Business Context and Reporting Period
Company: Investors Real Estate Trust (IRET)
Filing Type: Form 10-K (Annual Report)
Fiscal Year End: April 30, 2009
Business Overview: IRET is a self-advised equity REIT and UPREIT organized in North Dakota. It owns and operates income-producing real estate, primarily in Minnesota and North Dakota (68.5% of gross revenue). The portfolio consists of 77 multi-family residential properties (9,645 units) and 167 commercial properties (office, medical, industrial, and retail) totaling approximately 11.7 million square feet.
Key Financial Metrics
| Metric | Fiscal 2009 | Fiscal 2008 | Fiscal 2007 |
|---|---|---|---|
| Total Revenue | $240.0 million | $221.2 million | $197.5 million |
| Net Income | $8.5 million | $12.1 million | $14.1 million |
| Net Income Available to Common Shareholders | $6.2 million | $9.7 million | $11.7 million |
| Funds From Operations (FFO) | $64.6 million ($0.81/unit) | $64.2 million ($0.87/unit) | $57.0 million ($0.88/unit) |
| Net Operating Income (NOI) | $141.9 million | $133.8 million | $121.2 million |
| Total Real Estate Investments (Net) | $1.47 billion | $1.46 billion | $1.32 billion |
| Total Mortgages Payable | $1.07 billion | $1.06 billion | $951.1 million |
| Cash and Cash Equivalents | $33.2 million | $53.5 million | $44.5 million |
| Weighted Average Interest Rate (Mortgage Debt) | 6.30% | 6.37% | 6.43% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 8.5% to $240.0 million, driven primarily by the addition of new properties ($17.5 million) and rental increases on existing properties ($1.3 million).
- Net Income Decline: Net income available to common shareholders decreased 36% to $6.2 million. This decline was caused by increased interest expense ($5.3 million), higher depreciation/amortization ($4.6 million), and increased operating expenses (maintenance, utilities, taxes), which offset the growth in Net Operating Income.
- Occupancy Rates: Multi-family economic occupancy improved to 93.5% (from 92.7%). Commercial office occupancy declined to 89.1% (from 92.1%), while medical and industrial segments saw slight improvements.
- Acquisitions: Acquisition activity slowed significantly due to credit market conditions. IRET acquired properties totaling $33.8 million in 2009, compared to $154.7 million in 2008.
- Impairment: The company recorded an impairment charge of $338,000 related to its former Minot headquarters.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects continued uncertainty in credit markets and the general economy to limit acquisition and development opportunities in fiscal 2010. The company has shifted its financing strategy to include more equity sales to address financing needs. Despite market challenges, IRET believes it has sufficient liquidity to meet obligations and make distributions.
Risks and Contingencies
- Tenant Bankruptcies: Two significant medical properties (Fox River Cottages and Stevens Point) leased to affiliates of Sunwest Management, Inc., are facing tenant bankruptcy. IRET has written off approximately $1.4 million in receivables related to these projects. The Fox River project is currently receiving no payments.
- Geographic Concentration: 68.5% of revenue is derived from Minnesota and North Dakota, exposing the company to regional economic downturns.
- Debt Refinancing: Approximately 13.1% of mortgage debt ($140.5 million principal) is due in fiscal 2010. Tight credit markets may make refinancing difficult or costly.
- REIT Status: The company must distribute at least 90% of taxable income to maintain REIT status. Failure to do so would result in significant corporate taxation.
Unusual Items
Subsequent to the fiscal year end, IRET completed a public offering of 3 million common shares for net proceeds of approximately $24.8 million. Additionally, a pending acquisition of an Iowa office/warehouse building for $3.4 million was announced.
Investor Verification Checklist
- Tenant Solvency: Verify the status of the Sunwest Management bankruptcy proceedings and the likelihood of recovering value from the Fox River and Stevens Point properties.
- Debt Maturity Wall: Confirm the refinancing status of the $140.5 million in mortgage principal due in fiscal 2010 given current credit market conditions.
- Occupancy Trends: Monitor the commercial office segment, which saw a notable decline in economic occupancy (89.1%), to assess potential future rent concessions or vacancies.
- Capital Markets Access: Track the success of the ongoing continuous offering program and the ability to raise equity capital at favorable terms.
- FFO vs. Net Income: Note the divergence between stable FFO ($64.6M) and declining Net Income ($6.2M) due to non-cash depreciation and amortization charges.