CSR

Business Context and Reporting Period

Company: Investors Real Estate Trust (IRET), operating as a self-advised equity REIT and UPREIT.
Reporting Period: Fiscal year ended April 30, 2010.
Portfolio Overview: As of April 30, 2010, the portfolio consisted of 251 properties: 78 multi-family residential (9,691 units) and 173 commercial properties (office, medical, industrial, retail). The portfolio is heavily concentrated in Minnesota and North Dakota, which accounted for 67.4% of total gross revenue.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by $2.8 million (1.2%) primarily due to new acquisitions, offset by a $3.7 million decrease in rental income from stabilized properties due to lower occupancy.
• Profitability Decline: Net income available to common shareholders dropped significantly from $6.2 million to $1.6 million. This was driven by increased depreciation/amortization ($2.7 million increase), higher administrative expenses ($2.4 million increase), and a $1.3 million impairment charge on three properties.
• Occupancy Trends: Physical occupancy on an all-property basis decreased to 90.2% for multi-family (from 92.9%) and 87.4% for commercial segments (from 91.0%). Commercial medical occupancy was the only segment to increase slightly.
• Expense Increases: Property management expenses rose by $1.8 million, largely due to the transition of properties to internal management. Insurance expenses increased by 28.0% ($0.9 million) due to higher premiums.
• Acquisitions: The company acquired properties totaling $55.4 million in fiscal 2010, compared to $33.8 million in fiscal 2009.

Guidance, Outlook, and Risks

• Outlook: Management expects continued challenges in the real estate market, including reduced occupancies and rental rates. The company anticipates limited growth in net income from acquisitions in fiscal 2011 due to unfavorable market conditions and constrained credit availability.
• Distribution Policy: The Board decided to maintain the quarterly distribution at $0.1715 per share/unit rather than increasing it, citing the economic environment. Distributions totaled approximately 99.2% of FFO in fiscal 2010.
• Liquidity: The company maintains $54.8 million in cash and has access to unsecured lines of credit totaling $28.6 million. However, the company notes that continued deterioration in operating results could impact its ability to maintain current distribution levels.
• Key Risks:
  • Geographic Concentration: Significant exposure to economic conditions in Minnesota and North Dakota.
  • Refinancing Risk: Approximately 10.1% of mortgage debt is due in fiscal 2011. Tight credit markets may force refinancing at less favorable terms.
  • Tenant Bankruptcy: Ongoing bankruptcy proceedings involving tenants at the Fox River and Stevens Point senior housing projects pose risks to lease revenue.
  • Healthcare Reform: New federal healthcare laws may impact reimbursement rates for commercial medical tenants.

Investor Verification Checklist

• Occupancy Rates: Verify the trend in physical occupancy for the multi-family and commercial office segments, which declined year-over-year.
• Impairment Charges: Review the specific details of the $1.7 million impairment charge recorded on three properties (retail in Wisconsin and Michigan, and former headquarters in North Dakota).
• Debt Maturities: Assess the refinancing strategy for the $107.3 million in principal payments due in fiscal 2011 amidst tight credit markets.
• Internal Management Transition: Evaluate the long-term cost-benefit of the shift from third-party to internal property management, which drove a $1.4 million increase in property management expenses.
• Tenant Bankruptcy Resolution: Monitor the outcome of the settlement negotiations with Sunwest Management affiliates regarding the Fox River and Stevens Point properties.