revenue from contracts with customers |  | 1,091 |  | 1,231 |  |  | 2,276 |  | 2,455 |
Total revenue |  |  | $ | 65,043 |  | $ | 64,776 |  |  | $ | 129,549 |  | $ | 132,673 |
In addition to lease income and other property revenue, the Company recognizes gains or losses on the sale of real estate when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. During the three months ended June 30, 2024, the Company did not recognize a gain or loss on the sale of real estate and other investments, compared to a loss of $67,000 during the three months ended June 30, 2023. During the six months ended June 30, 2024, the Company recognized a loss of $577,000 on the sale of real estate and other investments, compared to a gain of $60.1 million during the six months ended June 30, 2023. Any gain or loss on real estate dispositions is net of certain closing and other costs associated with the disposition. IN-PLACE LEASE AMORTIZATION The Company records in-place lease assets at the time of acquisition. The amortization periods reflects the average remaining term of in-place leases acquired, which are generally less than one year. During the three months ended June 30, 2024 and 2023, the Company recognized $37,000 and $49,000, respectively, of amortization expense related to intangibles. During the six months ended June 30, 2024 and 2023, the Company recognized $1.7 million and $893,000, respectively, of amortization expense related to intangibles, included within depreciation and amortization in the Condensed Consolidated Statements of Operations. MARKET CONCENTRATION RISK The Company is subject to increased exposure from economic and other competitive factors specific to markets where it holds a significant percentage of the carrying value of its real estate portfolio. As of June 30, 2024, Centerspace held more than 10% of the carrying value of its real estate portfolio in the Minneapolis, Minnesota and Denver, Colorado markets. IMPAIRMENT OF LONG-LIVED ASSETS The Company evaluates long-lived assets, including real estate investments, for impairment indicators at least quarterly. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each property, and legal and environmental concerns. If indicators exist, the Company compares the estimated 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 generally recorded for the difference between the estimated fair value and the carrying amount. If the anticipated holding period for properties, the estimated fair value of properties, or other factors change based on market conditions or otherwise, the evaluation of impairment charges may be different and such differences could be material to the consolidated financial statements. The evaluation of estimated 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 decreases the likelihood of recording impairment losses. During the three and six months ended June 30, 2024 and 2023, the Company recorded no impairment charges. VARIABLE INTEREST ENTITIES Centerspace has determined that its Operating Partnership and each of its less-than-wholly owned real estate partnerships are variable interest entities (each, a “VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. The Company is the primary beneficiary of the VIEs, and the VIEs are required to be consolidated on the balance sheet because the Company has a controlling financial interest in the VIEs and has both the power to direct the activities of the VIEs that most significantly impact the economic performance of the VIEs as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because the Operating Partnership is a VIE, all of the Company’s assets and liabilities are held through a VIE. REAL ESTATE RELATED NOTES RECEIVABLE The Company has a tax increment financing note receivable (“TIF”) with a principal balance of $5.4 million and $5.7 million at June 30, 2024 and December 31, 2023, respectively, which appears within other assets in the Condensed Consolidated Balance Sheets at fair value. The note bears an interest rate of 4.5% with payments due in February and August of each year. In 2023, the Company originated a $15.1 million mezzanine loan for the development of an apartment community located in Inver Grove Heights, Minnesota. The mezzanine loan bears interest at 10.0% per annum. As of June 30, 2024 and December 31, 2023, the Company had funded $14.7 million and $1.6 million of the mezzanine loan, respectively. The loan matures in December 2027 unless extended to December 2028 in accordance with the terms of the mezzanine loan agreement. The loan is secured by a pledge of and first priority security interest against 100% of the membership interests in the mezzanine borrower and the agreement provides the Company with an option to purchase the development at a discount to future appraised value. The loan represents an investment in an unconsolidated variable interest entity. The Company is not the primary beneficiary of the VIE as Centerspace does not have the power to direct the activities which most significantly impact the entity’s economic performance nor does Centerspace have significant influence over the entity. The note receivable appears within other assets in the Condensed Consolidated Balance Sheets at fair value. ADVERTISING COSTS Advertising costs are expensed as incurred and reported on the Condensed Consolidated Statements of Operations within the property operating expenses, excluding real estate taxes line item. During the three months ended June 30, 2024 and 2023, total advertising expense was $742,000 and $744,000, respectively. During the six months ended June 30, 2024 and 2023, total advertising expense was $1.5 million and $1.4 million, respectively. SEVERANCE AND TRANSITION On March 23, 2023, the Company entered into a Separation and General Release Agreement (the “Separation Agreement”) in connection with the departure of former CEO, Mark Decker, Jr. During the six months ended June 30, 2023, the Company incurred total severance costs of $2.2 million for the cash severance and benefits for Mr. Decker, $737,000 in share-based compensation expense for the acceleration of certain equity awards, and $306,000 in other CEO transition related expenses. INVOLUNTARY CONVERSION OF ASSETS During the three and six months ended June 30, 2024, Centerspace recognized $137,000 and $755,000, respectively, in additional casualty loss resulting from updated loss estimates from six separate insurance events at apartment communities. Any insurance funds received will be recognized when received in accordance with ASC 610-30. In April 2023, a portion of an apartment community was destroyed by fire. The Company recorded a write-down of the apartment community asset, in accordance with ASC 610-30 on involuntary conversion of non-monetary assets, totaling $1.3 million with an offsetting insurance receivable recorded within other assets on the Condensed Consolidated Balance Sheets. During the six months ended June 30, 2024, the claim was settled for $1.6 million, including remediation and other operating expenses.

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