Business Context and Reporting Period
Company: Investors Real Estate Trust (IRET), a self-advised equity REIT focused on multi-family residential and commercial properties (office, medical, industrial, retail) primarily in the upper Midwest (North Dakota and Minnesota).
Reporting Period: Third quarter of fiscal year 2009, ended January 31, 2009.
Portfolio Overview: As of January 31, 2009, the portfolio consisted of 78 multi-family properties (9,645 units) and 166 commercial properties (11.7 million square feet).
Key Financial Metrics
| Metric | Three Months Ended Jan 31, 2009 | Nine Months Ended Jan 31, 2009 |
|---|---|---|
| Total Revenue | $60.9 million | $179.4 million |
| Net Operating Income (NOI) | $35.0 million | $105.7 million |
| Net Income | $1.4 million | $6.3 million |
| Net Income Available to Common Shareholders | $0.8 million | $4.5 million |
| Earnings Per Share (Basic & Diluted) | $0.02 | $0.08 |
| Funds From Operations (FFO) | $15.5 million ($0.19/share) | $48.0 million ($0.60/share) |
| Cash and Cash Equivalents | $31.0 million | $31.0 million (Ending Balance) |
| Total Debt (Mortgages + Revolving) | $1.077 billion | $1.077 billion |
| Weighted Average Interest Rate | 6.34% | 6.34% |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 11.9% ($6.5 million) for the quarter and 10.6% ($17.2 million) for the nine-month period compared to the prior year, driven primarily by acquisitions in fiscal years 2008 and 2009.
- Net Income Decline: Despite revenue growth, Net Income Available to Common Shareholders decreased significantly: down 67% for the quarter ($2.4M to $0.8M) and down 36% for the nine months ($7.0M to $4.5M). This was caused by increased operating expenses, interest expense, and depreciation/amortization on new properties.
- Expense Increases:
- Maintenance: Increased 24.1% for the quarter, largely due to record snowfall in the Midwest doubling snow removal costs.
- Utilities: Increased 18.6% for the quarter due to severe winter weather and higher fuel costs.
- Property Management: Increased 31.5% for the quarter, driven by bad debt provisions related to specific senior housing projects (Fox River and Stevens Point).
- Interest Expense: Increased 9.5% for the quarter due to debt on newly acquired properties.
- Occupancy: Economic occupancy for stabilized commercial office properties declined from 91.3% to 88.6% for the quarter. Multi-family stabilized occupancy improved slightly from 93.9% to 94.5%.
Outlook, Risks, and Unusual Items
- Economic Environment: Management notes worsening economic conditions and credit market disruptions are increasing credit stress on tenants, leading to expectations of moderate increases in past-due accounts and vacancies.
- Tenant Bankruptcies:
- Smurfit-Stone Container: A top 10 commercial tenant (1.5% of commercial base rent) filed for Chapter 11 bankruptcy. They remain current on rent, but lease intentions are unknown.
- Berman's the Leather Experts: Declared bankruptcy and rejected its lease for a 353,000 sq. ft. industrial building. IRET subsequently leased 44% of the space to a sub-tenant at 36% of the previous rent.
- Senior Housing Issues: Significant write-offs and past-due amounts recorded for Fox River and Stevens Point projects leased to affiliates of Sunwest Management, Inc. IRET is pursuing collection and evaluating options to market the properties.
- Liquidity and Financing: Cash on hand decreased from $53.5 million to $31.0 million. The company relies on Fannie Mae and Freddie Mac for multi-family financing; their placement into conservatorship presents a risk of higher loan costs or reduced availability.
- Pending Acquisition: Signed an agreement to acquire a portfolio of office and retail properties in the Minneapolis-St. Paul area for $29.7 million (subject to closing conditions).
Key Facts for Investor Verification
- Cash Burn Rate: Verify the sustainability of the $31.0 million cash balance given the $22.5 million net decrease in cash over the nine-month period and the need to fund distributions and debt service.
- Tenant Concentration Risk: Assess the impact of the Smurfit-Stone bankruptcy and the Berman's lease rejection on future cash flows, particularly in the industrial and commercial segments.
- Senior Housing Exposure: Confirm the status of the Fox River and Stevens Point projects and the likelihood of recovering the $18.6 million combined investment from Sunwest affiliates.
- Debt Refinancing: Monitor the ability to refinance maturing debt, specifically the reliance on Fannie Mae and Freddie Mac, given the government conservatorship.
- FFO vs. Net Income: Note the divergence where FFO increased slightly (1.9% for nine months) while GAAP Net Income dropped significantly, highlighting the impact of non-cash depreciation and amortization on earnings.