Business Context and Reporting Period
Investors Real Estate Trust (IRET), a self-advised REIT, owns and leases multifamily residential and commercial real estate, primarily in the Upper Midwest. The filing covers the three and nine months ended January 31, 2016, IRET’s third quarter of fiscal 2016. The request metadata identifies CenterSpace and “2015 Q3,” which does not match the registrant or reporting period shown in the filing.
At January 31, 2016, IRET held 94 multifamily properties with 12,401 apartment units and 83 commercial properties totaling approximately 4.5 million rentable square feet. Eight multifamily properties, one commercial property and one parcel of land were classified as held for sale.
Financial Performance and Key Metrics
| Metric | Three Months Ended January 31 | Nine Months Ended January 31 |
|---|---|---|
| Total revenue | $55.8 million, up 5.4% | $159.0 million, up 3.7% |
| Operating income | $16.4 million; approximately 29.5% margin | $41.4 million; approximately 26.0% margin |
| Income from continuing operations | $8.0 million | $14.7 million |
| Net income | $43.4 million | $64.8 million |
| Net income available to common shareholders | $36.9 million | $52.4 million |
| Basic and diluted earnings per common share | $0.30 | $0.42 |
| FFO applicable to common shares and units | $54.5 million, or $0.40 per share and unit | $84.7 million, or $0.61 per share and unit |
| Cash flow from operating activities | Not separately provided for the quarter | $46.9 million |
| Cash and cash equivalents | $47.1 million at January 31, 2016 |
Total NOI was $34.4 million for the quarter and $97.2 million for the nine-month period, representing approximately 62.9% and 62.3% of real estate revenue, respectively. Same-store NOI declined 0.3% for the quarter and 1.5% for the nine months.
Mortgage debt was $761.6 million, excluding $10.7 million related to assets held for sale. The revolving line of credit had $17.5 million outstanding against $100.0 million of commitments at 4.75%. Approximately 88.2% of mortgage debt was fixed rate, with a weighted average mortgage rate of approximately 4.80%. Total liabilities were $979.6 million and total equity was $708.9 million.
Common distributions were $0.13 per share for the quarter and $0.39 per share for the nine months. On March 8, 2016, the board declared another $0.13 common distribution.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from acquisitions and development projects placed in service. Real estate rentals rose 7.5% in the quarter and 5.1% for the nine months, while tenant reimbursements declined 14.0% and 11.0%, respectively.
- Operating income was essentially flat for the quarter and declined 1.4% for the nine months as higher depreciation, maintenance and property-management costs offset revenue growth.
- Net income and FFO increased sharply because of the strategic exit from office and retail properties. Discontinued operations contributed $35.4 million in the quarter and $50.2 million for the nine months, compared with $1.2 million and $1.3 million, respectively, in the prior periods.
- The January 2016 transfer of nine office properties to a mortgage lender extinguished $122.6 million of non-recourse debt and produced a $36.5 million gain on debt extinguishment.
- Operating cash flow declined from $80.8 million to $46.9 million for the nine months, while investing cash flow shifted to a $176.7 million inflow from a $160.2 million outflow, primarily because of property-sale proceeds.
- IRET repurchased approximately 4.6 million common shares for $35.0 million during the nine months, including 1.8 million shares for $13.1 million during the quarter.
- Property owned increased to $1.8 billion from $1.5 billion at April 30, 2015, while assets held for sale declined to $22.1 million from $463.1 million as the office and retail exit progressed.
Guidance, Outlook, Risks and Unusual Items
The filing does not provide formal quantitative earnings guidance. Management reported strong demand and generally favorable fundamentals in its markets, including stable or rising rents and strong commercial occupancy. Same-store multifamily occupancy increased to 94.9% from 94.5%, healthcare occupancy remained 95.8%, and industrial occupancy remained 100.0%.
Management identified weakness in oil-impacted Williston and Minot, North Dakota, where apartment vacancies and concessions increased. Same-store multifamily NOI declined 5.5% for the nine months, primarily because of higher vacancy, concessions, maintenance and property-management costs.
Development projects in progress had anticipated total costs of approximately $178.2 million, of which $157.0 million had been incurred. Projects were subject to completion, leasing, cost and financing contingencies. IRET also had a pending $72.5 million acquisition of four Rochester, Minnesota multifamily properties and pending dispositions with stated sales prices totaling approximately $30.0 million.
Management expected to refinance debt maturing during the next 12 months without significant issues, but cautioned that lenders remain conservative and that cash-out refinancing may be less available. A 1% increase in rates on $90.0 million of variable-rate mortgage debt would increase annual interest expense by approximately $900,000.
Other matters requiring attention include $4.5 million of committed tenant improvements, a joint-venture partner’s right to compel a purchase of its Southgate project interest during February 2016–February 2020, environmental and tenant-credit risks, and restrictions on taxable dispositions of approximately 78 properties.
Most Important Facts for Investors to Verify
- Confirm the registrant and period: the filing is for IRET’s fiscal third quarter ended January 31, 2016, not CenterSpace’s 2015 third quarter.
- Separate recurring operating performance from the $36.5 million debt-extinguishment gain and other discontinued-operation gains.
- Assess the sustainability of same-store multifamily NOI, particularly in Williston and Minot.
- Review the $761.6 million mortgage balance, upcoming maturities, refinancing assumptions and line-of-credit covenants.
- Evaluate funding needs and execution risk for the $178.2 million development pipeline and $4.5 million tenant-improvement commitment.
- Reconcile FFO and distributions with recurring cash flow; FFO is a non-GAAP measure and excludes significant unusual items.
- Monitor pending acquisitions, dispositions, the Nebraska Orthopaedic Hospital purchase option and the Southgate joint-venture redemption exposure.