Business Context and Reporting Period
The filing is for Investors Real Estate Trust (IRET), not a registrant named Centerspace. It reports the second quarter and six months of fiscal 2016 ended October 31, 2015, with comparisons to October 31, 2014. IRET is a self-advised REIT focused on multifamily, healthcare, industrial and other commercial real estate, primarily in the Upper Midwest. At October 31, 2015, it held 94 multifamily properties with 12,269 apartment units and 83 commercial properties totaling approximately 4.5 million square feet.
Key Financial Metrics
| Metric | Three months ended October 31, 2015 | Year-over-year change | Six months ended October 31, 2015 | Year-over-year change |
|---|---|---|---|---|
| Total revenue | $52.3 million | 2.1% increase | $103.2 million | 2.8% increase |
| Operating income | $10.8 million | 24.9% decrease | $25.0 million | 2.4% decrease |
| Income from continuing operations | $1.2 million | 80.8% decrease | $6.6 million | 20.3% increase |
| Net income | $16.7 million | 184.1% increase | $21.4 million | 277.4% increase |
| Net income available to common shareholders | $13.8 million | 516.6% increase | $15.4 million | Prior period was a $0.8 million loss |
| Net income per common share | $0.11 | Up from $0.02 | $0.12 | Up from a $0.01 loss |
| FFO applicable to common shares and units | $8.1 million | 63.4% decrease | $30.1 million | 26.8% decrease |
| Net cash from operating activities | Not separately provided for the quarter | Not clearly comparable in the filing | $34.3 million | Down from $52.2 million |
Reported operating margin was approximately 20.6% for the quarter and 24.2% for the six-month period. Net income was substantially affected by discontinued operations and property-sale gains, so reported net margins are not representative of recurring operations. Consolidated same-store NOI declined 5.7% in the quarter and 2.1% year to date; total NOI was $31.3 million for the quarter and $62.8 million for the six months.
Balance Sheet, Debt and Liquidity
- Total assets were $1.782 billion, down from $1.998 billion at April 30, 2015, primarily reflecting large property dispositions.
- Cash and cash equivalents were $55.1 million, compared with $49.0 million at April 30, 2015.
- Mortgage debt was $729.0 million, excluding $133.4 million of mortgage debt associated with assets held for sale. The weighted average mortgage rate was 5.04%; approximately 87.7% of mortgage debt was fixed-rate.
- The revolving credit facility had $100.0 million of commitments, $17.5 million outstanding and a 4.75% interest rate. Management stated that the company was in compliance with its covenants.
- Construction debt and other debt totaled $128.5 million. Total liabilities were $1.076 billion.
- Six-month investing cash flow was positive $207.3 million, driven principally by $364.6 million of proceeds from sales of discontinued operations. Financing cash flow was negative $235.5 million, largely because of debt repayments, distributions and share repurchases.
- The company paid common distributions of $0.13 per share per quarter and declared another $0.13 distribution payable in January 2016.
Material Changes Versus the Prior Comparable Period
- IRET executed a strategic exit from most office and retail properties. During the quarter it sold 39 office properties, one healthcare property and 15 retail properties for total sales proceeds of approximately $371.9 million.
- Discontinued operations generated $15.5 million of income in the quarter, including a $23.9 million gain on sales, versus a $0.5 million loss in the prior-year quarter. This was the principal driver of higher net income.
- Continuing-operations performance weakened in the quarter: operating income fell 24.9%, while same-store NOI decreased 5.7% because of higher multifamily maintenance and property-management costs and lower occupancy.
- Same-store multifamily occupancy declined to 95.4% from 96.0%, while all-property multifamily occupancy declined to 91.9% from 94.6%. Management cited rising vacancies and concessions in Bakken-affected Williston and Minot markets.
- Same-store healthcare occupancy was 96.0%, and same-store industrial occupancy remained 100.0%. Industrial same-store NOI increased 3.2% in the quarter and 6.1% year to date.
- The company acquired three properties during the quarter: a 27,819-square-foot healthcare property for $6.5 million, a 74-unit multifamily property for $9.3 million and a 276-unit multifamily property for $56.0 million.
- IRET placed approximately $137.0 million of development projects into service during the six months, compared with $10.3 million in the prior-year period.
- The company repurchased 2.85 million common shares for $21.9 million at an average price of $7.69, leaving approximately $28.1 million available under its $50.0 million authorization.
Outlook, Risks and Unusual Items
- Management described investment demand, debt availability, property pricing, sales volume and most market fundamentals as favorable, with generally stable or improving occupancies and rents.
- Key operating risks include increased multifamily supply, rising vacancies and concessions in energy-exposed North Dakota markets, tenant credit risk, changing interest rates and the availability and cost of refinancing.
- A $122.6 million non-recourse loan secured by assets held for sale was in default after nonpayment in April 2015. The loan matured in October 2016, and management was discussing a deed-in-lieu arrangement; no resolution was assured. The filing recorded $7.1 million of extinguishment loss and $3.1 million of default interest for the six months.
- Development projects in progress had estimated total costs of approximately $174.0 million, of which $136.6 million had been incurred. Completion dates and costs remain subject to contingencies.
- The company was committed to fund approximately $4.0 million of tenant improvements over the following 12 months, including $1.1 million related to properties held for sale.
- No formal quantitative earnings or FFO guidance was provided. Management stated that liquidity was expected to be adequate, but cautioned that weaker property results or reduced refinancing capacity could require scaling back development, capital spending or distributions.
- Reported FFO was reduced by default interest and the debt-extinguishment loss; excluding those items, management calculated FFO of $16.9 million for the quarter and $40.5 million for the six months.
Investor Verification Checklist
- Confirm the issuer identity: the source filing is for Investors Real Estate Trust, while the request identifies Centerspace.
- Separate recurring continuing-operations performance from the large discontinued-operations gain and related property-sale proceeds.
- Review the status and eventual resolution of the $122.6 million defaulted loan and the value of its collateral.
- Assess multifamily occupancy, concessions and same-store NOI, particularly in Williston and Minot.
- Verify funding, lease-up and completion assumptions for the approximately $174.0 million development pipeline.
- Evaluate refinancing needs, including approximately $57.3 million of mortgage debt maturing within the next 12 months, as disclosed in the filing.
- Reconcile FFO, distributions and cash flow, noting that FFO is a non-GAAP measure and does not equal cash available for distributions.