Business context and reporting period
Investors Real Estate Trust (IRET), a self-advised equity REIT operating through IRET Properties, owns and operates multifamily residential and commercial real estate, primarily in Minnesota and North Dakota. The filing is a Form 10-K for the fiscal year ended April 30, 2013; it is not a calendar fourth-quarter filing, despite the request metadata referencing 2012 Q4.
At April 30, 2013, the portfolio included 87 multifamily properties with 10,280 apartment units and 182 commercial properties totaling approximately 12.4 million square feet. Minnesota and North Dakota generated 69.5% of fiscal 2013 gross revenue.
Financial performance and key metrics
| Metric | Fiscal 2013 | Fiscal 2012 | Change |
|---|---|---|---|
| Total revenue | $259.4 million | $239.1 million | +8.5% |
| Net operating income | $161.4 million | $142.0 million | +13.7% |
| NOI margin | 62.2% | 59.4% | +280 bps |
| Operating income | $85.1 million | $73.0 million | +16.5% |
| Income from continuing operations | $23.0 million | $9.8 million | +135.2% |
| Net income | $30.0 million | $9.7 million | +208.8% |
| Net income available to common shareholders | $16.3 million | $5.8 million | +179.1% |
| Net income per common share | $0.17 | $0.07 | + $0.10 |
| FFO applicable to common shares and units | $78.9 million | $67.3 million | +17.2% |
| Net cash provided by operating activities | $77.7 million | $65.1 million | +19.3% |
Revenue growth was driven mainly by acquisitions and development projects placed in service, higher multifamily occupancy and rents, and increased stabilized-property performance. Multifamily revenue increased 25.2% to $90.8 million, while commercial office revenue increased 3.8% to $77.2 million. Commercial healthcare revenue declined 3.9% to $62.0 million, largely because of a restructuring of the assisted-living portfolio.
All-property occupancy was 94.6% for multifamily, 80.2% for office, 94.7% for healthcare, 96.8% for industrial and 86.5% for retail. Stabilized commercial occupancy increased to 88.2% from 87.1%.
Total assets were $1.89 billion, including $1.68 billion of real estate investments. Shareholders’ equity attributable to IRET was $612.8 million, compared with $433.0 million at April 30, 2012.
Debt, liquidity and capital allocation
- Mortgage debt was $1.049 billion, with a weighted-average interest rate of 5.55%; approximately 97.5% was fixed-rate debt.
- The debt-to-real-estate-investments ratio was 64.1%; debt-to-Net-Assets under the company’s bylaw calculation was 91.0%.
- Mortgage principal due in fiscal 2014 was $64.9 million, representing approximately 6.2% of mortgage debt. Total principal and interest payments on fixed- and variable-rate mortgages due in fiscal 2014 were approximately $122.1 million.
- The secured revolving credit facility had $60.0 million of commitments and $10.0 million outstanding at year-end. It matures August 12, 2014 and bears interest at the Wall Street Journal Prime Rate plus 1.25%, subject to a 5.15% floor and 8.65% cap. Management reported compliance with covenants.
- Cash and cash equivalents increased to $94.1 million from $40.0 million.
- Investing activities used $134.1 million, including $76.0 million for acquisitions, $57.6 million for development and redevelopment, and $26.3 million for improvements.
- Fiscal 2013 capital expenditures, tenant improvements and other capital expenditures totaled approximately $36.4 million; estimated fiscal 2014 capital expenditures excluding tenant improvements were $23.9 million.
- Common distributions were $0.52 per share for fiscal 2013, down from $0.5615 in fiscal 2012. The company paid $46.8 million in cash distributions and issued $12.4 million of common shares through its DRIP.
Material changes versus the prior comparable period
- The company added approximately 1,394 apartment units through acquisitions and development, sold 267 apartment units, and ended the year with a net addition of approximately 1,127 units.
- Real estate investments increased to $1.68 billion from $1.56 billion, while total assets increased 10.2% to $1.89 billion.
- IRET issued 4.6 million Series B preferred shares for net proceeds of approximately $111.2 million at a 7.95% annual distribution rate. A portion of the proceeds repaid $34.5 million of line-of-credit borrowings.
- IRET completed an offering of approximately 6.0 million common shares at $9.25 per share, generating approximately $53.0 million of net proceeds.
- Mortgage debt remained broadly stable, while line-of-credit borrowings declined from $39.0 million to $10.0 million.
- Discontinued operations generated $7.0 million of income in fiscal 2013 versus a $57,000 loss in fiscal 2012, principally reflecting gains on property dispositions. Fiscal 2013 gains on property sales were $6.9 million.
- The company recognized a $5.1 million gain on involuntary conversion related to flood and fire insurance proceeds and recorded a $305,000 real estate impairment charge.
Guidance, outlook, risks and unusual items
Management expected continued favorable multifamily operating performance in fiscal 2014, supported by high occupancy, rent increases and demand in the Bakken Shale region. It also expected multifamily development activity to increase competitive pressure. Office-market recovery was described as challenged by elevated unemployment, slow absorption and tenant downsizing. Healthcare fundamentals were viewed as stable, while industrial and selected retail markets showed signs of improvement.
IRET planned selective dispositions of non-core industrial and retail assets, with proceeds intended for deleveraging and investment in multifamily and healthcare properties. Subsequent to year-end, it sold five properties for aggregate proceeds of approximately $21.8 million and had entered into agreements for additional acquisitions and dispositions, all subject to closing conditions.
- Key risks include high leverage, refinancing requirements, interest-rate increases, property vacancies, tenant credit deterioration and commercial lease expirations.
- Approximately 16.2% of leased commercial square footage was scheduled to expire in fiscal 2014, with 14.3% of annualized commercial base rent subject to expiration.
- Approximately 1.4 million commercial square feet was vacant, and 551 apartment units were vacant at April 30, 2013.
- The company depends significantly on Fannie Mae and Freddie Mac for multifamily financing and warned that changes to their roles could increase borrowing costs or reduce financing availability.
- Approximately 25.4% of the net real estate investment portfolio consisted of healthcare properties, exposing IRET to healthcare reimbursement, regulation and operator risks.
- The company had no material pending legal proceedings and reported no significant off-balance-sheet arrangements. Environmental contamination, uninsured losses and regulatory compliance remain contingencies.
- Development commitments included River Ridge, Cypress Court, Southgate, Renaissance Heights and Arcata projects; total anticipated project costs for listed projects were approximately $187.9 million, subject to execution and market risks.
Most important facts for an investor to verify
- Whether fiscal 2013 FFO and operating cash flow adequately support common and preferred distributions after recurring capital needs.
- The timing and refinancing terms for the $64.9 million of mortgage principal due in fiscal 2014 and the August 2014 maturity of the $60.0 million credit facility.
- Commercial office occupancy, lease expirations and renewal rents, particularly given the 80.2% office occupancy rate.
- Whether Bakken-region demand and rent growth persist as substantial multifamily development is completed.
- The effect of the 7.95% Series B preferred shares and other equity issuance on common-shareholder cash flow and dilution.
- The completion, financing and lease-up of the company’s development pipeline and the status of pending property dispositions.
- The sustainability of reported earnings after excluding the $6.9 million of disposition gains and $5.1 million of involuntary-conversion gains.