Executive Summary / Key Takeaways

• Centerspace is executing a deliberate portfolio transformation, shifting towards higher-growth institutional markets in the Mountain West while divesting from smaller, lower-growth Midwest assets.
• Operational excellence, evidenced by strong same-store Net Operating Income (NOI) growth, high occupancy, and effective expense control, underpins this strategic repositioning.
• The company's technological adoption, including SmartRent and Ratio Utility Billing System (RUBS), enhances efficiency and resident satisfaction, contributing to its competitive moat.
• Despite near-term earnings dilution from capital recycling and market-specific headwinds in Denver, the long-term outlook is positive, driven by improved portfolio quality, enhanced growth prospects, and a strengthened balance sheet.
• A significant valuation disconnect between public and private market asset values, coupled with a recent Board review of strategic alternatives, highlights potential for shareholder value realization.

Centerspace's Foundation and Strategic Imperative

Centerspace, a real estate investment trust (REIT) founded in 1970, has a long history of providing apartment homes in the Midwest and Mountain West regions, consistently paying quarterly distributions since 1971. The company's core business revolves around the ownership, management, acquisition, redevelopment, and development of apartment communities, with a primary objective to deliver "great homes" and maximize resident satisfaction and retention through high-quality assets and resident-centered operations. As of September 30, 2025, Centerspace owned interests in 68 apartment communities, totaling 12,941 apartment homes.

The multifamily sector currently exhibits resilient demand, with new supply additions trending downward. Over the next 12 months, apartment stock in Centerspace's markets is expected to expand by only 2.2%, a decrease from 3.8% in the prior year, which compares favorably to historical absorption levels. Despite this positive backdrop, capital markets have experienced real-time volatility, muting transaction velocity due to persistent interest rate fluctuations and a notable bid-ask spread.

Within this landscape, Centerspace positions itself as a regionally focused player, emphasizing community-oriented strategies. While it possesses strengths in operational execution and resident focus, it generally lags larger, national competitors like Equity Residential (EQR) and AvalonBay Communities (AVB) in terms of scale, innovation, and overall financial robustness. Centerspace competes more directly with regional peers such as Mid-America Apartment Communities (MAA) in its core markets. Its competitive advantages stem from a strong regional brand, community integrity, and resident loyalty, which translate into higher retention rates, stable revenue streams, and efficient operations. However, its limited geographic diversity and reliance on regional economies present vulnerabilities, impacting scalability and potentially exposing it to revenue volatility during economic downturns.

Technological Differentiation and Operational Edge

Centerspace leverages technology to enhance its operational efficiency and resident experience, forming a crucial part of its competitive strategy. The company has implemented SmartRent technology, which includes the installation of leak detectors and keyless entries across its portfolio. This initiative is designed to drive operating expense reductions and enhance the overall value of its properties. While specific quantifiable savings from SmartRent were not detailed, the strategic intent is clear: to utilize technology for cost efficiency and property management.

Furthermore, Centerspace has fully deployed its Ratio Utility Billing System (RUBS) wherever feasible across its portfolio. This system helps manage utility costs by passing them on to residents, contributing to revenue stability. The company has observed that RUBS has helped revenue per home growth outpace rent growth, directly impacting Net Operating Income (NOI) and supporting profitability. However, upcoming legislation in Colorado, effective January 1, 2026, will limit the company's ability to pass on RUBS directly to tenants, which may cause some disruption in that market.

Beyond property-level technologies, Centerspace demonstrates a strong commitment to resident satisfaction, which is a key operational differentiator. The company has achieved continuous improvement in its online review scores, reaching its highest point in company history during the second quarter of 2025. This includes a 16% increase in five-star reviews and a 5.3% increase in overall resident satisfaction. These efforts directly contribute to an "outstanding same-store resident retention rate of 56.6% for the year" in 2024 and "60% in both of our peak leasing quarters" in 2025.

For investors, these technological adoptions and operational focus create a competitive moat by enhancing the resident experience, reducing operational costs, and stabilizing revenue. This directly supports NOI growth and long-term value creation, particularly as the company navigates its strategic portfolio shifts.

A History of Strategic Evolution

Centerspace has embarked on a calculated portfolio transformation to unlock value and enhance its long-term growth trajectory. This strategic evolution began in late 2023 with the acquisition of Lake Vista in Fort Collins, which was funded by the disposition of several communities in North Dakota and Minneapolis. This move aimed to improve the portfolio's operational efficiency and margins. In 2024, the company continued this path by acquiring The Lydian in Denver through an off-market transaction, utilizing operating partnership (OP) units and assuming attractive debt. Centerspace also strengthened its balance sheet by issuing stock under its at-the-market (ATM) program, raising approximately $114 million, and redeeming its Series C preferred shares.

The capital recycling efforts accelerated in 2025. Centerspace entered the Salt Lake City market with the $149 million acquisition of Sugarmont in May 2025, and expanded its presence in the Boulder and Fort Collins market with the $132 million acquisition of Railway Flats in Loveland, Colorado, in July 2025. The Railway Flats acquisition included the assumption of $76 million in HUD debt at a favorable 3.26% interest rate. To fund these acquisitions and reduce leverage, Centerspace completed the disposition of five communities in St. Cloud, Minnesota, for $124 million in September 2025, marking its exit from that market. This sale was executed at a "mid-6% cap rate well inside of the mid-7% implied portfolio cap rate our stock trades at today." The company also anticipated closing the sale of seven additional communities in Minneapolis in the fourth quarter of 2025 for $88.1 million, expected to price at a "high 5% cap rate, again, well inside the implied portfolio cap rate we trade at today."

These strategic moves are a deliberate effort to "improve portfolio metrics, increase exposure to institutional markets and enhancing the overall growth profile" . The dispositions are expected to reduce Minneapolis NOI exposure by 300 basis points, enhance portfolio quality with higher average rents, and boost portfolio margins, with year-one NOI margins on acquisitions projected to be between 65% and 70%, significantly higher than the disposition communities' low 50%.

Financial Performance and Operational Strength

Centerspace's recent financial performance reflects its strategic repositioning and operational discipline. For the third quarter ended September 30, 2025, the company reported a robust 4.5% year-over-year growth in same-store NOI, driven by a 2.4% increase in same-store revenues. Notably, same-store property operating expenses, including real estate taxes, decreased by 0.8% year-over-year in Q3 2025, primarily due to a reduction in non-controllable expenses, which offset increases in controllable expenses. Net income available to common shareholders for Q3 2025 was $53.8 million, a significant turnaround from a net loss of $6.2 million in Q3 2024, largely attributable to a $79.5 million gain on the sale of real estate and other investments. Funds From Operations (FFO) applicable to common shares and Units for Q3 2025 increased by 24.7% year-over-year to $23.3 million, with Core FFO per diluted share at $1.19.

On a trailing twelve-month (TTM) basis, Centerspace reported annual revenue of $260.98 million. The company's profitability metrics include a gross profit margin of 56.70% and an EBITDA margin of 45.34%. While the TTM net profit margin was -7.56%, this reflects non-cash items and the impact of strategic dispositions. Annual operating cash flow stood at $98.25 million, with free cash flow per share at $8.20.

Centerspace maintains a disciplined approach to liquidity and balance sheet management. As of September 30, 2025, total liquidity was approximately $200.4 million, comprising $187.5 million available on its revolving lines of credit and $12.9 million in cash and cash equivalents. The Unsecured Credit Facility, expanded to $400 million in May 2025, had $222.5 million outstanding, leaving $177.5 million available. This facility matures in July 2028. The company's mortgage debt, excluding its Fannie Mae Credit Facility, totaled $455.9 million across 13 communities, carrying a weighted average interest rate of 3.87%. Centerspace expects its net debt to EBITDA to reach a "low 7x level by year-end 2025," with a long-term goal to reduce leverage "ideally... into the 5s." The pro forma debt profile, following recent transactions, boasts an average rate of 3.6% and an average time to maturity of 7.2 years. Demonstrating confidence in its valuation, Centerspace repurchased 63,000 common shares in Q3 2025 at an average price of $54.86 per share, under a $100 million share repurchase program authorized in July 2025.

Market Dynamics and Competitive Positioning

Centerspace's portfolio is strategically diversified across Midwest and Mountain West markets, each presenting unique dynamics.

Minneapolis: This market is showing strong signs of recovery, with robust absorption and decreasing supply. Blended lease increases were 2.1% in Q3 2025, and management expects Minneapolis to "outperform its historical" performance in 2026, potentially ranking among the "top 5 of U.S. markets for rent growth." Next 12-month deliveries are forecasted at a modest 1.4% of existing apartment stock.

Denver: The Denver portfolio continues to be challenged by significant supply pressures, resulting in Q3 2025 blended lease rates being down 3.5%. Concessions in the company's portfolio range from none to six weeks free, while the broader market can see up to two months free in some instances. Management anticipates demand will begin to outpace supply "in the back half of 2026 and that will certainly carry forward into 2027," leading to a return to a more normal environment. Next 12-month deliveries are forecasted at 2.5% of existing apartment stock.

North Dakota: This market remains a standout performer, with portfolio-leading blended increases of 5.2% in Q3 2025. Centerspace expects North Dakota to "continue to perform" strongly into 2026, benefiting from healthy regional economies and lower new supply.

Salt Lake City and Fort Collins: These are key target markets for Centerspace's expansion. The acquisition of Sugarmont in Salt Lake City was at a cap rate of 4.65%-4.7%, while Railway Flats in Loveland, Colorado, was acquired at an unlevered 4.8% cap rate. Fort Collins has demonstrated "outperformance in annual rent growth, absorption and vacancy when compared to Metro Denver fundamentals."

The company's capital recycling strategy directly addresses a significant valuation disconnect. The St. Cloud disposition at a "mid-6% cap rate well inside of the mid-7% implied portfolio cap rate our stock trades at today" and the Minneapolis sale at a "high 5% cap rate, again, well inside the implied portfolio cap rate we trade at today" underscore management's belief that its public market valuation does not fully reflect the private market value of its assets. Institutional quality assets in Denver and Minneapolis are currently pricing at mid-to-high 4% and low 5% cap rates, respectively, which is "favorable private market pricing compared to that implied by our stock price." This disconnect is a primary driver behind the strategic shift towards institutional markets, aiming to enhance investor visibility and valuation.

Outlook, Guidance, and Risks

Centerspace's outlook for 2025 reflects a blend of strategic adjustments and market realities. The company has updated its full-year 2025 Core FFO guidance to a range of $4.88 to $4.96 per diluted share, with a midpoint of $4.92. This adjustment is primarily "due to timing adjustments related to our planned strategic transactions and associated G&A costs." Centerspace anticipates full-year 2025 same-store NOI growth of 3% to 3.5%, driven by same-store revenue growth of 2% to 2.5% (a reduction mainly due to concessionary activity in Denver) and same-store expense growth of only 75 basis points. The "earn-in" for 2026 is currently "just a shade above 1%," reflecting the ongoing weakness in Denver.

Key risks to the investment thesis include the company's market concentration in Minneapolis and Denver, which exposes it to localized supply pressures and economic shifts. Inflation and supply chain challenges could lead to operating costs increasing faster than rent growth, potentially impacting residents' ability to absorb rent increases. Rising interest rates pose a risk to borrowing costs for variable rate debt and future refinancing activities. Specifically, the new Colorado legislation, effective January 1, 2026, limiting the ability to pass on RUBS directly to tenants, could cause "disruption" in the Denver market. Furthermore, the muted transaction velocity in the broader market, driven by interest rate volatility and the bid-ask spread, could extend the timeline for Centerspace's capital recycling initiatives.

Conclusion

Centerspace is executing a calculated portfolio evolution, strategically shifting its asset base towards higher-growth, institutional markets in the Mountain West while divesting from smaller, lower-growth Midwest properties. This transformation is a direct response to a persistent valuation disconnect between its public market trading and the underlying private market value of its assets, aiming to enhance long-term growth and investor recognition. The company's operational strengths, underpinned by technological adoptions like SmartRent and RUBS, provide a stable foundation, driving consistent same-store NOI growth and high resident retention.

While this capital recycling strategy introduces some near-term earnings dilution and the Denver market faces ongoing supply pressures, Centerspace is positioning itself for a stronger, more diversified, and higher-quality portfolio. The Board's recent review of strategic alternatives underscores a firm commitment to maximizing shareholder value. Investors should closely monitor the continued execution of the capital recycling program, the anticipated recovery in the Denver market, and the sustained outperformance of Minneapolis, as these factors will be critical in bridging the valuation gap and realizing the full potential of Centerspace's evolving portfolio.