Business Context and Reporting Period
Company: Investors Real Estate Trust (IRET), a self-advised equity REIT focused on multi-family residential and commercial properties (office, medical, industrial, retail) primarily in the upper Midwest.
Reporting Period: Second Quarter of Fiscal Year 2010, ended October 31, 2009.
Portfolio Overview: As of October 31, 2009, the portfolio consisted of 77 multi-family properties (9,669 units) and 169 commercial properties (11.8 million square feet).
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2009 | Six Months Ended Oct 31, 2009 |
|---|---|---|
| Total Revenue | $59.6 million | $120.4 million |
| Net Operating Income (NOI) | $35.1 million | $71.5 million |
| Net Income (Consolidated) | $0.2 million | $2.8 million |
| Net Income Attributable to Common Shareholders | $(0.3) million (Loss) | $1.1 million |
| Funds From Operations (FFO) | $14.6 million | $31.1 million |
| Cash and Cash Equivalents | $102.7 million | $102.7 million |
| Total Debt (Mortgages + Revolving) | $1.067 billion | $1.067 billion |
| Weighted Average Interest Rate | 6.27% | 6.27% |
Material Changes vs. Prior Period
- Revenue: Total revenue was flat for the quarter ($59.6M vs $59.6M prior year) but increased 1.7% for the six-month period ($120.4M vs $118.4M). Increases were driven by acquisitions and lease termination fees, partially offset by higher economic vacancy.
- Net Income: Net income decreased significantly due to an $0.86 million impairment charge on two commercial properties (a former headquarters and a retail property) and increased operating expenses. Net income attributable to common shareholders turned to a loss of $0.3 million for the quarter compared to $1.9 million in the prior year.
- Occupancy: Economic occupancy rates declined across all segments. The Commercial Industrial segment saw the largest drop (88.1% vs 97.3% prior year) due to vacancy at a former Wilson's Leather facility.
- Equity Capitalization: The company raised significant capital through public offerings of 12.2 million common shares in the first half of fiscal 2010, generating approximately $96.9 million in proceeds (net of discounts).
- Liquidity: Cash and cash equivalents increased from $33.2 million at the start of the fiscal year to $102.7 million, driven by equity issuances and mortgage proceeds.
Outlook, Risks, and Management Commentary
- Economic Environment: Management cites continuing challenges in the real estate industry, including job losses, reduced demand for commercial space, and tenant cost-cutting measures. Credit market conditions remain tight.
- Tenant Risks:
- Smurfit-Stone Container: A top-10 tenant (1.5% of commercial rents) filed for Chapter 11 bankruptcy but has assumed leases and remains current on payments.
- Sunwest Management: Tenants at two senior housing projects (Fox River and Stevens Point, WI) filed for Chapter 11. IRET has written off or recorded as past due approximately $1.77 million related to these projects. IRET is evaluating options to market the properties to recover investment.
- Acquisitions and Dispositions:
- Acquired two properties in Q2 (Iowa industrial, North Dakota office) for $5.75 million.
- Subsequent to period end, signed agreements to acquire five senior housing facilities in Wyoming (~$45 million) and two multi-family properties in Minnesota (~$4.3 million).
- Marketing the 504-unit Dakota Hill property in Irving, Texas, for sale.
- Debt Maturities: Approximately $59.2 million of mortgage debt is due in the remainder of fiscal 2010. The company has obtained commitments to refinance approximately $11.0 million of this amount.
Key Facts for Investor Verification
- Impairment Charges: Verify the specific valuation assumptions used for the $0.86 million impairment charge on the Minot headquarters and Kentwood, Michigan retail property.
- Sunwest Bankruptcy Exposure: Monitor the status of the Fox River and Stevens Point projects, where the tenant is in bankruptcy and IRET has suspended collection efforts on guarantees.
- Refinancing Risk: Assess the ability to refinance the $59.2 million of debt maturing in the remainder of fiscal 2010, particularly given the reliance on Freddie Mac for multi-family debt.
- Occupancy Trends: Track the recovery of economic occupancy rates, specifically in the Commercial Industrial and Multi-Family segments which showed the most significant declines.
- Capital Deployment: Review the terms and due diligence status of the pending $45 million Wyoming senior housing acquisition and the $4.3 million Minnesota multi-family acquisition.