CSR

Business Context and Reporting Period

Company: Investors Real Estate Trust (IRET), a self-advised equity REIT focused on multi-family residential and commercial properties (office, medical, industrial, retail) primarily in the upper Midwest.

Reporting Period: Second Quarter of Fiscal Year 2008, ended October 31, 2007.

Portfolio Overview: As of October 31, 2007, the portfolio consisted of 69 multi-family properties (9,397 units) and 152 commercial properties (10.6 million sq. ft.).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 11.7% ($5.7 million) for the quarter and 16.0% ($14.9 million) for the six-month period compared to the prior year, driven primarily by acquisitions in fiscal years 2007 and 2008.
• Net Income Decline: Net income available to common shareholders decreased to $2.2 million (quarter) and $4.6 million (six months) from $2.9 million and $5.4 million in the prior year. This decline is largely attributed to the absence of a gain on sale of discontinued operations recorded in the prior year ($1.3 million gain in Q2 2006).
• Expense Increases: Operating expenses rose due to new acquisitions. Maintenance expenses increased 10.3% (quarter) and 15.3% (six months). Utility expenses increased 14.7% (quarter) and 24.6% (six months), partly due to unusually warm weather increasing cooling costs.
• Occupancy: Economic occupancy rates declined in three of five segments (Multi-Family, Medical, Retail) compared to the prior year, though Commercial Office and Industrial segments saw improvements.
• Capital Structure: The company completed a public offering of 6.9 million common shares in October 2007, raising net proceeds of $66.4 million. Total common shares outstanding increased from 48.6 million to 56.4 million.

Outlook, Risks, and Contingencies

• Acquisitions: Signed agreements to acquire a portfolio of six medical office buildings in Minneapolis/St. Paul for approximately $52.0 million and a multi-family complex in Omaha for $4.7 million. These are subject to closing conditions.
• Dispositions: Tenants at four Edgewood Vista senior housing facilities have exercised purchase options totaling approximately $3.1 million.
• Development Projects: Significant funding commitments remain for the Southdale Medical Building expansion ($7.5M), IRET Corporate Plaza ($17.8M), 2828 Chicago Avenue Medical Building ($15.7M), and Cottonwood Apartments ($6.1M).
• Risk Factors: Management notes that uncertainty and volatility in credit markets and the single-family home mortgage market have restrained demand for commercial and retail space. Approximately 97.5% of debt is fixed-rate, limiting interest rate exposure.
• Legal: No pending litigation expected to have a material impact on financial statements.

Investor Verification Checklist

• Discontinued Operations Impact: Verify the extent to which the decline in GAAP net income is driven by the one-time gain on sale of properties in the prior year versus ongoing operational performance.
• Acquisition Financing: Confirm the final terms and closing status of the pending $52.0 million medical office building portfolio acquisition and the associated debt assumption.
• Occupancy Trends: Monitor the economic occupancy rates in the Retail and Medical segments, which showed year-over-year declines, to assess potential revenue headwinds.
• Development Costs: Track actual spending versus estimates for the four major development projects, particularly the IRET Corporate Plaza, where cost estimates are not yet firm.
• Debt Maturities: Review the schedule of future principal payments, noting that approximately $18.6 million is due in the remainder of Fiscal 2008.