Business Context and Reporting Period
The filing is Investors Real Estate Trust’s unaudited Form 10-Q for the three months ended July 31, 2016, the first quarter of fiscal 2017. The request metadata identifies Centerspace, but the filing names Investors Real Estate Trust (IRET); this issuer discrepancy should be verified.
IRET is a self-advised REIT focused primarily on multifamily and healthcare real estate in the Upper Midwest. At July 31, 2016, it held for investment 100 multifamily properties with 13,012 apartment units, 31 healthcare properties and 16 other properties. It also held 35 healthcare properties, one multifamily property and two land parcels for sale.
Key Financial Metrics
| Metric | Q1 FY2017 | Q1 FY2016 | Change |
|---|---|---|---|
| Total revenue | $49.6 million | $45.0 million | +10.1% |
| Net operating income | $28.0 million | $26.7 million | +4.6% |
| Operating income (loss) | $(43.9) million | $11.4 million | Down $55.3 million |
| Net income (loss) | $(40.6) million | $4.7 million | Down $45.3 million |
| Net loss available to common shareholders | $(24.5) million | $1.7 million | Down $26.2 million |
| Basic and diluted loss per common share | $(0.20) | $0.01 | Declined $0.21 |
| FFO applicable to common shares and units | $15.9 million | $22.0 million | Down 27.7% |
| Cash flow from operating activities | $15.8 million | $24.8 million | Down $9.0 million |
Revenue growth primarily reflected properties acquired or placed in service during fiscal 2016. Same-store revenue declined 2.5%, while same-store NOI declined 9.9%. NOI was $20.2 million for multifamily, $7.3 million for healthcare and $2.3 million for other properties.
Reported net loss was substantially affected by $54.2 million of real estate impairment charges, compared with $1.3 million in the prior-year quarter. The filing does not provide a consolidated GAAP operating margin; reported NOI margin was approximately 56.4% of total revenue, but NOI is a non-GAAP measure.
Balance Sheet, Debt and Liquidity
- Total assets were $1.69 billion at July 31, 2016, down from $1.76 billion at April 30, 2016.
- Cash and cash equivalents were $54.4 million, compared with $66.7 million at April 30, 2016.
- Mortgage debt, including debt associated with properties held for sale, was approximately $884.4 million, with a weighted-average interest rate of 4.54%.
- Approximately 76.4% of mortgage debt was fixed-rate; variable-rate mortgage debt was approximately $249.2 million. A 1% increase in rates on $208.6 million of variable-rate mortgage debt would increase annual interest expense by approximately $2.1 million.
- The secured revolving credit facility had $100.0 million of commitments, $17.5 million outstanding, a 4.75% interest rate and a $17.5 million minimum balance requirement. Management stated that the company was in covenant compliance.
- Total liabilities were $1.03 billion. Mortgage maturities over the next 12 months totaled approximately $64.2 million, of which management expected to refinance $31.7 million and repay $1.8 million in the second and third fiscal quarters.
- Net cash used in financing activities was $25.6 million, primarily reflecting debt repayments and distributions. The company paid $15.7 million of common distributions and $2.9 million of preferred distributions.
- The common distribution remained $0.13 per share. The board subsequently declared a $0.13 quarterly common distribution payable October 3, 2016.
Material Changes Versus the Prior Comparable Period
- Revenue increased $4.6 million, but property operating expenses increased 19.0%, depreciation and amortization increased 27.2%, and interest expense increased 32.6%.
- Same-store multifamily occupancy decreased to 93.0% from 95.1%; all-property multifamily occupancy decreased to 90.4% from 91.2%.
- Same-store healthcare occupancy decreased to 92.7% from 95.8%; all-property healthcare occupancy decreased to 88.7% from 89.3%.
- Williston, North Dakota experienced high vacancies, rent concessions, poor leasing activity and declining rents because of energy-market weakness. Four Williston assets generated $54.2 million of impairment charges.
- The company placed the 241-unit 71 France multifamily project in Edina, Minnesota, into service at a total project cost of approximately $72.2 million. It also sold one commercial property and one parcel of land for $13.7 million, generating an $9.0 million gain.
- Discontinued operations generated $3.7 million of income versus $0.7 million in the prior-year quarter, reflecting the ongoing exit from office, retail and senior housing operations.
- IRET adopted accounting guidance affecting consolidation and the presentation of debt issuance costs. The filing states that these changes did not materially alter recognized operating results or financial position, except for reclassification of approximately $4.5 million of debt issuance costs.
Outlook, Risks, Contingencies and Unusual Items
Management described investment demand, credit availability and general real estate fundamentals as favorable, but identified energy-impacted markets, rent and occupancy pressure, increased multifamily competition, tenant credit quality and refinancing availability as principal risks. Management expected to refinance debt maturing during the following 12 months without significant issues, while cautioning that lenders were applying conservative underwriting standards.
- Development and placed-in-service projects had anticipated total costs of approximately $105.1 million, with $99.6 million incurred by July 31, 2016. The Monticello Crossing project was expected to be completed in the third quarter of fiscal 2017.
- The company was committed to fund $5.3 million of tenant improvements over approximately the next 12 months.
- Eight senior housing properties and a parcel of land were subject to a $43.5 million pending disposition. Subsequent to quarter-end, agreements were signed to sell 26 senior housing properties for approximately $236.0 million, subject to closing conditions.
- Subsequent to quarter-end, the company agreed to purchase the remaining 41.41% interest in the Red 20 property for $4.9 million and signed an agreement to acquire a planned 150-unit multifamily property with retail space for $47.6 million, subject to conditions.
- The company had a joint venture arrangement under which a partner could compel it to acquire the partner’s interest during the period from February 6, 2016 through February 5, 2020. The estimated redeemable interest was $7.5 million.
- Management reported no material litigation, mortgage defaults or material compliance issues. Disclosure controls and procedures were deemed effective.
Investor Verification Checklist
- Verify the issuer identity: the supplied metadata says Centerspace, while the filing identifies Investors Real Estate Trust and reports fiscal 2017 results.
- Assess whether the $54.2 million impairment charge, particularly the Williston exposure, signals additional valuation or covenant risk.
- Reconcile cash flow available for distributions with the $0.13 common distribution and preferred distribution obligations.
- Review the timing and refinancing terms for approximately $64.2 million of mortgage maturities over the next 12 months.
- Evaluate occupancy, rent concessions and same-store NOI trends in multifamily markets, especially North Dakota.
- Confirm whether the announced senior housing dispositions, Red 20 acquisition and Minneapolis-area multifamily acquisition closed on the proposed terms.