CSR

Business Context and Reporting Period

Company: Investors Real Estate Trust (IRET), a self-advised equity REIT.

Reporting Period: First quarter of fiscal year 2009, ended July 31, 2008.

Portfolio Overview: As of July 31, 2008, IRET owned 76 multi-family residential properties (9,528 units) and 163 commercial properties (office, medical, industrial, retail) totaling 11.5 million net rentable square feet. Operations are concentrated in North Dakota and Minnesota, with additional holdings in nine other states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased 9.8% ($5.2 million) year-over-year, driven primarily by rent from 25 properties acquired in the prior fiscal year and reduced tenant concessions.
• Net Income Decline: Despite revenue growth, net income available to common shareholders decreased 26% ($0.6 million). This was caused by increased interest expense ($1.7 million increase), higher amortization of in-place leases, and reduced "other income" (lease termination fees and tax appeals).
• Expense Increases:
  • Interest Expense: Rose 11.4% to $16.9 million due to new debt on acquisitions and refinancing.
  • Maintenance: Increased 16.5% to $7.0 million due to recurring repairs and new properties.
  • Utilities: Increased 12.3% to $4.4 million due to rate hikes.
  • Real Estate Taxes: Increased 14.6% to $7.4 million due to higher assessments.
• Occupancy Trends: Economic occupancy on stabilized properties declined in four of five segments (Office, Medical, Industrial, Retail) due to economic uncertainty, though Multi-Family occupancy remained stable or slightly improved.

Guidance, Outlook, Risks, and Unusual Items

• Outlook: Management expects occupancy to continue declining in commercial segments through the second and third quarters of fiscal 2009 due to credit market stress and economic deterioration. Multi-family occupancy is expected to hold steady. Two major medical development projects (Southdale and 2828 Chicago Avenue) are expected to boost income upon completion in Q2 FY2009.
• Liquidity and Financing: The company holds $42.4 million in cash and has $32 million in unsecured lines of credit (currently undrawn). Management notes heightened risk regarding refinancing due to the conservatorship of Fannie Mae and Freddie Mac, from which IRET sources a majority of its multi-family debt. Two unclosed loans totaling $18.6 million are pending with these entities.
• Tenant Credit Risks (Unusual Items):
  • Sunwest Management: Recorded past due balances of $65,000 (Fox River Cottages) and $223,000 (Stevens Point facility) due to tenant financing shortfalls. These represent approximately 0.9% of total real estate investment.
  • Wilson's Leather (Berman's): Subsequent to the quarter, the tenant ceased operations. The company amended the lease to receive 85% of rent, but expects the primary tenant will not make agreed payments. The property investment is $13.8 million.
• Development Commitments: Significant funding commitments remain for three major projects (2828 Chicago Avenue, Southdale Medical, IRET Corporate Plaza) with estimated total costs of $47.4 million.

Investor Verification Checklist

• Refinancing Risk: Verify the status of the $18.6 million in pending loans with Fannie Mae and Freddie Mac given the government conservatorship.
• Tenant Defaults: Monitor the collection status of the Sunwest Management past due balances and the amended lease payments from the Wilson's Leather/Berman's tenant.
• Occupancy Trends: Track economic occupancy rates in the commercial office and industrial segments, which showed significant declines in stabilized properties.
• Development Progress: Confirm the completion timeline and lease-up status of the Southdale Medical and 2828 Chicago Avenue projects to validate future revenue projections.
• Interest Rate Exposure: Review the maturity schedule of the $1.07 billion debt portfolio, noting that 98.9% is fixed-rate, limiting immediate rate risk but creating refinancing risk upon maturity.