Business Context and Reporting Period
Investors Real Estate Trust (IRET; identified in the request as CenterSpace) filed an unaudited Form 10-Q for the quarter and six months ended June 30, 2019. IRET is a multifamily REIT focused primarily on Midwest markets. At quarter-end, it owned interests in 88 apartment communities containing 13,975 homes. Beginning January 1, 2019, the company changed its fiscal year-end from April 30 to December 31; 2018 comparative information is therefore presented for the corresponding three- and six-month periods ended June 30.
Key Financial Metrics
| Metric | Three Months Ended June 30, 2019 | Three Months Ended June 30, 2018 | Six Months Ended June 30, 2019 | Six Months Ended June 30, 2018 |
|---|---|---|---|---|
| Revenue | $46.9 million | $46.2 million | $92.5 million | $89.2 million |
| Net operating income | $27.4 million | $27.3 million | $53.0 million | $51.0 million |
| NOI margin | 58.4% | 59.0% | 57.3% | 57.2% |
| Operating income (loss) | $3.9 million | $(15.5) million | $5.4 million | $(17.3) million |
| Net income (loss) | $3.3 million | $(23.3) million | $(2.7) million | $(16.7) million |
| Net income (loss) available to common shareholders | $1.4 million | $(21.9) million | $(5.0) million | $(17.0) million |
| Basic and diluted earnings per common share | $0.11 | $(1.83) | $(0.43) | $(1.42) |
| FFO applicable to common shares and Units | $18.8 million | $11.6 million | $29.0 million | $20.7 million |
| Net cash provided by operating activities | Not separately provided for the quarter | Not separately provided for the quarter | $28.6 million | $29.2 million |
Quarterly FFO per common share and Unit was $1.45 versus $0.87 in the prior-year quarter; six-month FFO per share and Unit was $2.22 versus $1.55. FFO is a non-GAAP measure and is not equivalent to cash flow from operations.
Balance Sheet, Debt, and Liquidity
- Total assets were $1.348 billion at June 30, 2019, including $1.283 billion of net property owned, compared with total assets of $1.336 billion at December 31, 2018.
- Total debt was $694.9 million, up from $648.5 million at December 31, 2018. Debt represented approximately 51.6% of total assets.
- Debt consisted of $177.9 million in revolving lines of credit, $145.0 million in term loans, and $372.0 million in mortgages payable, before considering interest-rate swap effects.
- Cash and cash equivalents were $17.4 million, and restricted cash was $4.7 million. Management reported approximately $89.5 million of total liquidity, including $72.1 million of unused line capacity.
- The primary $250.0 million revolving facility matures August 31, 2022, with a one-year extension option. The $70.0 million and $75.0 million term loans mature in 2024 and 2025, respectively.
- Management stated that the company was in compliance with its debt covenants and believed liquidity was sufficient for reasonably anticipated needs during 2019 and 2020.
Material Changes Versus the Prior Comparable Period
- Revenue increased 1.6% for the quarter and 3.7% for the six months. Same-store revenue increased 3.1% and 3.6%, respectively, while same-store NOI increased 2.6% and 3.6%.
- Weighted average occupancy improved to 94.4% for the quarter and 94.9% for the six months, compared with 93.5% and 93.2% in the prior-year periods.
- Net income improved substantially because the prior-year periods included $17.8 million of real estate impairment charges; no impairment charges were recorded in 2019.
- IRET recorded a $6.3 million gain on settlement of a construction defect claim in the second quarter of 2019. The settlement included $4.0 million of cash, $937,000 of cash receivable, and $1.4 million of liabilities waived.
- Interest expense declined 11.4% for the quarter and 8.1% for the six months, primarily due to lower average debt balances and refinancing at lower rates.
- Six-month cash flow from operations was broadly stable at $28.6 million versus $29.2 million. Investing cash use improved to $26.2 million from $109.5 million, while financing activities were nearly neutral compared with $181.0 million of cash used in the prior-year period.
- The company acquired the 272-home SouthFork Townhomes in Lakeville, Minnesota, for $44.0 million, funded with $27.4 million of cash and $16.6 million of Series D preferred units. It also acquired a $2.1 million office building.
- IRET repurchased approximately 290,000 common shares for $15.7 million and redeemed approximately 135,000 Operating Partnership Units for $8.1 million during the six months.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- No specific earnings or FFO guidance was provided. Management expressed confidence that liquidity and financial condition were sufficient for anticipated 2019 and 2020 requirements.
- Management is focused on improving portfolio quality, balance-sheet flexibility, core operating fundamentals, resident retention, and cash-flow growth.
- Weather-related events, including extreme cold and record snowfall, produced $733,000 of casualty losses in the first six months, including $641,000 representing insurance stop-loss amounts. Additional uninsured water-intrusion damage affected one community.
- A $50.0 million interest-rate swap was entered into during the quarter to fix rates on part of the primary revolving credit facility. At quarter-end, interest-rate swaps had total notional amounts of $195.0 million currently effective and $70.0 million effective beginning January 31, 2023.
- On August 6, 2019, the company closed a $59.9 million fixed-rate mortgage at 3.88% for twelve years; proceeds were intended to reduce revolving-line borrowings.
- Principal risks include multifamily market and occupancy conditions, concentration in Midwest and Western markets, changes in rental rates and operating costs, interest-rate and refinancing risk, property values and collateral availability, capital-market access, weather and casualty events, environmental liabilities, REIT qualification, and the ability to fund capital expenditures and distributions.
- The filing reported no material pending legal proceedings, no significant off-balance-sheet arrangements, and no material changes to previously disclosed risk factors.
Important Facts for Investors to Verify
- Reconcile the reported $89.5 million liquidity figure to cash, restricted cash, borrowing capacity, and outstanding revolver balances.
- Assess leverage, upcoming maturities, mortgage refinancing requirements, covenant headroom, and the impact of the August 2019 mortgage refinancing.
- Separate recurring operating performance from the $6.3 million litigation settlement and the absence of prior-year impairment charges.
- Review the sustainability of the $0.70 quarterly common distribution against recurring cash flow, FFO, capital expenditures, debt service, and share or Unit repurchases.
- Evaluate same-store rent growth and occupancy trends alongside rising real estate taxes, insurance costs, maintenance expenses, and weather-related losses.
- Confirm the terms, redemption rights, distribution rate, and potential dilution associated with the $16.6 million of Series D preferred units issued for the SouthFork acquisition.