Business Context and Reporting Period
The filing is Investors Real Estate Trust’s unaudited Form 10-Q for the second quarter and six months of fiscal 2014 ended October 31, 2013. The filing does not identify the registrant as Centerspace; investors should verify the company name and filing reference. IRET is a self-advised REIT owning and leasing multifamily and commercial properties, primarily in North Dakota and Minnesota.
At October 31, 2013, the portfolio included 93 multifamily properties with 10,705 units and 169 commercial properties totaling approximately 10.8 million rentable square feet.
Financial Highlights
| Metric | Three Months Ended October 31, 2013 | Prior Period | Six Months Ended October 31, 2013 | Prior Period |
|---|---|---|---|---|
| Total revenue | $66.2 million | $62.3 million | $131.7 million | $121.6 million |
| Operating income | $19.2 million | $22.1 million | $36.1 million | $39.4 million |
| Income from continuing operations | $5.0 million | $6.6 million | $7.4 million | $8.2 million |
| Net income | $10.3 million | $10.0 million | $13.5 million | $12.0 million |
| Net income available to common shareholders | $5.9 million | $5.6 million | $6.1 million | $6.7 million |
| Net income per common share | $0.06 | $0.06 | $0.06 | $0.07 |
| Net operating income | $39.7 million | $40.5 million | $79.3 million | $75.8 million |
| FFO applicable to common shares and units | $20.0 million | $20.7 million | $39.6 million | $38.3 million |
Revenue increased 6.3% for the quarter and 8.3% for the six-month period. Operating income margins were approximately 29.0% for the quarter and 27.4% for the six months, compared with approximately 35.6% and 32.4%, respectively, in the prior periods. NOI was approximately 60.0% of revenue for the quarter and 60.2% for the six months.
- Cash flow from operating activities was $36.2 million for the six months, compared with $35.0 million in the prior period.
- Investing cash flow was negative $41.6 million, including $63.2 million for development and redevelopment, $32.4 million for acquisitions, and $67.5 million of proceeds from sales of discontinued operations.
- Financing cash flow was negative $19.9 million, primarily reflecting $60.1 million of mortgage principal payments, distributions, and other debt repayments, partially offset by new borrowings and $25.6 million from the distribution reinvestment plan.
- Cash and cash equivalents declined to $68.7 million from $94.1 million at April 30, 2013.
- Total assets were $1.896 billion and total liabilities were $1.120 billion at October 31, 2013.
- Mortgage debt was $1.021 billion, down $28.0 million from April 30, 2013. The weighted-average mortgage rate was 5.50%, and approximately 99.2% of mortgage debt was fixed-rate.
- The secured revolving line of credit had $60.0 million of commitments and $10.0 million outstanding at quarter-end. It was subsequently amended and increased to $72.0 million, with a three-year maturity ending December 1, 2016.
- Common distributions were $0.13 per share for each quarter, or $0.26 per share for the six months. Preferred dividends totaled $5.8 million for the six months.
Material Changes Versus the Prior Comparable Period
- Revenue growth reflected acquisitions, newly placed-in-service developments, higher multifamily rents, and increased commercial tenant reimbursements.
- Six-month NOI increased 4.7% to $79.3 million, but second-quarter NOI declined 2.0% because the prior-year quarter included a $2.3 million gain on involuntary conversion.
- Continuing-operations income declined 24.2% for the quarter and 9.0% for the six months. Higher depreciation, operating costs, and the absence of the prior-year insurance-related gain were significant factors.
- Net income available to common shareholders declined 9.1% for the six months, despite higher consolidated net income, primarily because preferred dividends were substantially higher in the current period.
- FFO increased 3.6% for the six months but decreased 3.4% for the quarter.
- Physical occupancy at October 31, 2013 was 93.8% for multifamily, 81.0% for office, 96.2% for healthcare, 72.4% for industrial, and 85.9% for retail. Industrial all-property occupancy fell from 82.9% to 72.4%, primarily because of vacancy at the Stone Container Roseville property.
- IRET sold 13 properties during the six months, generating $69.1 million of sales proceeds and a $6.6 million gain, compared with $8.2 million of sales proceeds and a $2.7 million gain in the prior period.
- Real estate impairment charges totaled approximately $1.9 million in the six months, compared with none in the prior period. Four commercial properties were written down based on offers and planned dispositions.
Guidance, Outlook, Risks, Contingencies, and Unusual Items
Management did not provide formal quantitative earnings guidance. It expected favorable multifamily performance for the remainder of fiscal 2014, supported by high occupancy, selected rent increases, and housing shortages in energy-impacted Bakken-region markets. Management also expected continued pressure and a slow, uneven recovery in commercial office markets.
- Management planned selective dispositions of non-core industrial and retail assets and intended to use proceeds for deleveraging and investment in multifamily and healthcare properties.
- Risks include increased multifamily competition from new construction, elevated construction costs, commercial office space downsizing, conservative lending standards, interest-rate changes, tenant credit risk, and potential changes to the roles of Fannie Mae and Freddie Mac in multifamily financing.
- Development projects in progress had estimated total costs of $268.3 million, of which $107.8 million had been incurred. Project completion and lease-up remain subject to construction, financing, market, and other contingencies.
- The company was committed to fund $10.1 million of tenant improvements within approximately 12 months.
- Subsequent to quarter-end, a December 5, 2013 fire destroyed the 15-unit and 57-unit Chateau II buildings while under construction and unoccupied. Management had not decided whether to rebuild.
- A $7.9 million sale of an assisted-living property was accounted for as a financing because of continuing involvement; a $29.0 million contract for deed was recorded within other liabilities.
- Legal proceedings, environmental matters, tenant purchase options, taxable-disposition restrictions, and other ordinary-course contingencies were disclosed. Management did not expect known litigation to have a material effect.
Important Facts to Verify
- Confirm that the filing belongs to Investors Real Estate Trust rather than Centerspace, as the supplied metadata and filing registrant differ.
- Reconcile common-shareholder returns with preferred dividend obligations and noncontrolling interests; six-month common earnings declined despite higher consolidated net income.
- Assess refinancing needs, including approximately $36.5 million of mortgage debt maturing within the next 12 months and the company’s dependence on continued credit availability.
- Review the $268.3 million development pipeline, committed tenant improvements, construction-loan funding, projected lease-up, and exposure to cost escalation.
- Evaluate the effect of the Chateau II fire, insurance recovery, and any decision to reconstruct.
- Distinguish recurring operating performance from gains on property sales, involuntary conversion gains, impairments, discontinued operations, and other unusual items.
- Consider occupancy and lease-renewal trends, particularly the 72.4% all-property industrial occupancy and office lease rollover exposure.
- Review FFO and NOI reconciliations because both are non-GAAP measures and may not be comparable across REITs without examining definitions.