Business Context and Reporting Period
The source is Investors Real Estate Trust (IRET), not Centerspace, and covers the fiscal year ended April 30, 2016. It is therefore not a 2015 fourth-quarter filing. IRET was a self-advised equity REIT operating primarily multifamily and healthcare properties in the Upper Midwest through its UPREIT structure.
- At April 30, 2016, IRET held 99 multifamily properties with 12,950 units and 47 commercial properties totaling approximately 2.9 million square feet.
- Reportable segments were multifamily and healthcare; office, retail, industrial and senior housing assets were substantially sold or classified as held for sale.
- Management announced a plan after year-end to become a pure-play multifamily REIT by selling remaining commercial properties.
Financial Performance and Key Metrics
| Metric | Fiscal 2016 | Fiscal 2015 | Change |
|---|---|---|---|
| Total revenue | $188.3 million | $179.3 million | +5.0% |
| Net income | $76.6 million | $28.7 million | +167.1% |
| Net income available to common shareholders | $60.5 million | $12.6 million | +381.1% |
| EPS, basic and diluted | $0.49 | $0.11 | +$(0.38) |
| Funds from operations attributable to common shares and units | $103.9 million | $86.6 million | +20.0% |
| FFO per share and unit | $0.76 | $0.64 | +18.8% |
| Net cash from operating activities | $66.5 million | $114.2 million | -41.8% |
| Total real estate investments, net | $1.44 billion | $1.24 billion | +16.6% |
| Cash and cash equivalents | $66.7 million | $49.0 million | +36.2% |
NOI, a non-GAAP measure, increased 2.9% to $109.2 million. Multifamily NOI increased 4.9% to $70.7 million, while healthcare NOI decreased 6.0% to $29.6 million. Same-store NOI declined 1.8%, reflecting weaker multifamily performance despite growth from acquisitions and development.
- Total multifamily occupancy was 90.8%, down from 92.0%; same-store occupancy was 94.8%, down from 95.1%.
- Total healthcare occupancy was 89.4%, down from 91.5%; same-store occupancy improved to 95.6% from 95.3%.
- Same-store multifamily revenue decreased 0.5%, primarily because of higher vacancy in Williston and Minot, North Dakota. Same-store multifamily expenses increased 5.3%.
- Recurring quarterly common distributions remained $0.13 per share, or $0.52 annually.
Liquidity, Debt and Capital Resources
- Mortgage debt, including debt on properties held for sale, was $886.1 million, compared with $974.8 million at April 30, 2015. The weighted-average mortgage rate declined to 4.54% from 5.16%.
- Construction debt was $82.0 million, compared with $136.2 million, at a weighted-average rate of 2.74%.
- The revolving credit facility had $17.5 million outstanding against a $100.0 million commitment, bore interest at 4.75%, and matured September 1, 2017.
- Approximately 22.2% of mortgage principal, or $196.8 million, was variable-rate debt. Management estimated that a 1% increase in rates would increase annual interest expense by approximately $2.0 million.
- Total indebtedness was 63.6% of total real estate investments and 88.2% of net assets as defined in the bylaws.
- Approximately 17.0% of mortgage debt was scheduled to mature in fiscal 2017. Principal payments on mortgages in fiscal 2017 totaled $150.7 million, with approximately $38.8 million of related interest payments.
- Management stated that it believed liquidity was adequate for the next twelve months, including approximately $30.9 million of planned capital expenditures, but noted potential reliance on refinancing, asset sales and additional borrowing.
Material Changes Versus the Prior Comparable Period
- IRET sold 8 multifamily properties, 40 office properties, 2 healthcare properties, 18 retail properties and 3 parcels of land for total sales proceeds of approximately $414.1 million; it also transferred nine office properties to a lender in a deed-in-lieu transaction.
- The lender transfer extinguished approximately $122.6 million of non-recourse debt and produced a $36.5 million gain on debt extinguishment. The filing states that a lender claim for remaining liability could still be asserted.
- IRET acquired approximately $143.5 million of properties, including six multifamily properties and one healthcare property, compared with $56.3 million of acquisitions in fiscal 2015.
- Development projects placed in service totaled approximately $211.8 million, compared with $124.5 million in fiscal 2015.
- IRET repurchased approximately 4.6 million common shares for $35.0 million, reducing common shares outstanding to 121.1 million from 124.5 million.
- Operating cash flow declined substantially because of lower net income adjusted for noncash items and a decrease in accounts payable, despite higher reported net income.
- Discontinued operations generated $57.3 million of income, including $23.8 million of gains on sales and $29.3 million of gain on debt extinguishment. These unusual items materially affected reported net income.
Outlook, Commentary, Risks and Unusual Items
- Management described investment demand, pricing and fundamentals as generally favorable, but identified Williston, North Dakota, as a significant exception because of high vacancies, rent concessions and reduced oil and gas activity.
- IRET had ownership interests in 477 Williston units and 1,039 Minot units. Continued weakness in the energy sector could reduce occupancy and rents and place property-level operating-income covenants at risk.
- Management expects continued multifamily development and competition for residents, although new construction costs were supporting higher market rents.
- Major risks include refinancing and interest-rate risk, dependence on Fannie Mae and Freddie Mac for multifamily financing, geographic concentration in Minnesota and North Dakota, tenant vacancies and credit deterioration, healthcare tenant operating and reimbursement pressures, construction and lease-up risk, environmental liabilities and REIT qualification risk.
- Fiscal 2016 included approximately $6.0 million of real estate impairment, a $3.4 million bargain-purchase gain, substantial discontinued-operation gains and the debt extinguishment gain described above.
- Subsequent to year-end, the tenant in eight Spring Creek senior housing properties exercised a purchase option for $43.5 million, and IRET signed an agreement to sell an industrial property for $13.4 million. Both transactions were subject to closing conditions.
Most Important Facts for Investors to Verify
- Confirm the requested issuer and period: the supplied filing is IRET’s fiscal 2016 Form 10-K, not Centerspace’s 2015 fourth-quarter filing.
- Assess recurring earnings separately from the $57.3 million of discontinued-operation income and other one-time gains.
- Review fiscal 2017 debt maturities, refinancing capacity, covenant compliance and exposure to variable interest rates.
- Monitor Williston and Minot occupancy, rent concessions and potential covenant effects from the energy-sector downturn.
- Evaluate the execution, pricing and timing of the planned sale of remaining commercial properties and transition to a multifamily-focused REIT.
- Reconcile FFO and operating cash flow with distributions: fiscal 2016 operating cash flow was $66.5 million versus $67.2 million of cash distributions and $4.0 million of shares issued under the DRIP.
- Review pending dispositions, lender rights following the deed-in-lieu transaction, tenant purchase options and joint-venture buy/sell provisions.