Business Context and Reporting Period
The filing is for Investors Real Estate Trust (IRET), not a registrant identified as Centerspace. It covers the first quarter of fiscal 2016, the three months ended July 31, 2015, with comparative results for July 31, 2014. IRET is a self-advised REIT focused on multifamily and commercial real estate, primarily in North Dakota and Minnesota. At quarter-end, it held 100 multifamily properties with 12,027 units, 81 commercial properties totaling approximately 4.4 million rentable square feet, and 67 commercial properties held for sale.
Key Financial Metrics
| Metric | Q1 FY2016 | Q1 FY2015 | Change |
|---|---|---|---|
| Total revenue | $51.0 million | $49.2 million | +3.5% |
| Operating income | $14.2 million | $11.2 million | +26.2% |
| Income from continuing operations | $5.4 million | $(0.8) million | Improved |
| Net income | $4.7 million | $(0.2) million | Improved |
| Net income available to common shareholders | $1.7 million | $(3.0) million | Improved by $4.7 million |
| Basic and diluted EPS | $0.01 | $(0.03) | Improved |
| FFO applicable to common shares and units | $22.0 million | $18.9 million | +16.3% |
| FFO per share and unit | $0.16 | $0.14 | +14.3% |
| Net cash from operating activities | $24.8 million | $23.4 million | +$1.4 million |
| Cash and cash equivalents at quarter-end | $44.8 million | $60.6 million | Lower by $15.8 million |
Reported operating margin was approximately 27.8%, compared with 22.8% in the prior-year quarter. Net margin was approximately 9.3%, compared with a slight net loss in the prior period. Net operating income increased 4.5% to $31.5 million, including same-store NOI growth of 1.8% and non-same-store NOI growth of 31.5%.
Balance Sheet, Debt and Liquidity
- Total assets were $2.02 billion at July 31, 2015, compared with $2.00 billion at April 30, 2015.
- Real estate investments totaled $1.45 billion, while assets held for sale totaled $453.2 million and related liabilities totaled $308.8 million.
- Mortgage debt was $669.7 million, with a weighted average interest rate of 4.89%; approximately 92.4% was fixed-rate debt.
- The secured revolving line of credit had $100.0 million of commitments, $83.5 million outstanding, and a 4.75% interest rate. Management stated that covenant requirements were satisfied.
- Construction debt and other debt totaled $165.9 million. Including mortgages, the principal debt balances shown on the balance sheet were approximately $919.1 million, excluding liabilities held for sale.
- Cash declined by $4.2 million during the quarter, as operating and financing inflows were more than offset by development and other investing expenditures.
- Common distributions remained $0.1300 per share. Preferred distributions totaled $2.9 million for the quarter.
Material Changes Versus the Prior Comparable Period
- Revenue increased primarily from properties acquired or placed in service in fiscal 2015 and 2016, partially offset by properties sold or classified as held for sale.
- Administrative expense declined 33.0% to $2.5 million, principally because long-term incentive awards for fiscal 2016 had not yet been granted.
- Interest expense decreased 5.7% to $9.2 million; lower mortgage interest more than offset higher line-of-credit interest.
- Impairment expense declined to $1.3 million from $2.3 million. The current-quarter impairments related to an office property and land; $0.4 million was reported in discontinued operations.
- IRET classified 48 office properties, 17 retail properties and one healthcare property as discontinued operations as part of its strategic plan to exit substantially all office and retail assets. Discontinued operations generated a $0.7 million loss versus $0.6 million of income in the prior-year quarter.
- Development projects totaling $105.8 million were placed in service, including Chateau II, Edina 6565 France SMC III and the final phase of Renaissance Heights. No properties were acquired during the quarter, versus $26.6 million of acquisitions in the prior-year quarter.
- Same-store multifamily occupancy decreased to 93.5% from 94.0%; same-store healthcare occupancy decreased to 96.0% from 96.6%; same-store industrial occupancy remained 100.0%.
Guidance, Outlook, Risks and Unusual Items
- Management expects to sell substantially all office and retail properties and use sale proceeds primarily for deleveraging and investments in multifamily and healthcare assets.
- Management described apartment trends as generally stable but noted increased competition from new multifamily construction, dependence on employment and wage growth, and a 0.5 percentage-point decline in same-store multifamily occupancy.
- Healthcare was described as stable, while industrial demand was improving; same-store industrial occupancy remained 100.0%.
- IRET had approximately $184.1 million of anticipated development costs for projects in progress, of which $135.5 million had been incurred. Projects were subject to construction, leasing, financing and other contingencies.
- The company had $7.8 million of tenant-improvement commitments due within approximately 12 months, including $5.2 million related to held-for-sale properties.
- A subsidiary defaulted on a $122.6 million non-recourse loan secured by assets held for sale. The lender issued a default notice, and IRET was discussing a deed-in-lieu arrangement. The carrying value of the collateral was below the loan balance, and no resolution was assured.
- A tenant exercised an option to purchase the Nebraska Orthopaedic Hospital property; the purchase price was subject to arbitration and completion was uncertain.
- Subsequent to quarter-end, IRET sold a portfolio of 33 office properties, one healthcare property and land for $250.0 million, recording an approximately $18.1 million gain and an approximately $4.8 million loss on debt extinguishment. It also sold five office properties through a joint venture for $40.0 million.
- Interest-rate exposure remains relevant because the company does not use derivatives or other hedging instruments. A one-percentage-point increase in rates on $50.6 million of variable-rate mortgage debt would increase annual interest expense by approximately $0.5 million.
Important Facts for Investors to Verify
- Confirm that the intended issuer is IRET rather than Centerspace and that the applicable period is Q1 fiscal 2016 ended July 31, 2015.
- Assess the outcome and economic impact of the $122.6 million loan default, including any deed-in-lieu transaction, foreclosure risk or additional loss.
- Verify the timing, proceeds and debt reduction from the office and retail asset sales and whether planned dispositions close on expected terms.
- Reconcile FFO growth with GAAP earnings, discontinued operations, impairments and the company’s definition of FFO.
- Monitor occupancy and lease-up of recently completed developments, particularly multifamily properties with below-target occupancy.
- Evaluate refinancing requirements, maturities, line-of-credit utilization, covenant compliance and the availability of financing for development commitments.
- Consider the effect of the strategic exit from office and retail on recurring revenue, NOI, leverage and portfolio concentration.