Business Context and Reporting Period
The filing is Investors Real Estate Trust (IRET), not Centerspace, and covers the unaudited quarter ended July 31, 2012, the first quarter of fiscal 2013. IRET is a self-advised REIT owning and leasing multifamily and commercial properties, primarily in North Dakota and Minnesota. At July 31, 2012, the portfolio included 87 multifamily properties with 10,143 units and 182 commercial properties totaling approximately 12.3 million rentable square feet.
Key Financial Metrics
| Metric | Q1 FY2013 | Q1 FY2012 | Change |
|---|---|---|---|
| Total revenue | $62.4 million | $59.6 million | 4.8% |
| Net operating income | $37.3 million | $34.7 million | 7.6% |
| Income from continuing operations | $2.1 million | $1.6 million | 28.9% |
| Net income | $2.0 million | $1.6 million | 26.9% |
| Net income attributable to IRET | $1.7 million | $1.4 million | 18.2% |
| Net income available to common shareholders | $1.1 million | $0.8 million | 31.2% |
| FFO applicable to common shares and units | $17.6 million | $15.8 million | 11.2% |
| Cash flow from operating activities | $13.7 million | $10.3 million | 32.8% |
NOI margin was approximately 59.8% of revenue, compared with 58.3% in the prior-year quarter. Net income margin was approximately 3.2%. FFO was $0.16 per common share and operating-partnership unit in both periods. The common distribution was $0.1300 per share, versus $0.1715 in the prior-year quarter.
Balance Sheet, Debt and Liquidity
- Total assets were $1.77 billion at July 31, 2012, up from $1.71 billion at April 30, 2012.
- Cash and cash equivalents were $37.0 million, down from $40.0 million at April 30, 2012.
- Mortgages payable were $1.081 billion, up $32.0 million from April 30, 2012. The weighted-average mortgage rate was 5.72%, and approximately 98.5% of mortgage debt was fixed-rate.
- The revolving line of credit had a $60.0 million commitment and $44.5 million outstanding at quarter-end, with a 5.15% interest rate. Management stated that IRET was in compliance with its covenants.
- Total liabilities were $1.191 billion and total equity was $575.7 million.
- Debt maturities included approximately $42.0 million of mortgage principal during the remainder of fiscal 2013, $75.2 million in fiscal 2014, and $107.1 million in fiscal 2015.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by properties acquired or placed in service in fiscal 2012 and 2013, higher multifamily occupancy, increased straight-line rent, and lower tenant concessions.
- Multifamily revenue increased 23.8% to $21.6 million, while multifamily NOI increased 32.9% to $12.1 million. Stabilized multifamily occupancy rose to 93.5% from 91.5%.
- Commercial office NOI declined 5.3% to $9.3 million because expenses increased faster than revenue; occupancy was broadly stable at 78.8%.
- Commercial medical revenue declined 7.8%, primarily because of the restructuring of the Wyoming assisted-living portfolio, but medical NOI increased 1.3% to $11.2 million due to lower expenses.
- Commercial industrial occupancy declined to 90.0% from 94.7%, and NOI decreased 1.2%.
- Commercial retail NOI increased 2.3%, supported by improved occupancy and post-flood stabilization at the Arrowhead Shopping Center.
- Interest expense increased $0.6 million to $16.5 million, principally because of additional debt associated with acquired and developed properties.
- Investing cash outflows increased substantially to $54.4 million, including $55.3 million for acquisitions and real estate improvements. Financing activities provided $37.7 million, compared with a $2.3 million use of cash in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
- Management did not provide quantitative earnings guidance. It stated that operating cash flow, existing cash, refinancing, credit facilities, equity issuance and property sales were expected to support liquidity needs, but noted that deterioration in property performance could require reduced development, capital spending or distributions.
- Management cited conservative commercial real estate underwriting, refinancing risk, interest-rate exposure, tenant demand and occupancy risk, and potential changes to Fannie Mae and Freddie Mac multifamily lending programs.
- IRET acquired three multifamily properties for approximately $52.4 million, adding 748 units, and placed 232 development units in service during the quarter. Quarry Ridge was 50.0% leased and Williston Garden was 98.6% leased at quarter-end.
- IRET sold two condominium units and a retail property for $955,000, recognizing a $73,000 loss included in discontinued operations.
- The Minot flood and subsequent Chateau Apartments fire remained significant contingencies. IRET expected final settlement of related insurance claims in the second quarter of fiscal 2013 and expected to rebuild the destroyed building, but had no firm cost or completion estimate.
- IRET had approximately $6.6 million of tenant-improvement commitments expected to be funded within approximately 12 months. Development and renovation projects also involved substantial remaining expenditures.
- Subsequent to quarter-end, IRET issued 4.6 million Series B preferred shares for net proceeds of approximately $111.2 million and used $34.5 million to reduce the revolving line balance from $44.5 million to $10.0 million.
- Pending transactions included approximately $25.1 million of multifamily acquisitions and expected gross proceeds of approximately $2.8 million from three proposed property sales; completion was not assured.
- No material litigation, impairment losses, debt defaults or material control deficiencies were reported.
Facts Investors Should Verify
- Confirm that the intended issuer is Investors Real Estate Trust rather than Centerspace, because the supplied filing names IRET as the registrant.
- Reconcile the substantial acquisition and development spending with operating cash flow, debt increases, equity issuance and post-quarter-end preferred financing.
- Review mortgage maturities, refinancing assumptions and compliance with the revolving-credit debt-service coverage and deposit covenants.
- Assess stabilized versus non-stabilized occupancy, particularly the 50.0% initial leasing level at Quarry Ridge and declines in commercial industrial occupancy.
- Evaluate the effect of the Wyoming assisted-living restructuring and the Minot flood and fire insurance settlement on recurring revenue, expenses and future capital requirements.
- Distinguish GAAP net income from non-GAAP NOI and FFO when assessing operating performance and distribution coverage.