Business Context and Reporting Period
Company: Investors Real Estate Trust (IRET), a North Dakota Real Estate Investment Trust (REIT).
Reporting Period: Second Quarter of Fiscal 2002 ended October 31, 2001 (unaudited).
Operations: IRET acquires and owns residential apartment communities and commercial properties, primarily in North Dakota and Minnesota, with additional holdings in nine other states. As of October 31, 2001, the portfolio consisted of 59 apartment communities (8,248 units) and 62 commercial buildings (2,928,338 sq. ft.).
Key Financial Metrics
| Metric | Six Months Ended 10/31/01 | Six Months Ended 10/31/00 |
|---|---|---|
| Total Revenue | $44,955,135 | $35,835,904 |
| Net Income | $5,721,643 | $4,308,657 |
| Funds from Operations (FFO) | $14,335,235 | $10,971,288 |
| Net Cash from Operating Activities | $13,494,323 | $9,330,824 |
| Cash and Equivalents (Ending) | $19,994,239 | $5,386,769 |
| Total Assets | $626,240,224 | $570,322,124 |
| Total Liabilities | $435,707,549 | $389,086,105 |
| Mortgages Payable | $401,345,146 | $368,956,930 |
| Investment Certificates Issued | $25,875,441 | $11,876,417 |
| Net Income Per Share | $0.24 | $0.19 |
| Dividends Paid Per Share | $0.2925 | $0.2675 |
Material Changes vs. Prior Period
- Revenue Growth: Total revenue increased 25.4% year-over-year, driven primarily by the acquisition of new properties. Real estate rental income rose 25.2%.
- Profitability: Net income increased 32.8% to $5.72 million. Funds from Operations (FFO) increased 30.7% to $14.34 million.
- Expense Increases: Operating expenses rose significantly due to portfolio expansion. Insurance expenses jumped 83.9% (six months) due to higher general premium levels. Interest expense increased 24.0%.
- Balance Sheet: Real estate owned increased by approximately $46 million. Cash balances nearly tripled to $20 million due to proceeds from the sale of marketable securities, new mortgages, and investment certificates.
- Capital Gains: The company realized $324,332 in capital gains from the sale of the Sunchase Apartments and the Lester Chiropractic building, compared to zero in the prior year.
Outlook, Risks, and Management Commentary
- Acquisitions: During the six months ended October 31, 2001, IRET acquired five properties totaling $39.8 million, including the Interlachen Corporation Center ($16.7M) and Applewood on the Green ($10.4M).
- Future Commitments: IRET has contracts to acquire two additional properties (Thresher East & West Office Building and Pinehurst Apartment Complex) totaling $12.1 million. It is also committed to providing $7 million in construction financing for a facility in Virginia, MN.
- Insurance Risk: Management anticipates a substantial increase in insurance premiums for fiscal year 2003 following the September 11, 2001 terrorist attacks, though the specific amount is not yet quantifiable.
- Liquidity: The company maintains $17.5 million in unsecured lines of credit, none of which were utilized as of October 31, 2001. Management believes existing cash and borrowing capacity are adequate for current obligations.
- Dividends: A dividend of $0.15 per share was declared on November 14, 2001, payable January 17, 2002.
- Accounting Changes: The company noted upcoming adoption of SFAS No. 142 (Goodwill) and SFAS No. 144 (Impairment of Long-Lived Assets) effective May 1, 2002, but expects no material immediate impact.
Investor Verification Checklist
- Insurance Premium Impact: Verify the magnitude of the expected insurance cost increase for fiscal 2003 and its potential effect on future margins.
- Debt Maturities: Review the maturity schedule for the $25.9 million in Investment Certificates, with $14.3 million due in fiscal 2002.
- Variable Rate Exposure: Confirm the interest rate risk associated with the $24.5 million of mortgage debt subject to variable rates.
- Acquisition Integration: Assess the lease-up rates and performance of the five properties acquired in the first half of fiscal 2002.
- FFO vs. Net Income: Note that FFO ($14.3M) significantly exceeds Net Income ($5.7M) due to the exclusion of depreciation; verify if this is consistent with peer REITs.