Business Context and Reporting Period
The filing is for Investors Real Estate Trust (IRET), not Centerspace. It covers the first quarter of fiscal 2015, the three months ended July 31, 2014, with comparative results for the three months ended July 31, 2013. IRET is a self-advised REIT owning and leasing multifamily and commercial properties, primarily in North Dakota and Minnesota.
At quarter-end, IRET owned 96 multifamily properties with 11,080 apartment units and 163 commercial properties totaling approximately 10.2 million rentable square feet.
Financial Metrics
| Metric | Q1 FY2015 | Q1 FY2014 | Change |
|---|---|---|---|
| Total revenue | $68.6 million | $65.1 million | 5.4% |
| Net operating income | $40.3 million | $39.4 million | 2.3% |
| NOI margin | 58.8% | 60.6% | Down |
| Operating income | $16.8 million | $17.0 million | Down 1.3% |
| Income before property-sale losses | $2.8 million | $2.6 million | Up 7.2% |
| Net income attributable to IRET | $(0.2) million | $3.1 million | Down $3.2 million |
| Net loss available to common shareholders | $(3.0) million | $0.2 million | Down $3.2 million |
| Basic and diluted EPS | $(0.03) | $0.00 | Down |
| FFO applicable to common shares and units | $18.9 million | $19.7 million | Down 3.8% |
| Cash flow from operating activities | $23.4 million | $17.3 million | Up $6.1 million |
Revenue growth reflected acquisitions, development projects placed in service, same-store rent growth and $793,000 of new senior housing revenue. NOI increased, but the margin declined because expenses grew faster than real estate revenue. Common-share results were pressured by $2.3 million of property impairments, $3.0 million of losses on property sales, higher administrative costs and preferred dividends of $2.9 million.
Quarter-end cash and cash equivalents were $60.6 million, compared with $47.3 million at April 30, 2014 and $93.2 million at July 31, 2013. Net cash used in investing activities was $52.3 million, primarily for development, redevelopment, acquisitions and improvements. Net cash provided by financing activities was $42.3 million.
Debt, Liquidity and Capital Resources
- Mortgages payable were $1.018 billion, up from $998 million at April 30, 2014. The weighted-average mortgage rate was 5.32%.
- Approximately 95.5% of mortgage debt was fixed-rate; variable-rate mortgage debt was $45.4 million.
- The revolving credit facility had $75.0 million of commitments, $35.5 million outstanding and a 4.75% interest rate.
- Mortgage maturities were $70.8 million during the remainder of fiscal 2015, $92.9 million in fiscal 2016 and $214.7 million in fiscal 2017.
- Management stated that liquidity was adequate for operating needs and distributions, but noted that refinancing and cash-out refinancing could become more difficult because lenders remain conservative.
- The common distribution remained $0.1300 per share. Series A and Series B preferred dividends were also paid.
Material Changes Versus the Prior Comparable Period
- Total revenue increased 5.4%, while total NOI increased 2.3% and same-store NOI increased only 0.3%.
- Multifamily occupancy increased to 93.4% from 92.8%; commercial healthcare occupancy increased to 96.5% from 95.4%; industrial occupancy increased to 100.0% from 79.8%; and retail occupancy increased to 86.3% from 80.3%. Office occupancy was 81.3% versus 80.8%.
- Administrative expense increased 38.1% to $3.5 million, primarily from higher share-based compensation and salaries.
- Insurance expense increased 33.4% to $1.7 million, and property management expense increased 12.0% to $4.6 million.
- IRET recognized $2.3 million of impairments on two commercial properties, compared with no impairment in continuing operations in the prior-year quarter.
- IRET recorded a $3.0 million loss on three property dispositions, compared with a $1.9 million gain on prior-year dispositions.
- The company adopted ASU 2014-08, resulting in ordinary-course property dispositions being reported in continuing operations rather than discontinued operations when they do not represent a strategic shift.
- Acquisitions totaled $26.6 million, compared with $6.4 million in the prior-year quarter. Development projects placed in service totaled $10.3 million, versus none in the prior-year quarter.
Guidance, Outlook, Risks and Unusual Items
Management expected favorable multifamily results to continue, supported by high occupancy, selected rent increases and strong initial demand for newly completed properties. It also expected continued weakness and a slow, uneven recovery in the commercial office segment because of tenant space reductions and stagnant real wage growth. Management planned selective dispositions of non-core office and retail assets, with proceeds intended for deleveraging and investment in multifamily and healthcare assets. No formal numerical earnings or revenue guidance was provided.
- The $122.6 million CMBS loan secured by nine commercial office properties was transferred to a special servicer because the loan balance exceeded management's estimate of the portfolio's current fair value. The borrower remained current on payments, but the outcome of discussions was uncertain.
- Development projects in progress had anticipated total costs of approximately $354.6 million, of which $154.8 million had been incurred. The company also had $8.7 million of tenant-improvement commitments expected within approximately 12 months.
- Chateau Apartments was affected by prior fires. IRET received $2.0 million of partial insurance proceeds during the quarter and subsequently received final proceeds of $4.0 million; no gain or loss was recorded on final settlement.
- The tenant at Nebraska Orthopaedic Hospital exercised a purchase option. The purchase price was subject to arbitration, and completion of the sale was uncertain.
- Disclosure controls were deemed ineffective because of a material weakness in accounting for performance-based share compensation. Management initiated remediation with third-party assistance.
- The filing includes a non-cash revision to previously reported equity related to the classification of a redeemable noncontrolling interest. Management concluded the error was not material to previously issued financial statements.
- Key risks include office-market weakness, tenant credit and lease-renewal risk, development costs and lease-up, refinancing availability, interest-rate changes, insurance and environmental exposures, and the ability to maintain distributions while funding capital needs.
Investor Verification Priorities
- Confirm the issuer identity: the supplied filing is for Investors Real Estate Trust, while the request identifies Centerspace.
- Review the special-servicing status and potential resolution of the $122.6 million CMBS loan.
- Assess coverage of debt maturities, development spending, tenant improvements and distributions from operating cash flow.
- Monitor remediation of the material weakness in performance-based share-compensation accounting.
- Evaluate lease-up and construction risk across the approximately $354.6 million development pipeline.
- Verify the stated commercial real estate investment amount in the MD&A, which appears to contain a unit inconsistency; the text states $955.9 billion, while the balance sheet and other disclosures indicate a figure in millions.
- Track office occupancy, lease expirations, tenant renewals and the planned disposition of non-core assets.