Business Context and Reporting Period
Company: Investors Real Estate Trust (IRET), operating as a North Dakota Real Estate Investment Trust (REIT).
Reporting Period: Second Quarter of Fiscal 2003, ended October 31, 2002 (unaudited).
Business Overview: IRET acquires and owns residential apartment communities and commercial properties, primarily in North Dakota and Minnesota. As of October 31, 2002, the portfolio consisted of 65 apartment communities (8,347 units) and 74 commercial buildings (5.1 million sq. ft.). The company conducts operations through its operating partnership, IRET Properties.
Key Financial Metrics
| Metric | Three Months Ended Oct 31, 2002 |
Six Months Ended Oct 31, 2002 |
Six Months Ended Oct 31, 2001 |
|---|---|---|---|
| Total Revenue | $30,432,693 | $57,972,334 | $44,955,135 |
| Net Income | $3,068,222 | $5,996,223 | $5,721,643 |
| Net Income Per Share | $0.10 | $0.19 | $0.24 |
| Funds From Operations (FFO) | $8,826,234 | $16,899,096 | $14,191,926 |
| FFO Per Share | $0.21 | $0.41 | $0.44 |
| Cash and Marketable Securities | $17,395,029 | $17,395,029 | $22,833,426 (Apr 30, 2002) |
| Total Assets | $799,287,865 | $799,287,865 | $730,209,018 (Apr 30, 2002) |
| Total Liabilities | $523,564,320 | $523,564,320 | $495,351,764 (Apr 30, 2002) |
| Mortgages Payable | $498,501,196 | $498,501,196 | $459,568,905 (Apr 30, 2002) |
| Weighted Avg Interest Rate | 7.41% | 7.41% | N/A |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 31% ($7.26M) for the quarter and 29% ($13.02M) for the six-month period compared to the prior year. This was driven primarily by acquisitions of 19 properties in 2002 and 6 properties in Fiscal 2003.
- Net Income vs. EPS: While Net Income increased 4.2% for the quarter and 4.8% for the six months, Net Income Per Share (EPS) declined from $0.12 to $0.10 (quarter) and $0.24 to $0.19 (six months). Management attributes this dilution to a large balance of uninvested cash and marketable securities ($17.4M) earning low returns (~1.5%) and an increase in minority partnership units.
- Expense Increases: Operating expenses rose significantly due to new acquisitions and market conditions:
- Real Estate Taxes: +57.6% (quarter) / +48.8% (six months).
- Maintenance: +58.8% (quarter) / +52.3% (six months).
- Utilities: +76.3% (quarter) / +49.9% (six months).
- Insurance: +75.1% (quarter) / +64.5% (six months).
- Vacancy Rates: Same-store vacancy increased across the portfolio. Residential vacancy rose to 6.4% (quarter) and 6.9% (six months). Commercial vacancy rose to 4.6% (quarter) and 4.9% (six months).
- Acquisitions: Acquired 8 commercial properties and 2 apartment complexes totaling approximately $78.2 million during the six-month period.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects to invest the majority of uninvested cash into real estate over the next six months to eliminate EPS dilution, though no assurance is given due to market conditions. Occupancy levels are not expected to improve during the remainder of Fiscal 2003 due to poor economic conditions.
- Dividends: A dividend of $0.157 per share was declared on November 13, 2002, payable January 17, 2003. The company intends to distribute approximately 70% of FFO.
- Risks and Contingencies:
- Terrorism Insurance: Current policies exclude acts of terrorism. The company is evaluating the financial impact of new federal legislation requiring reinstatement of coverage for an additional premium.
- Environmental Liability: Potential liability for hazardous substances on current or former properties; no insurance is carried for environmental liabilities.
- Tenant Concentration: Conseco Finance Service Corp. leases a facility in Rapid City, SD. If Conseco defaults, the estimated financial impact is $1.19 million per year.
- Southdale Medical Center: Increased vacancy at this property prevented full recovery of tax, maintenance, and utility costs passed through to tenants.
- Unusual Items:
- Subsequent Sale: Entered into an agreement to sell the "America's Best Warehouse" in Boise, ID, for $3.35 million, resulting in an estimated loss of $315,226.
- Expansion Commitments: Committed to provide $5 million equity for a Southdale Medical Center expansion and $5 million for an Edgewood Vista Senior Living expansion.
Investor Verification Checklist
- Uninvested Cash Deployment: Verify the timeline and success of deploying the $17.4 million cash balance into income-producing real estate to reverse EPS dilution.
- Vacancy Trends: Monitor same-store vacancy rates, particularly at the Southdale Medical Center, to assess the ability to recover operating costs from tenants.
- Insurance Costs: Confirm the final premium costs associated with reinstating terrorism coverage under new federal legislation.
- Conseco Lease Status: Track the financial health of Conseco Finance Service Corp. to assess the risk of the $1.19 million annual revenue exposure.
- Acquisition Pipeline: Review the status of pending acquisitions (e.g., Westgate Center, Plaza 7 Office Center) and the associated financing terms.