Centerspace: Midwestern Apartments At A Discount

Core Thesis - Centerspace (CSR) is a Midwest-focused apartment REIT trading at a discount compared to peers, with a market cap of approximately $1 billion and lower AFFO multiples and NAV [1][22]. Group 1: Financial Performance and Growth Prospects - CSR's markets have experienced less new supply, allowing for continued growth in AFFO/share for 2024 and 2025, while the broader sector remains flat or slightly down [2]. - The stock is trading at less than 80$4.21 for 2025 and $4.42 for 2026, reflecting strong growth [12][14]. Group 2: Acquisition Strategy - CSR employs a clever acquisition strategy, recently acquiring the Lydian, a 129-unit apartment building in Denver for$54 million, financed through debt assumption and OP unit issuance [5][6]. - The acquisition was structured to be accretive from day one, with a low cap rate typical for newly built properties in growth markets [5][10]. - The OP unit issuance allowed CSR to issue equity above market price, providing tax benefits to the seller and enhancing the company's capital structure [7][8]. Group 3: Market Position and Valuation - CSR has historically traded at a discount to peers, currently at 14.9X AFFO compared to the sector median of 18.7X, indicating potential for valuation improvement [22][24]. - The company has made significant improvements in size and leverage, with a market cap of $1.06 billion and healthy EBITDA coverage of interest expenses [24][25]. - CSR's portfolio is now primarily in major markets like Minneapolis and Denver, reducing the historical discount associated with smaller, less recognized markets [28][29]. Group 4: Regional Market Dynamics - Midwestern apartments are less volatile compared to coastal or sunbelt markets, with CSR's markets currently outperforming peers in same-store NOI growth [11][14]. - Despite facing a rental rate surge in 2021-2022, CSR's markets are expected to show better growth rates in the near term, benefiting from lower vacancy rates and rising rental rates [14][19]. - The company has a lower rent-to-tenant income ratio of 23.1%, suggesting room for significant rent growth [20].