Business Context and Reporting Period
The filing is Investors Real Estate Trust’s unaudited Form 10-Q for the quarter and six months ended October 31, 2017, representing fiscal 2018 second-quarter results. The request identifies the company as Centerspace, but the filing names Investors Real Estate Trust (IRET); this company-identity discrepancy should be verified.
IRET was a multifamily-focused REIT owning interests in 89 multifamily properties with 13,576 apartment homes and 40 commercial properties totaling approximately 2.5 million square feet. The company was continuing its strategic shift toward multifamily real estate while disposing of non-core commercial and healthcare assets.
Key Financial Metrics
| Metric | Three months ended October 31 | Six months ended October 31 |
|---|---|---|
| Total revenue | $53.9 million, up 6.5% | $106.7 million, up 6.4% |
| Net income (loss) | $13.1 million, versus $12.3 million | $(0.1) million, versus $(28.3) million |
| Net income (loss) available to common shareholders | $6.4 million, versus $8.7 million | $(7.2) million, versus $(15.8) million |
| Net earnings (loss) per common share | $0.05, versus $0.07 | $(0.06), versus $(0.13) |
| Net operating income | $28.6 million, down 1.4% | $57.1 million, essentially flat |
| FFO applicable to common shares and units | $9.5 million, down 42.5%; $0.07 per share/unit | $22.5 million, down 30.3%; $0.17 per share/unit |
| Operating cash flow | Not separately reported | $26.9 million, versus $35.4 million |
| Cash and cash equivalents | $42.5 million at October 31, 2017, versus $28.8 million at April 30, 2017 |
Six-month operating margins were approximately 53.5% on an NOI basis and 0.1% on an operating-income basis. These are calculated from reported figures; the filing does not present a single consolidated GAAP margin.
Balance Sheet, Debt and Liquidity
- Total assets were $1.55 billion, compared with $1.47 billion at April 30, 2017. Net property owned was $1.45 billion.
- Total liabilities were $958.7 million, including $655.9 million of mortgages payable, $247.5 million drawn on the $300.0 million revolving credit facility, and $21.6 million of construction debt.
- Mortgage debt had a weighted-average interest rate of approximately 4.67%; approximately 90.1% was fixed rate. Mortgage maturities totaled $658.965 million, with $21.4 million due in fiscal 2018 and $100.3 million in fiscal 2019.
- The company reported compliance with its revolving-credit covenants and no material mortgage defaults or compliance issues.
- A 100-basis-point increase in 30-day LIBOR was estimated to reduce annual net income by approximately $3.1 million.
- Management expected operating cash flow, cash on hand, credit facilities and additional financing sources to fund operating needs, distributions, capital improvements and debt obligations, but noted that weaker property performance or financing constraints could require cash-preservation measures.
Material Changes Versus the Prior Comparable Period
- Revenue increased 6.5% for the quarter and 6.4% year to date, driven by acquisitions, prior-year developments and same-store growth.
- Same-store revenue increased 3.3% for both the quarter and six-month period, but same-store NOI declined 4.6% and 3.1%, respectively, because expenses rose faster than revenue.
- Multifamily same-store occupancy increased to 95.2% from 92.4%; multifamily same-store NOI declined 5.5% for the quarter and 4.5% year to date. Healthcare same-store occupancy was 92.5%, versus 92.6%, and healthcare same-store NOI declined 0.8% for the quarter and 0.4% year to date.
- Depreciation and amortization increased 52.9% for the quarter and 78.5% year to date because the company shortened estimated useful lives of real estate assets effective May 1, 2017. The change reduced six-month net income by approximately $20.3 million and earnings per share by $0.15.
- Six-month impairment expense declined to $0.3 million from $54.2 million in the prior year. The current-period impairment related to Bismarck land; prior-year impairments primarily reflected deterioration in the Williston, North Dakota market.
- Interest expense declined 9.0% for the quarter and 9.7% year to date, attributed to lower average debt balances, although the revolving-credit balance increased materially to $247.5 million from $57.1 million at April 30, 2017.
- FFO declined despite stable reported NOI, reflecting higher depreciation-related adjustments, property sales and other factors.
- The company acquired two multifamily properties during the six-month period for $153.8 million and sold properties for total sales proceeds of $66.9 million. Second-quarter activity included the $92.3 million Park Place acquisition and $63.4 million of dispositions.
- IRET issued approximately $103 million of 6.625% Series C preferred shares and redeemed all $115 million of 7.95% Series B preferred shares. Common shares outstanding declined to 120.2 million from 121.2 million, partly due to repurchases.
Guidance, Outlook, Risks and Unusual Items
- No quantitative earnings or operating guidance was provided.
- Management emphasized multifamily growth in markets with stable employment, economic growth and attractive quality-of-life characteristics, while pursuing dispositions of non-core properties.
- Subsequent to quarter-end, IRET acquired a 274-unit Denver property for $90.6 million and entered into an agreement to sell 28 medical office buildings and one office property for $417.5 million. The sale was pending, subject to due diligence, buyer financing and other conditions, and was expected to close in the third fiscal quarter.
- The revolving credit facility was amended after quarter-end to provide for a new term loan of up to $70 million and permit interest-rate hedging instruments.
- Key risks include multifamily occupancy and rent levels, commercial tenant credit, property values, interest rates, debt refinancing, access to capital, execution of planned dispositions and redeployment of sale proceeds, operating costs, insurance, environmental liabilities, REIT qualification and tax restrictions on approximately 28 properties.
- The company had a commitment to fund approximately $10.1 million remaining on a $16.2 million multifamily development loan and approximately $4.6 million of tenant improvements within the following 12 months.
- Discontinued operations contributed $12.7 million in the quarter and $13.3 million year to date, primarily including gains from selling the remaining senior-housing properties. This contribution is not representative of ongoing operations.
- The filing reported no material litigation, no material legal proceedings, no defaults on senior securities and effective disclosure controls.
Important Facts for Investors to Verify
- Confirm whether this filing belongs to Centerspace or the predecessor entity Investors Real Estate Trust, as named in the filing.
- Assess the sustainability of distributions given six-month common-shareholder losses, FFO decline and distributions exceeding reported net income.
- Review refinancing requirements, especially the large revolving-credit balance, near-term mortgage maturities and construction debt maturing in May 2018.
- Evaluate whether same-store expense growth and the useful-life change are recurring operational issues or largely accounting and transition effects.
- Verify completion, timing, financing and proceeds from the pending $417.5 million medical-office and office-property disposition.
- Review the effect of the Denver acquisition and other multifamily investments on occupancy, NOI, leverage and geographic concentration.
- Consider the sensitivity of earnings and liquidity to interest-rate increases, property values, tenant credit and the company’s ability to execute planned asset sales.