Investors Real Estate Trust (IRET) — Form 10-Q Summary
Business Context and Reporting Period
This filing is for the quarter and six months ended October 31, 2016, the second quarter of fiscal 2017. The filing identifies the registrant as Investors Real Estate Trust; the request metadata identifies Centerspace. IRET is a self-advised REIT focused primarily on multifamily and healthcare real estate in the Upper Midwest and other states. At October 31, 2016, it held for investment 86 multifamily properties with 12,751 units, 30 healthcare properties and 14 other properties, and classified 14 multifamily, 27 healthcare, two retail properties and one parcel of land as held for sale.
Financial Highlights
| Metric | Three Months Ended October 31 | Six Months Ended October 31 |
|---|---|---|
| Total revenue | $50.6 million, up 9.2% | $100.2 million, up 9.7% |
| Net operating income | $29.0 million, up 10.0% | $57.0 million, up 7.3% |
| Operating income (loss) | $12.0 million, versus $8.0 million | $(32.0) million, versus $19.3 million |
| Income from continuing operations | $1.9 million, versus $(0.2) million | $(42.4) million, versus $3.8 million |
| Net income (loss) | $12.3 million, versus $16.7 million | $(28.3) million, versus $21.4 million |
| Net income (loss) available to common shareholders | $8.7 million; $0.07 per share | $(15.8) million; $(0.13) per share |
| Funds from operations applicable to common shares and units | $16.5 million; $0.12 per share and unit | $32.3 million; $0.24 per share and unit |
| Cash flow from operating activities | Not separately provided for the quarter | $35.4 million, versus $34.3 million |
Revenue growth was principally driven by acquisitions and development projects placed in service in fiscal 2016. Reported NOI margins were approximately 57.4% for the quarter and 56.9% for the six months. Same-store NOI declined 2.1% for the quarter and 5.8% for the six months, while non-same-store NOI increased 100.8% and 120.9%, respectively.
The six-month results included $54.2 million of real estate impairment charges, primarily on three multifamily properties and one parcel of land in energy-impacted Williston, North Dakota. This was compared with $3.2 million of impairment charges in the prior-year period. The impairment was the principal reason for the six-month net loss.
Balance Sheet, Debt and Liquidity
- Total assets were $1.679 billion at October 31, 2016, compared with $1.755 billion at April 30, 2016.
- Cash and cash equivalents were $68.7 million, compared with $66.7 million at April 30, 2016.
- Mortgage debt was approximately $844.6 million, including debt related to held-for-sale properties. Approximately 73.0% was fixed rate, with a weighted average rate of 4.55%.
- The revolving credit facility had $100.0 million of commitments, $47.5 million outstanding and a 4.75% interest rate at October 31, 2016. Management stated that the company was in compliance with its covenants.
- Total liabilities were $1.020 billion, and total equity was $651.2 million.
- Cash flow from operations of $35.4 million exceeded common and preferred distributions paid during the six months, which totaled $37.3 million, before considering other financing cash flows.
- Net cash provided by investing activities was $15.5 million, including $43.9 million of proceeds from discontinued-operations sales and $13.9 million from other property sales. Net cash used in financing activities was $48.9 million.
Mortgage maturities during the remainder of fiscal 2017 totaled $118.8 million, including $45.7 million secured by properties held for sale. Management expected to pay off $1.7 million and refinance $61.9 million of mortgage debt maturing in the third and fourth quarters of fiscal 2017. The filing notes that refinancing remains dependent on asset quality, occupancy, tenant creditworthiness and lending conditions.
Material Changes Versus the Prior Comparable Period
- Revenue increased 9.2% in the quarter and 9.7% for the six months, but same-store revenue declined 1.6% and 1.8%, respectively.
- Multifamily same-store occupancy declined to 92.9% from 95.2%; all-property multifamily occupancy was 91.2% versus 91.9%.
- Healthcare same-store occupancy declined to 92.8% from 95.8%; all-property healthcare occupancy was 88.9% versus 90.0%.
- Interest expense increased 21.6% in the quarter and 26.8% for the six months, primarily due to higher mortgage debt and reduced capitalized construction interest.
- IRET acquired no new properties during the six months, compared with $71.8 million of acquisitions in the prior-year period. It did acquire the remaining 41.41% minority interest in the Red 20 multifamily joint venture for $4.9 million.
- IRET placed $72.3 million of development projects in service, compared with $137.0 million in the prior-year period, and sold eight healthcare properties and adjacent land for $43.9 million.
- Discontinued-operations income declined to $10.4 million for the quarter and $14.1 million for the six months, from $16.9 million and $17.6 million, respectively, largely reflecting the ongoing exit from senior housing, office and retail assets.
- Common and preferred distributions remained $0.13 per common share per quarter. Subsequent to quarter-end, IRET redeemed all 1.15 million Series A preferred shares for $29.164 million.
Outlook, Commentary, Risks and Unusual Items
Management described investment demand, access to equity and debt, and most market fundamentals as favorable. However, energy and commodity weakness, increased supply and elevated vacancies pressured certain North Dakota markets, particularly Minot and Williston. Management also cited continued multifamily development competition and dependence on employment and wage growth to support occupancy and rent increases.
IRET was executing a strategic shift toward multifamily real estate and away from senior housing, office and retail. Signed agreements covered 26 senior housing properties, one multifamily property and one parcel of land for an aggregate proposed sale price of $236.0 million, plus a retail property proposed for $4.0 million. These transactions were subject to closing conditions and contingencies.
- Management stated that liquidity was adequate for operations, distributions and planned capital requirements, but acknowledged that weaker property performance or reduced refinancing capacity could require scaling back development, capital improvements or distributions.
- Approximately $31.8 million of total costs were anticipated for the Monticello Crossings development, of which $31.4 million had been incurred; completion was expected in the fourth quarter of fiscal 2017.
- IRET was committed to fund $6.0 million of tenant improvements within approximately 12 months.
- A one-percentage-point increase in variable mortgage rates would increase annual interest expense by approximately $1.9 million based on $185.8 million of variable-rate mortgage debt.
- One joint-venture partner could compel IRET to acquire its interest in IRET-Minot Apartments during a specified period through February 5, 2020; the redeemable interest was valued at $8.6 million.
- Management reported no material legal proceedings, mortgage defaults or compliance issues. Environmental liabilities, tenant credit risk, lease expirations, property impairments and refinancing risk remain material contingencies.
- No formal numerical earnings or operating guidance was provided in the filing.
Most Important Facts to Verify
- Confirm the issuer identity and ticker because the filing is for Investors Real Estate Trust, while the request metadata names Centerspace.
- Review the valuation assumptions supporting the $54.2 million impairment charge, especially the Williston properties and energy-market exposure.
- Verify completion, proceeds and debt paydown from the proposed $236.0 million senior-housing portfolio disposition.
- Assess the ability to refinance approximately $63.6 million of fiscal 2017 maturities and the broader $84.6 million of mortgage debt maturing within 12 months.
- Monitor same-store occupancy, rent trends and NOI in North Dakota, where same-store multifamily performance deteriorated.
- Reconcile cash available for distributions with operating cash flow, development spending, tenant-improvement commitments and the post-quarter-end $29.164 million Series A preferred redemption.
- Review the company’s non-GAAP FFO calculation and the effect of excluding impairments, depreciation and property-sale gains.