SEC Filing Summary
Filing identification: The source text is Investors Real Estate Trust’s Form 10-K for the fiscal year ended April 30, 2018, filed June 27, 2018. It does not appear to be a CenterSpace filing or a 2017 fourth-quarter filing; investors should verify the issuer and reporting period.
Business Context and Reporting Period
Investors Real Estate Trust, a North Dakota REIT operating through IRET Properties, owns, manages, acquires, develops, and redevelops apartment communities. During fiscal 2018, the Company substantially completed its transition from a diversified real estate portfolio to a multifamily-focused REIT.
- At April 30, 2018, the Company held interests in 90 apartment communities containing 14,176 homes.
- Total real estate investments were $1.380 billion, including $1.358 billion of net property owned and $10.3 million of mortgage loans receivable.
- Total property investment, before accumulated depreciation, was $1.681 billion.
- Portfolio occupancy was 95.6%; same-store occupancy was 96.5%.
- Geographic concentration was significant: Minnesota represented 42.5% of real estate investment, North Dakota 26.3%, and Colorado 15.9%.
Key Financial Metrics
| Metric | Fiscal 2018 | Fiscal 2017 | Change |
|---|---|---|---|
| Revenue | $169.7 million | $160.1 million | 6.0% increase |
| Net income | $127.6 million | $30.5 million | 318.1% increase |
| Net income attributable to IRET | $116.8 million | $43.3 million | 169.4% increase |
| Net income available to common shareholders | $104.6 million | $31.4 million | 233.4% increase |
| Continuing operations | $(37.2) million | $(46.2) million | Loss narrowed |
| Funds from operations | $36.3 million | $55.2 million | 34.2% decrease |
| Net operating income | $96.7 million | $95.8 million | 1.0% increase |
| Cash flow from operating activities | $48.0 million | $73.9 million | Decrease |
| Distributions to common shareholders and OP unitholders | $37.8 million | Not clearly provided in the source summary | 2018 distributions exceeded FFO |
Net income was heavily affected by $164.8 million of income from discontinued operations, including a $163.6 million gain on sales. Continuing operations remained unprofitable. Depreciation and amortization increased 85.5% to $82.1 million, primarily because the Company shortened estimated useful lives of real estate assets; the accounting change increased fiscal 2018 depreciation by approximately $29.3 million and reduced earnings per share by approximately $0.22.
Reported net income per common share was $0.87 versus $0.26 in fiscal 2017. Distributions declined to $0.28 per share from $0.46, and distributions represented approximately 104% of FFO in fiscal 2018 versus 115% in fiscal 2017.
Debt, Liquidity, and Capital Resources
- Total debt was approximately $706.1 million at April 30, 2018, down from $786.0 million.
- Debt represented 41.7% of total real estate investments.
- Mortgage debt was $512.1 million, with a 4.69% weighted-average interest rate; 95.6% was fixed rate.
- The revolving unsecured credit facility had $300.0 million of capacity, $124.0 million drawn, and approximately $176.0 million of additional availability. It matures January 31, 2021, with a potential one-year extension.
- The Company entered into a $70.0 million unsecured term loan maturing January 31, 2023, and a $6.0 million operating line that was undrawn at year-end.
- Total reported liquidity was approximately $193.9 million, consisting of $176.0 million of revolver availability, $11.9 million of cash, and $6.0 million under the operating line.
- Cash and cash equivalents declined to $11.9 million from $28.8 million.
- The Company repaid approximately $198.3 million of mortgage principal, funded $373.1 million of acquisitions, and spent approximately $12.7 million on apartment capital expenditures.
- A $70.0 million interest-rate swap was used to synthetically fix the term loan rate. Management estimated that a 100-basis-point increase in 30-day LIBOR would reduce annual net income by approximately $1.5 million.
Material Changes Versus the Prior Comparable Period
- The Company sold 50 commercial and other non-core multifamily properties for approximately $515.1 million, compared with approximately $286.9 million of dispositions in fiscal 2017.
- It acquired four apartment communities containing 1,355 homes for $373.1 million; there were no comparable acquisitions in fiscal 2017.
- Multifamily revenue increased 12.5% to $160.0 million, while revenue from other properties and dispositions declined substantially.
- Same-store revenue rose 4.3%, but same-store real estate expenses increased 9.5%, resulting in only a 0.4% increase in same-store NOI.
- Impairment charges declined to $18.1 million from $57.0 million, but remained material.
- The Company issued 4.1 million 6.625% Series C preferred shares for gross proceeds of $103.0 million and redeemed all 4.6 million 7.95% Series B preferred shares for approximately $115.0 million. Management expected annual preferred dividend savings of approximately $2.3 million.
- Common shares outstanding declined to 119.5 million from 121.2 million because the Company repurchased approximately 1.8 million common shares for $9.9 million.
- Operating Partnership units held by limited partners declined to 14.1 million from 15.6 million, primarily due to cash redemptions.
Outlook, Commentary, Risks, and Unusual Items
Management reported strong demand for institutional-quality real estate and generally stable multifamily fundamentals. It intends to focus on operational improvements, resident experience, redevelopment, and additional acquisitions in the Minneapolis/St. Paul and Denver metropolitan areas. Future occupancy and rent growth depend on continued employment and wage growth.
Management also noted increasing apartment development and competition, upgrades by competing owners, moderating development debt capital, rising Treasury rates, and continued capitalization-rate compression. No quantitative earnings or FFO guidance was provided.
- Fiscal 2018 results benefited substantially from property-sale gains and discontinued operations, which may not recur.
- Distributions exceeded FFO, creating a coverage concern despite management’s expectation of adequate liquidity.
- Approximately $30 million of taxable capital gains could become undeferred in fiscal 2019 because of an expiring Section 1031 exchange window; the Company was evaluating mitigation strategies.
- Approximately 26 properties containing about 4,266 homes were subject to restrictions on taxable dispositions and potential tax indemnification payments.
- A joint-venture partner could compel the Company to purchase its interest in Commons and Landing at Southgate through February 5, 2020.
- Key risks include apartment oversupply, occupancy and rent declines, operating-cost inflation, refinancing and interest-rate risk, covenant compliance, impairment of real estate, limited insurance coverage, environmental liabilities, cyber risk, REIT qualification, and geographic concentration.
- The Company reported no material pending legal proceedings, no significant off-balance-sheet arrangements, effective internal controls, and unqualified audit opinions.
Most Important Facts to Verify
- Confirm that the intended issuer is Investors Real Estate Trust rather than CenterSpace and that the intended period is fiscal year ended April 30, 2018 rather than 2017 Q4.
- Separate recurring multifamily operating performance from the $164.8 million of discontinued-operations income and $163.6 million of related sale gains.
- Reconcile FFO of $36.3 million with $37.8 million of common and OP-unit distributions.
- Review debt maturities, revolver covenants, the $70.0 million term loan, and the Company’s exposure to variable interest rates.
- Assess the effect of the useful-life change that increased depreciation by approximately $29.3 million.
- Review the potential $30 million of undeferred taxable capital gains and related distribution or tax obligations.
- Evaluate property-level concentration in Minnesota, North Dakota, and Colorado and the Company’s exposure to new apartment supply.