Business Context and Reporting Period
The filing is a Form 10-Q for Investors Real Estate Trust, not a filing identified as Centerspace in the source metadata. It covers the third quarter and nine months of fiscal 2017 ended January 31, 2017, with comparisons to the prior-year periods. IRET is a self-advised REIT focused primarily on multifamily properties in Midwest growth markets, with healthcare and other commercial properties also held.
At January 31, 2017, IRET held for investment 86 multifamily properties containing 12,813 apartment units and 44 commercial properties, including 30 healthcare properties. It also held 14 multifamily properties, 22 healthcare properties, one retail property and one land parcel for sale.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2017 | Nine Months Ended January 31, 2017 |
|---|---|---|
| Total revenue | $51.2 million, up 5.7% | $151.4 million, up 8.3% |
| Net operating income | $28.4 million, up 1.1% | $85.4 million, up 5.1% |
| Net income attributable to IRET | $23.1 million | $13.1 million |
| Income from continuing operations | $1.6 million | $(40.9) million |
| Net income available to common shareholders | $19.2 million | $3.4 million |
| Basic and diluted earnings per common share | $0.16 | $0.03 |
| FFO applicable to common shares and units | $12.7 million, or $0.09 per share/unit | $45.0 million, or $0.33 per share/unit |
| Cash flow from operating activities | Not separately provided for the quarter | $55.7 million |
Revenue growth primarily reflected properties acquired and development projects placed in service in fiscal 2016 and 2017. Same-store revenue declined 0.4% in the quarter and 1.3% for the nine-month period, while same-store NOI declined 5.8% in both periods. Total NOI margin was approximately 55.5% for the quarter and 56.4% for the nine-month period.
Occupancy at January 31, 2017 was 91.5% for multifamily properties and 89.3% for healthcare properties. Same-store occupancy was 92.7% for both segments, compared with 95.0% for multifamily and 95.3% for healthcare in the prior year.
Balance Sheet, Debt and Liquidity
- Total assets were $1.61 billion, compared with $1.76 billion at April 30, 2016.
- Cash and cash equivalents were $57.0 million, compared with $66.7 million at April 30, 2016.
- Mortgage debt, including debt related to held-for-sale properties, totaled approximately $739.5 million. The weighted average mortgage interest rate was approximately 4.7%, and approximately 89% of mortgage debt was fixed-rate.
- The revolving line of credit balance was $157.0 million at January 31, 2017. The new unsecured BMO facility had a $250.0 million commitment, but borrowing capacity based on the unencumbered asset pool was $174.0 million.
- Total liabilities were $980.6 million, and total equity was $621.2 million.
- Operating cash flow of $55.7 million and investing cash flow of $81.4 million were offset by $146.8 million of financing cash outflows, resulting in a $9.7 million decrease in cash during the nine months.
- Mortgage principal payments due during the remainder of fiscal 2017 and fiscal 2018 totaled approximately $42.7 million, including $31.3 million related to properties held for sale.
Material Changes Versus the Prior Comparable Period
- Revenue increased, but expense growth exceeded revenue growth. Nine-month total expenses rose 59.5% to $172.6 million, driven primarily by a $54.2 million impairment charge versus $3.3 million in the prior year.
- Continuing operations declined from $9.0 million of income to a $40.9 million loss for the nine-month period. The impairment charges primarily related to three multifamily properties and one parcel of land in Williston, North Dakota, reflecting energy-market weakness, poor leasing activity and declining rents.
- Net income available to common shareholders declined 93.6% for the nine-month period, from $52.4 million to $3.4 million. FFO declined 46.9% for the nine months, from $84.7 million to $45.0 million.
- Same-store multifamily revenue declined 2.1% for the nine months, primarily because of higher vacancy and concessions in Minot and Williston, North Dakota. Same-store multifamily NOI declined 4.7%.
- IRET sold five healthcare properties and one retail property during the third quarter for total sales proceeds of $73.9 million. Nine-month dispositions generated a total gain of $37.4 million before classification effects.
- IRET redeemed all 1.15 million Series A preferred shares in December 2016 for approximately $29.2 million and subsequently had 4.6 million Series B preferred shares outstanding.
- The quarterly common distribution was reduced from $0.13 to $0.07 per share/unit beginning with the January 2017 distribution, which management stated was intended to improve the balance sheet and finance future growth.
Guidance, Outlook, Risks and Unusual Items
Management did not provide quantified earnings or FFO guidance in the filing. Management described investment real estate demand and credit availability as generally strong, but noted heightened supply concerns, moderating development debt capital and conservative commercial real estate underwriting.
- North Dakota markets remain pressured by energy and commodity weakness, increased supply, elevated vacancies and lower rents.
- Multifamily performance depends on employment and wage growth, while substantial new apartment construction may increase competition for residents.
- Healthcare same-store occupancy was stable but below the prior-year level, and tenant concentration is material: affiliates of Edgewood Vista represented approximately 22.6% of commercial minimum rents, although the properties were classified as held for sale.
- IRET had a 202-unit Monticello Crossings development underway with anticipated total costs of $32.1 million, of which $29.3 million had been incurred; completion was expected in the fourth quarter of fiscal 2017.
- IRET was committed to fund approximately $5.6 million of tenant improvements over the following 12 months and had six properties subject to tenant purchase options.
- The company identified approximately $943.8 million of outstanding borrowings subject to financial covenants. The new credit facility included a maximum consolidated leverage ratio of 0.60 to 1.00; management reported compliance at January 31, 2017.
- A 1% increase in rates would increase annual interest expense by approximately $516,000 on variable-rate mortgage debt and approximately $1.6 million on the $157.0 million line-of-credit balance.
- Subsequent to quarter-end, IRET sold additional senior housing and healthcare properties for aggregate stated sales prices of approximately $136.3 million.
Investor Verification Items
- Verify the issuer identity and ticker because the supplied metadata identifies Centerspace, while the filing identifies Investors Real Estate Trust.
- Assess recurring operating performance excluding discontinued operations, property-sale gains and the $54.2 million impairment charge.
- Monitor North Dakota occupancy, rent concessions and same-store NOI, particularly in Minot and Williston.
- Reconcile the $157.0 million revolving balance, the $174.0 million borrowing base and the facility’s leverage and other covenants.
- Evaluate the sustainability of the reduced $0.07 quarterly common distribution relative to recurring FFO and operating cash flow.
- Track completion, funding and lease-up of Monticello Crossings and remaining held-for-sale properties.