CSR

Business Context and Reporting Period

Company: Investors Real Estate Trust (IRET), operating as a self-administered, externally managed equity REIT and UPREIT structure.
Reporting Period: Fiscal year ended April 30, 2002.
Business Overview: IRET owns and operates income-producing real estate, primarily in the upper Midwest (Minnesota, North Dakota, South Dakota, Montana, Nebraska). The portfolio is diversified between multi-family residential (66 properties, 8,296 units) and commercial properties (67 properties, 3.8 million sq. ft.). As of April 30, 2002, 79% of gross revenue was derived from investments in the core upper Midwest states.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue Growth: Total revenue increased by $17.2 million (22.8%) compared to fiscal 2001, driven primarily by rent from 28 properties acquired in the prior year and 14 new properties added in fiscal 2002.
• Portfolio Shift: The company accelerated its shift toward commercial properties. Approximately 85% of acquisitions in the past 24 months were commercial. Commercial properties now represent 49% of the portfolio (net of depreciation) compared to 40% in 2001.
• Acquisitions: Acquired 10 commercial properties ($119.3 million) and 5 residential communities ($23.9 million) totaling $143.3 million. Financing included $33.2 million cash, $20.1 million in operating partnership units, and $89.9 million in debt.
• Equity Capital: Issued 6.7 million shares of beneficial interest in two offerings (December 2001 and April 2002), raising net proceeds of approximately $56.8 million.
• Dispositions: Sold 5 properties (3 commercial, 2 residential) for a net gain of $604,282.
• Occupancy: Economic occupancy rates remained strong at 94.4% for multi-family and 97.2% for commercial properties.

Guidance, Outlook, and Risks

• Acquisition Strategy: Management anticipates acquiring $100 million to $200 million of real estate assets annually, subject to capital availability. They expect commercial properties to equal or exceed multi-family residential properties in the portfolio during fiscal 2003.
• Distribution Policy: IRET intends to distribute approximately 70% of Funds from Operations (FFO) to shareholders and unitholders. Cash distributions have increased every year since inception.
• Insurance Costs: Management expects a substantial increase in insurance costs for the coming year (44.29% increase noted for the current year). They anticipate net income and FFO will still increase but at a lower rate than the 10% FFO growth seen in fiscal 2002.
• Vacancy Risks: Due to a general economic slowdown, management expects vacancy rates to increase over the next 12 to 18 months. Commercial rent rates in the Minneapolis area have stagnated.
• Interest Rate Risk: The company has $31 million in variable-rate debt. A 1% increase in interest rates would increase annual interest expense by approximately $316,000.
• Geographic Concentration: Significant concentration in Minnesota (43.7% of total real estate investment) and North Dakota (21.9%).

Investor Verification Checklist

• Insurance Coverage: Verify the status of the waiver request for terrorism insurance coverage on the Rochester, MN apartment complex, as the current policy excludes acts of terrorism.
• Related Party Transactions: Review the acquisitions of Bloomington Business Plaza, Thresher Square, and Wirth Corporate Center from affiliates of Trustee Steven B. Hoyt, and the $3.5 million UPREIT unit loan made to Mr. Hoyt.
• Debt Maturities: Confirm the refinancing strategy for $19.2 million in mortgage principal payments due in fiscal 2003 and the $16.5 million in investment certificates maturing in fiscal 2003.
• Commercial Lease Expirations: Assess the impact of 11.8% of commercial square footage leases expiring in fiscal 2003 and the potential for rent stagnation in the Minneapolis market.
• Environmental Liabilities: Confirm that no material environmental contamination exists at acquired properties, as the company relies on Phase I studies which may not reveal all conditions.