CSR

Business Context and Reporting Period

Company: Investors Real Estate Trust (IRET), a self-advised equity Real Estate Investment Trust (REIT) organized under North Dakota law.

Reporting Period: Fiscal year ended April 30, 2007.

Business Overview: IRET owns and operates income-producing real estate, primarily in the upper Midwest (Minnesota and North Dakota). The portfolio consists of multi-family residential properties and commercial properties (office, medical, industrial, and retail). As of April 30, 2007, the portfolio included 69 multi-family properties (9,397 units) and 148 commercial properties (approx. 10.0 million sq. ft.).

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by $27.4 million (16.1%) primarily due to the addition of new real estate properties. Approximately 81.8% of the revenue increase was attributable to new acquisitions.
• Acquisitions: The Company spent approximately $220.7 million on acquisitions in fiscal 2007, a significant increase from $93.4 million in fiscal 2006. The largest transaction was the acquisition of the "Magnum Portfolio" (nine office complexes) for approximately $140.8 million.
• Dispositions: The Company disposed of 14 properties and two parcels of land for $22.5 million, realizing a gain of $4.6 million.
• Debt Levels: Mortgage indebtedness increased by $185.2 million (24.2%) to fund acquisitions. The ratio of total indebtedness to Net Assets (per Bylaws) was 149.6%.
• Occupancy: Economic occupancy for the total commercial segments increased slightly to 93.2% from 92.8%. Multi-family occupancy improved to 93.2% from 91.6%.

Guidance, Outlook, and Risks

Management Commentary: Management noted a challenging acquisition environment due to high liquidity and competition, which reduced investment returns on available properties. Despite this, the Company successfully executed its largest acquisition in history. Management expects acquisitions to remain the primary driver of revenue and net income growth.

Outlook: The Company anticipates demand for multi-family, medical, office, and industrial space in its markets will strengthen in fiscal 2008. It plans to continue using available cash, short-term debt, and UPREIT units to acquire properties, subsequently refinancing with fixed-rate secured debt.

Risks and Contingencies:

• Geographic Concentration: 69.8% of gross revenue is derived from properties in Minnesota and North Dakota, exposing the Company to regional economic downturns.
• Lease Expirations: Approximately 10.5% of commercial net rentable square footage leases expire in fiscal 2008.
• Interest Rate Risk: While 97.7% of debt is fixed-rate, rising rates could impact refinancing costs and variable-rate debt ($21.7 million).
• REIT Status: Failure to qualify as a REIT would subject the Company to corporate income taxes and disqualify it from tax treatment for four subsequent years.
• Medical Sector: Significant exposure to healthcare provider operations and reimbursement policies (19.1% of portfolio).

Investor Verification Checklist

• Acquisition Returns: Verify the yield and performance of the $140.8 million Magnum Portfolio acquisition compared to historical IRET returns.
• Debt Maturities: Review the schedule of mortgage principal payments, noting $30.8 million due in 2008 and $47.7 million in 2009.
• FFO vs. Net Income: Analyze the divergence between GAAP Net Income ($11.7M) and FFO ($57.0M) to understand the impact of depreciation and amortization on reported earnings.
• UPREIT Unit Conversions: Monitor the conversion of limited partnership units (20.0 million outstanding) into common shares, which may dilute existing shareholders.
• Lease Renewals: Assess the risk associated with the 10.5% of commercial leases expiring in fiscal 2008 and the potential for rent concessions.