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.

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

The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim Condensed Consolidated Financial Statements and accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2022, as filed with the SEC on February 21, 2023.

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.


Standard	Description	Date of Adoption	Effect on the Financial Statements or Other Significant Matters
ASU 2022-06, Reference Rate Reform (Topic 848) - Deferral of the Sunset Date of Topic 848	This ASU extends the sunset date of Reference Rate Reform (Topic 848): Facilitation of Reference Rate Reform to December 31, 2024.	This ASU is effective immediately for all companies.	The ASU will not have a material impact on the Condensed Consolidated Financial Statements.

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 our bank deposits and our deposits in a money market mutual fund. As of September 30, 2023 restricted cash consisted primarily of net tax-deferred exchange proceeds remaining from a portion of our dispositions, real estate deposits, and escrows held by lenders. As of December 31, 2022, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions. We are potentially exposed to credit risk for cash deposited with FDIC-insured financial institutions in accounts which, at times, may exceed federally insured limits. Although recent bank failures have increased the risk of loss in such accounts, we have not experienced any losses in such accounts.

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 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 September 30, 2023 and 2022, rental income represented approximately 98.1% and 97.4% 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 September 30, 2023 and 2022, other property revenues represented the remaining 1.9% and 2.6% 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 nine months ended September 30, 2023 and 2022, rental income represented approximately 98.2% and 97.8% of total revenues, respectively. For the nine months ended September 30, 2023 and 2022, other property revenues represented the remaining 1.8% and 2.2% 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.

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


		(in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,
Revenue Stream	Applicable Standard	2023		2022		2023		2022
Fixed lease income - operating leases	Leases	$	60,324	$	60,851	$	184,256	$	176,911
Variable lease income - operating leases	Leases	3,006		2,905		9,523		7,728
Other property revenue	Revenue from contracts with customers	1,238		1,682		3,462		4,229
Total revenue		$	64,568	$	65,438	$	197,241	$	188,868

In addition to lease income and other property revenue, the Company recognizes gains or losses on the sale of real estate when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained control of the nonfinancial asset that was sold. For the three months ended September 30, 2023, the Company recognized $11.2 million as a gain on the sale of real estate and other investments. For the three months ended September 30, 2022, the Company did not recognize any gain on the sale of real estate and other investments. For the nine months ended September 30, 2023 and 2022, the Company recognized $71.3 million and $27,000, respectively, as a gain on the sale of real estate and other investments.

We are subject to increased exposure from economic and other competitive factors specific to markets where we hold a significant percentage of the carrying value of our real estate portfolio. As of September 30, 2023, we held more than 10% of the carrying value of our real estate portfolio in each of the following markets: Minneapolis, Minnesota and Denver, Colorado.

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

The Company has a tax increment financing note receivable (“TIF”) with a principal balance of $5.7 million and $6.1 million at September 30, 2023 and December 31, 2022, 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.

Centerspace originated a $29.9 million construction loan and a $15.3 million mezzanine loan for the development of a multifamily community located in Minneapolis, Minnesota. The construction and mezzanine loans bore and accrued interest at 4.5% and 11.5%, respectively. The Company exercised its option to purchase the apartment community in exchange for the loans and cash, during the nine months ended September 30, 2022. As of September 30, 2023 and December 31, 2022, the loans had no remaining balance.

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 September 30, 2023 and 2022, total advertising expense was $878,000 and $795,000, respectively. During the nine months ended September 30, 2023 and 2022, total advertising expense was $2.3 million and $2.4 million, respectively.

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 nine months ended September 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. Refer to Note 11 for additional information on the share-based compensation expense.

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 $1.0 million with an offsetting insurance receivable recorded within other assets on the Condensed Consolidated Balance Sheets. As of September 30, 2023, the estimated insurance claim was $1.3 million. Any amounts received in excess of the write-down will be recognized when received.

During the three months ended September 30, 2023, Centerspace recorded a $695,000 write-down to an apartment community asset as a result of extensive damage to the pool. Any insurance funds received will be recognized when received in accordance with ASC 610-30.

During the nine months ended, September 30, 2023, the Company recorded a loss on litigation settlement of $2.9 million due to a trial judgment entered against Centerspace on May 8, 2023 for property damage, resulting in monetary losses. Centerspace was the named defendant in a lawsuit where the owner of a neighboring property claimed a retaining wall at one of the Company’s properties was causing water damage to the neighboring property. Subsequent to September 30, 2023, the judgement was ordered and the Company paid the settlement of $2.9 million. The Company cannot, with any level of certainty, predict or estimate if there will be additional costs incurred as a result of the lawsuit.

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.