Business Context and Reporting Period
Investors Real Estate Trust (IRET; identified in the request metadata as Centerspace) filed this unaudited Form 10-Q for the three months ended March 31, 2020. IRET is a REIT focused on owning, managing, acquiring, developing, and redeveloping multifamily apartment communities. At quarter-end, it owned interests in 70 communities containing 12,135 apartment homes.
Financial Performance and Position
- Revenue: $44.4 million, down 2.6% from $45.6 million in the prior-year quarter. Rental revenue represented approximately 98.4% of total revenue.
- Net operating income: $25.5 million versus $25.6 million; NOI margin was approximately 57.4%, compared with 56.1% in the prior-year quarter.
- Operating income: $2.0 million versus $1.5 million; operating margin was approximately 4.5% versus 3.2%.
- Net loss: $7.7 million versus a $6.0 million loss. Net loss available to common shareholders was $8.4 million, or $0.69 per basic share and $0.67 per diluted share, compared with a $6.4 million loss, or $0.54 per share, in the prior-year quarter.
- FFO: FFO applicable to common shares and units was $8.7 million, or $0.66 per diluted share and unit, down from $10.1 million, or $0.77, in the prior-year quarter.
- Cash flow: Operating cash flow was $6.2 million, compared with $6.3 million. Investing cash flow was negative $31.9 million, while financing cash flow was positive $8.3 million. Cash, cash equivalents, and restricted cash declined to $28.7 million from $46.1 million at December 31, 2019.
- Assets and equity: Total assets were $1.389 billion versus $1.392 billion at year-end 2019. Total equity was $639.7 million versus $679.9 million.
- Debt: Total debt was $683.0 million, up from $651.5 million, including $83.0 million drawn on revolving lines, $145.0 million of term loans, $125.0 million of unsecured senior notes, and approximately $330.0 million of mortgage debt. The weighted-average interest rate was 4.01% on mortgages and 3.18% on revolving lines after swaps.
- Liquidity: Management reported approximately $193.3 million of liquidity at quarter-end, consisting of $26.3 million of cash and $167.0 million of additional borrowing availability under the unsecured line of credit.
- Occupancy: Total weighted-average occupancy was 95.2%, compared with 95.5% in the prior-year quarter; same-store occupancy was 95.4% versus 95.6%.
Material Changes Versus the Prior Comparable Period
- Revenue declined primarily because of prior dispositions and other properties, partially offset by 3.9% same-store revenue growth and additional non-same-store revenue.
- Same-store NOI increased 3.8% to $22.6 million, but consolidated NOI declined slightly because of dispositions and portfolio mix.
- Interest expense decreased 12.5% to $6.9 million because of lower-rate replacement debt and lower average revolving-line balances.
- Interest and other income shifted from $424,000 of income to $2.8 million of loss, primarily because of a $3.6 million decline in the value of marketable securities.
- General and administrative expense decreased 9.9% to $3.4 million, and casualty losses declined from $641,000 to $327,000.
- IRET acquired the 182-home Ironwood Apartments in New Hope, Minnesota, for $46.3 million, funded with $28.6 million of cash and $17.7 million through payoff of a note receivable. It also acquired the remaining 47.4% noncontrolling interest in 71 France for $12.2 million.
- The company issued approximately 50,000 common shares under its ATM program for $3.4 million net and repurchased 136,380 Series C preferred shares for $3.1 million.
- IRET declared common distributions of $0.70 per share and unit, Series C preferred distributions of $0.4140625 per share, and Series D preferred distributions of $0.9655 per unit.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that COVID-19 had not materially affected first-quarter results because most restrictions began during the second half of March. However, it expects the pandemic to adversely affect financial condition, results, and cash flows for the foreseeable future and could not quantify the impact on second-quarter 2020 rental revenue.
- COVID-19 measures included closing common amenity areas, enhanced cleaning, limiting nonessential unit-entry maintenance, virtual leasing, rent deadline extensions, fee waivers, suspended eviction filings, rent-deferment plans, and flexible lease renewals.
- To preserve liquidity, IRET halted or delayed selected capital projects, suspended certain value-add initiatives, reduced travel, and reviewed capital spending for deferral opportunities.
- Management estimated approximately $9.5 million of debt maturities remained in 2020 and approximately $35.8 million in 2021. It also expected to fund approximately $38.4 million over roughly the next 15 months under construction and mezzanine loans.
- Although management reported compliance with debt covenants at March 31, 2020, COVID-19 could reduce borrowing-base capacity, impair covenant compliance, restrict lender funding, increase leverage, or limit access to debt and equity markets.
- Interest-rate swaps had a fair value liability of $17.4 million, compared with $7.6 million at December 31, 2019. Approximately $4.0 million was expected to be reclassified from accumulated other comprehensive income into interest expense over the following 12 months.
- No impairment charges were recorded, no dispositions occurred during the quarter, and management reported no material pending litigation or material environmental violations known at quarter-end.
Important Facts for Investors to Verify
- Verify the company identity: the filing names Investors Real Estate Trust, while the request metadata references Centerspace.
- Monitor post-quarter rent collections, occupancy, concessions, bad debt, eviction activity, and renewal rates as COVID-19 effects were expected to emerge after March 31, 2020.
- Assess liquidity against debt maturities, required construction-loan funding, distributions, capital expenditures, and potential reductions in revolving-credit availability.
- Review the $683.0 million debt balance, covenant requirements, borrowing-base tests, interest-rate swap exposure, and refinancing needs.
- Reconcile GAAP net losses with FFO and evaluate the effect of marketable-security losses and other nonrecurring items on recurring operating performance.
- Verify whether the $0.70 common distribution remained sustainable given negative GAAP earnings, reduced liquidity, and potential COVID-19-related cash-flow pressure.