Business Context and Reporting Period
The filing is an unaudited Form 10-Q for Investors Real Estate Trust, a self-advised REIT owning and leasing multifamily and commercial properties. The reporting period ended January 31, 2012, covering the three and nine months ended January 31, 2012, compared with the corresponding 2011 periods. The request metadata identifies the company as CENTERSPACE and “2011 Q3,” which does not match the filing’s registrant or reporting period.
At January 31, 2012, the portfolio included 81 multifamily properties with 8,921 units and 184 commercial properties totaling approximately 12.3 million rentable square feet, primarily in North Dakota and Minnesota.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2012 | Nine Months Ended January 31, 2012 | Prior Comparable Period |
|---|---|---|---|
| Total revenue | $61.0 million | $181.3 million | $60.1 million and $178.1 million |
| Net operating income | $36.2 million | $105.8 million | $33.1 million and $102.5 million |
| NOI margin | 59.3% | 58.3% | 55.0% and 57.5% |
| Net income | $2.5 million | $5.6 million | $14.6 million and $24.0 million |
| Net income available to common shareholders | $1.5 million | $3.1 million | $11.2 million and $17.9 million |
| Net income per common share | $0.02 | $0.04 | $0.14 and $0.23 |
| FFO applicable to common shares and units | $17.2 million | $48.2 million | $14.6 million and $47.5 million |
| Cash flow from operating activities | Not separately reported | $44.4 million | $38.4 million |
Net margin was approximately 4.1% for the quarter and 3.1% for the nine-month period. FFO per share and unit was $0.16 for the quarter and $0.47 for the nine months, compared with $0.14 and $0.48, respectively, in the prior periods.
At January 31, 2012, total assets were $1.68 billion, including $1.53 billion of real estate investments. Cash and cash equivalents were $35.5 million, compared with $41.2 million at April 30, 2011. Mortgages payable were $1.039 billion, and the revolving line of credit balance was $49.0 million against $60.0 million of commitments. Mortgage debt had a weighted average interest rate of 5.84%, with approximately 99% at fixed rates.
Total liabilities were $1.14 billion and total equity was $540.2 million. The company paid common distributions of $0.4315 per share during the nine months and declared a subsequent quarterly common distribution of $0.13 per share.
Material Changes Versus Prior Comparable Period
- Revenue increased 1.5% for the quarter and 1.8% for the nine months, primarily from properties acquired in fiscal 2011 and 2012, higher straight-line rent, and improved multifamily performance.
- NOI increased 9.2% for the quarter and 3.2% for the nine months. Maintenance expense declined substantially, partly due to lower snow-removal costs, while insurance and real estate tax expenses increased.
- Net income declined $12.1 million for the quarter and $18.5 million for the nine months, primarily because the prior-year periods included substantially larger gains from discontinued property sales.
- FFO increased 17.4% for the quarter and 1.5% for the nine months, excluding the effect of property-sale gains and other non-operating items.
- Multifamily occupancy improved to 93.5% on a stabilized basis from 91.1%. Commercial office stabilized occupancy declined to 77.6% from 79.8%, and commercial medical occupancy declined to 93.8% from 95.8%.
- Property owned increased to $1.86 billion from $1.77 billion at April 30, 2011. Mortgage debt increased $44.9 million, while the line of credit balance increased $19.0 million.
- The company acquired or placed in service multiple properties and projects totaling approximately $66.3 million during the nine months, compared with approximately $40.9 million in the prior period. It sold one small retail property for a $589,000 gain, compared with $19.4 million of gains from prior-year dispositions.
Cash Flow, Debt, Liquidity, Outlook and Risks
- Operating cash flow was $44.4 million. Investing activities used $89.0 million, principally for acquisitions and real estate improvements. Financing activities provided $38.9 million, resulting in a $5.7 million decrease in cash from April 30, 2011.
- Mortgage principal maturities total $13.4 million for the remainder of fiscal 2012, $51.7 million in fiscal 2013, $66.0 million in fiscal 2014, $106.2 million in fiscal 2015, and $86.2 million in fiscal 2016; $715.2 million matures thereafter.
- Management believed liquidity was adequate for operations, distributions, maintenance, debt service and planned activities, supported by operating cash flow, refinancing, the credit facility, equity issuance, property sales and potential UPREIT unit issuances.
- Management cautioned that conservative commercial real estate underwriting, lower occupancy or rental rates, reduced refinancing capacity, and changes to Freddie Mac or Fannie Mae multifamily lending programs could constrain liquidity and future investment. Approximately $15.2 million of mortgage debt was scheduled to mature within the following 12 months, all secured by commercial properties; approximately $6.0 million had loan applications or refinancing commitments.
- The June 2011 Minot flood damaged Arrowhead Shopping Center and Chateau Apartments. The company had received $5.3 million of insurance proceeds for cleanup and redevelopment and approximately $246,000 for business interruption. Management estimated a potential future Arrowhead gain of approximately $1.7 million, subject to revision.
- On February 22, 2012, one Chateau Apartments building was destroyed by fire while undergoing flood-related restoration. The company expects to rebuild, but had no firm cost or completion estimate. Insurance coverage is expected to apply, subject to a $200,000 deductible; any gain or loss had not yet been determined.
- The company had approximately $10.1 million of tenant-improvement commitments expected to be funded within 12 months and several active development and expansion projects. Pending acquisitions and a proposed medical-office joint venture remained subject to closing conditions.
- No material litigation was reported. Management stated that disclosure controls were effective and that it was in compliance with the revolving credit facility covenants at January 31, 2012.
Most Important Facts to Verify
- Confirm the intended issuer and period, because the supplied metadata says CENTERSPACE and 2011 Q3, while the filing is for Investors Real Estate Trust for the quarter ended January 31, 2012.
- Verify refinancing plans and available liquidity for the $15.2 million of mortgage debt maturing within 12 months, including the $8.1 million maturing in the remainder of fiscal 2012 and first quarter of fiscal 2013.
- Monitor occupancy and leasing trends in the commercial office and medical segments, where occupancy declined and commercial revenue was pressured.
- Assess the ultimate insurance recoveries, rebuilding costs and financial impact of the Minot flood and Chateau Apartments fire.
- Reconcile reported GAAP earnings with FFO and confirm distribution coverage using recurring operating cash flow rather than property-sale gains.
- Review the effect of continued acquisitions, development spending, equity issuance and debt growth on leverage, dilution and future distributions.