CSR

Business Context and Reporting Period

Company: Investors Real Estate Trust (IRET), a North Dakota Real Estate Investment Trust (REIT).

Reporting Period: Third quarter and nine months ended January 31, 2002 (Fiscal Year 2002).

Operations: IRET acquires and owns residential apartment communities and commercial properties, primarily in North Dakota and Minnesota, with additional holdings in Colorado, Idaho, Iowa, Georgia, Kansas, Montana, Nebraska, South Dakota, Texas, Michigan, and Washington. As of January 31, 2002, the portfolio included 59 apartment communities (8,236 units) and 64 commercial buildings (3,123,849 sq. ft.).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 25.0% year-over-year, driven primarily by the acquisition of new properties. Real estate rental income rose 25.2%.
• Net Income: Net income increased 21.4% to $7.96 million. However, net income for the third quarter alone declined 3.7% compared to the prior year's third quarter due to a specific allocation of net income to limited partners of the operating partnership.
• Expense Increases: Total property expenses increased 21.4%. Notable increases included insurance costs (up 90.0% due to general premium hikes) and real estate taxes (up 26.5%).
• Portfolio Expansion: Real estate owned increased by approximately $68 million to $659.6 million. The company acquired seven properties totaling $59.2 million during the nine-month period.
• Liquidity: Cash on hand increased significantly from $6.4 million to $22.9 million, supported by proceeds from share sales, mortgage refinancing, and the sale of marketable securities.

Guidance, Outlook, Risks, and Unusual Items

• Insurance Risk: Management anticipates a substantial increase in insurance premiums for fiscal year 2003 following the September 11, 2001 attacks. While commercial tenants may absorb these costs, increased premiums for apartment communities could reduce net income if rental rates cannot be raised.
• Dividend Outlook: A dividend of $0.152 per share was declared on February 13, 2002, payable April 1, 2002.
• Market Listing: IRET has applied to list its shares on the National NASDAQ Market (up from the small-cap market), expecting the change to occur in the fourth quarter of fiscal 2002.
• Related Party Transaction: On January 30, 2002, the company issued a $3.5 million loan to Steven B. Hoyt, a member of the Board of Trustees, under a new UPREIT unit loan program.
• Accounting Changes: The company plans to adopt SFAS No. 142 (Goodwill and Other Intangible Assets) and SFAS No. 144 (Impairment of Long-Lived Assets) effective May 1, 2002. Management does not expect a material impact on financial position at adoption.
• Future Acquisitions: The company has contracts to acquire approximately $17 million in additional real estate, requiring $4.5 million in cash.

Investor Verification Checklist

• Insurance Cost Impact: Verify the magnitude of the expected insurance premium increase for fiscal 2003 and the ability to pass these costs to residential tenants.
• Debt Maturity Profile: Review the schedule of mortgage maturities; while no mortgages are due in the remainder of fiscal 2002, $7.4 million is due in fiscal 2003.
• Related Party Loan: Confirm the terms and repayment status of the $3.5 million loan to Board member Steven B. Hoyt.
• Acquisition Integration: Assess the lease-up rates and performance of the seven properties acquired in the current fiscal year, which drove the majority of revenue growth.
• FFO vs. Net Income: Note the divergence between Net Income and Funds from Operations (FFO), as FFO ($21.7M) is a more standard metric for REIT performance due to the exclusion of depreciation.