Investors Real Estate Trust (IRET) — Form 10-Q Summary
Business context and reporting period
IRET is a self-advised REIT focused on acquiring, owning and leasing multifamily and commercial real estate, primarily in North Dakota and Minnesota. The filing covers the three and nine months ended January 31, 2015, the third quarter of fiscal 2015. At period-end, IRET owned 99 multifamily properties totaling 11,765 apartment units and 160 commercial properties totaling approximately 9.8 million rentable square feet.
Financial performance and condition
| Metric | Three months ended January 31 | Nine months ended January 31 |
|---|---|---|
| Total revenue | $72.9 million, up 6.6% | $212.4 million, up 6.6% |
| Operating income | $22.1 million, up 22.1% | $57.4 million, up 6.0% |
| Net income | $9.2 million, up 124.9% | $14.8 million, down 15.7% |
| Net income available to common shareholders | $5.5 million, versus $0.6 million | $4.7 million, versus $6.7 million |
| Basic and diluted EPS | $0.05, versus $0.00 | $0.04, versus $0.06 |
| FFO applicable to common shares and units | $23.4 million, up 3.1% | $64.6 million, up 3.5% |
| Cash flow from operating activities | Not separately provided for the quarter | $80.8 million, versus $60.1 million |
Operating margin was approximately 30.3% for the quarter and 27.0% for the nine-month period, compared with approximately 26.5% and 27.2%, respectively, in the prior comparable periods. Net margin was approximately 12.6% for the quarter and 7.0% for the nine-month period. Consolidated NOI was $43.5 million for the quarter, up 0.7%, and $126.6 million for the nine-month period, up 3.7%. Same-store NOI declined 2.5% for the quarter and 0.4% for the nine-month period, while non-same-store NOI increased 35.9% and 67.1%, respectively.
At January 31, 2015, total assets were $2.00 billion, including $1.80 billion of real estate investments, $44.3 million of real estate held for sale and $52.1 million of cash and cash equivalents. Total liabilities were $1.26 billion, including $1.006 billion of mortgages payable, $50.5 million drawn on the revolving credit facility and $132.2 million of other liabilities. The revolving facility had $90.0 million of commitments, leaving approximately $39.5 million of stated capacity before other borrowing limitations.
Mortgage debt carried a weighted-average interest rate of 5.17%; approximately 92.2% was fixed-rate debt. Mortgage maturities range from the remainder of fiscal 2015 through 2036. Common distributions remained $0.13 per share per quarter, or $0.39 per share for the nine-month period.
Material changes versus the prior comparable period
- Revenue increased primarily from properties acquired or placed in service and higher same-store multifamily rents. Same-store commercial revenue growth was limited, particularly in office properties.
- Quarterly net income improved substantially because the prior-year period included higher impairment charges, a $1.5 million gain on involuntary conversion and $0.5 million of discontinued-operations income. Nine-month net income declined because the prior-year period included $6.45 million of discontinued-operations income and $2.48 million of involuntary-conversion gains.
- Interest expense declined 3.5% for the quarter and 1.5% for the nine-month period, although revolving-credit expense increased as borrowings rose.
- Nine-month operating cash flow increased $20.7 million, but investing cash use increased to $160.2 million from $88.8 million, primarily because development and redevelopment spending increased to $143.3 million.
- IRET placed $113.6 million of development projects in service during the nine months, compared with $53.5 million in the prior-year period, and acquired approximately $41.3 million of real estate.
- Common shares outstanding increased to 122.1 million from 109.0 million at April 30, 2014, primarily through the distribution reinvestment plan and conversion of operating partnership units. Operating partnership units declined to 14.4 million from 21.1 million.
- Same-store occupancy at January 31, 2015 was 94.0% for multifamily, 84.1% for office, 95.8% for healthcare, 100.0% for industrial and 83.5% for retail. Office occupancy improved on an all-property basis, while retail occupancy declined.
Guidance, outlook, risks and unusual items
- Management reported continued strong multifamily demand, high occupancy and selected rent increases, but noted increasing competition from new apartment construction and dependence on employment and wage growth.
- Office demand remained weak, particularly in suburban Minneapolis, with tenant space reductions and limited expected rent growth. Retail performance was mixed, with stronger Minneapolis-metro and grocery-anchored properties and weaker secondary-market locations.
- IRET announced it was exploring the disposition during calendar 2015 of substantially all office and retail properties. Proceeds are intended for deleveraging and investment in multifamily, industrial and healthcare assets.
- At January 31, 2015, 14 properties were classified as held for sale, with assets of $44.3 million and liabilities of $22.6 million. Pending sales agreements totaled approximately $34.9 million, subject to closing conditions.
- A $122.6 million non-recourse CMBS loan secured by nine office properties matures in October 2016 and was transferred to a special servicer because the loan balance exceeds management’s current estimate of the portfolio’s fair value. The borrower remained current, but the outcome of discussions was uncertain.
- Development projects in progress had anticipated total costs of approximately $379.9 million, of which $263.1 million had been incurred. The company also had $9.3 million of committed tenant improvements expected within approximately 12 months.
- IRET recorded $6.1 million of real estate impairments for the nine months, involving commercial properties and unimproved land. Management’s impairment estimates depend on occupancy, rental rates, capital requirements, holding periods and property values.
- The Nebraska Orthopaedic Hospital tenant exercised a purchase option. IRET and the tenant were in arbitration to determine the purchase price, and completion of the sale was not assured.
- Management stated that liquidity was adequate for current operating requirements and distributions, but cautioned that weaker property performance or reduced refinancing availability could require reduced development, capital spending or distributions.
- The filing identifies interest-rate, refinancing, tenant credit, construction, environmental, insurance, litigation and market risks. A 1% increase in rates on $78.5 million of variable-rate mortgage debt would increase annual interest expense by approximately $0.8 million.
Most important facts to verify
- Reconciliation of FFO and NOI to GAAP results, including the effect of impairments, property sales and discontinued-operations presentation.
- Refinancing or restructuring developments concerning the $122.6 million CMBS loan and upcoming mortgage maturities.
- Progress and funding requirements for the approximately $379.9 million development pipeline.
- Execution and proceeds of the planned office and retail dispositions and the use of proceeds for deleveraging.
- Multifamily lease-up, same-store expense growth and occupancy trends, particularly in North Dakota markets.
- Office and retail leasing demand, upcoming lease expirations and tenant credit exposure.
- Outcome of the Nebraska Orthopaedic Hospital purchase-option arbitration and other pending dispositions.
- Effects of share issuance and operating-partnership unit conversions on per-share results and distribution coverage.