Business Context and Reporting Period
The filing identifies the registrant as Investors Real Estate Trust (IRET), not Centerspace. It is an unaudited Form 10-Q for the quarter and six months ended October 31, 2012, representing the second quarter of fiscal 2013. IRET is a self-advised REIT owning and leasing multifamily and commercial properties, primarily in North Dakota and Minnesota. At quarter-end, it owned 85 multifamily properties with 9,934 units and 182 commercial properties totaling approximately 12.3 million rentable square feet.
Financial Performance and Condition
| Metric | Three months ended October 31, 2012 | Six months ended October 31, 2012 |
|---|---|---|
| Total revenue | $64.9 million | $126.9 million |
| Net operating income | $42.4 million | $79.5 million |
| Net income | $10.0 million | $12.0 million |
| Net income attributable to IRET | $8.5 million | $10.2 million |
| Net income available to common shareholders | $5.6 million | $6.7 million |
| FFO applicable to common shares and units | $20.7 million | $38.3 million |
| Net cash provided by operating activities | Not separately provided | $35.0 million |
Revenue increased 7.9% year over year in the quarter and 6.3% for the six-month period. NOI margins were approximately 65.3% for the quarter and 62.7% for the six months. Net income margins were approximately 15.4% and 9.5%, respectively. FFO increased 36.2% in the quarter and 23.4% for the six months.
Cash and cash equivalents were $84.3 million at October 31, 2012, compared with $40.0 million at April 30, 2012. Operating cash flow was $35.0 million, investing cash flow was negative $75.6 million, and financing cash flow was positive $84.9 million. Capital investment in acquisitions and real estate improvements totaled $81.8 million.
Mortgage debt was $1.045 billion and the revolving line of credit balance was $10.0 million. Mortgage debt carried a weighted-average interest rate of 5.66%, with approximately 97.7% at fixed rates. The revolving credit facility had $60.0 million of commitments, a 5.15% interest rate and $10.0 million outstanding. Management reported no defaults or material compliance issues and believed the applicable covenants were satisfied.
Total assets were $1.819 billion and total equity was $692.5 million at October 31, 2012. Common shares outstanding were 93.2 million, compared with 89.5 million at April 30, 2012. The common distribution was $0.13 per share for the quarter.
Material Changes Versus the Prior Comparable Period
- Quarterly revenue increased $4.7 million, or 7.9%; six-month revenue increased $7.6 million, or 6.3%.
- Quarterly NOI increased $7.7 million, or 22.3%; six-month NOI increased $10.4 million, or 15.0%.
- Net income attributable to IRET increased 562.4% for the quarter and 276.6% for the six months.
- Net income available to common shareholders increased from $0.7 million to $5.6 million for the quarter and from $1.5 million to $6.7 million for the six months.
- Growth was driven primarily by acquisitions and development placed in service, improved multifamily performance, lower property-management costs and higher retail occupancy. The quarter also benefited from a $2.3 million gain from insurance proceeds related to the Chateau Apartments fire.
- Commercial medical revenue declined 9.1% for the quarter and 8.4% for the six months, primarily because of the prior restructuring of the Wyoming assisted-living portfolio. Associated property expenses also declined.
- Physical occupancy at October 31, 2012 was 94.6% for multifamily, 78.4% for office, 95.2% for medical, 90.7% for industrial and 88.3% for retail.
- The company issued 4.6 million Series B preferred shares for net proceeds of approximately $111.2 million. Approximately $79.0 million had been applied to debt repayment by quarter-end. The Series B shares carry a 7.95% annual distribution rate.
Outlook, Risks, Contingencies and Unusual Items
Management stated that existing cash, operating cash flow, refinancing, credit facilities, equity issuance and property dispositions were expected to support operating needs, distributions, capital improvements, development and acquisitions. However, management cautioned that conservative commercial real estate underwriting could limit cash-out refinancing and financing availability.
- Debt maturities, refinancing availability and potential changes to Freddie Mac and Fannie Mae multifamily lending policies are significant liquidity risks.
- Approximately $28.8 million of mortgage debt was scheduled to mature during the following twelve months, based on the filing’s maturity disclosures.
- The company was committed to fund approximately $9.0 million of tenant improvements within approximately 12 months.
- Development projects included River Ridge Apartments in Bismarck, Cypress Court in St. Cloud, a Jamestown medical office building and other projects. Estimated remaining costs and completion dates are subject to execution and market risks.
- Insurance claims related to the Minot flood and Chateau fire remained subject to final settlement. IRET expected to rebuild the destroyed Chateau building but had no firm cost estimate or completion date.
- Four condominium units and one multifamily property were classified as held for sale. Discontinued operations included gains on property dispositions.
- Management reported no material litigation, no defaults upon senior securities and no material weaknesses in disclosure controls.
- Interest-rate risk remains relevant for variable-rate debt and future refinancing; a one-percentage-point increase on $23.5 million of variable-rate mortgage debt would increase annual interest expense by approximately $235,000.
Subsequent events included a planned transfer of the common and Series A preferred shares from NASDAQ to the NYSE, the November 27, 2012 sale of Candlelight Apartments, and pending acquisitions with an aggregate stated purchase price of approximately $39.8 million, subject to closing conditions.
Most Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Investors Real Estate Trust, while the request metadata names Centerspace.
- Reconcile reported FFO and NOI to GAAP net income and review the company’s non-GAAP definitions.
- Assess the sustainability of earnings excluding the $2.3 million insurance-related gain and gains from discontinued operations.
- Review debt maturities, refinancing assumptions, credit-facility covenants and the fair-value premium of fixed-rate mortgages over carrying value.
- Evaluate occupancy and lease exposure, especially the 78.4% office occupancy and the concentration of Edgewood Vista affiliates at 13.2% of commercial minimum rents.
- Verify the status, remaining costs and expected returns of active development projects and pending acquisitions.
- Review the Series B preferred issuance, its 7.95% distribution obligation and the resulting impact on common-shareholder cash flow.