Business Context and Reporting Period
This filing is for Investors Real Estate Trust, not Centerspace, and covers the third quarter and nine months ended January 31, 2013, of fiscal 2013. IRET is a self-advised REIT owning and leasing multifamily and commercial properties, primarily in North Dakota and Minnesota. At January 31, 2013, the portfolio included 85 multifamily properties with 9,924 units and 184 commercial properties totaling approximately 12.4 million rentable square feet.
Financial Results and Key Metrics
| Metric | Three months ended January 31 | Nine months ended January 31 |
|---|---|---|
| Total revenue | $66.2 million, up 9.4% | $193.2 million, up 7.4% |
| Net operating income | $39.9 million, up 10.8% | $119.4 million, up 13.6% |
| Net income | $6.2 million | $18.2 million |
| Net income attributable to IRET | $5.3 million, up 150.3% | $15.5 million, up 221.0% |
| Net income available to common shareholders | $2.4 million | $9.2 million |
| Basic and diluted earnings per common share | $0.03 | $0.10 |
| FFO applicable to common shares and units | $18.5 million, up 7.5% | $56.8 million, up 17.8% |
| FFO per share and unit | $0.16 | $0.50 |
| Operating cash flow | Not separately provided for the quarter | $55.2 million, up from $44.4 million |
Calculated revenue-based margins were approximately 60.2% for quarterly NOI and 61.8% for nine-month NOI. Net income margins were approximately 9.3% and 9.4%, respectively. NOI and FFO are non-GAAP measures and should not be treated as substitutes for GAAP net income or operating cash flow.
- Cash and cash equivalents were $62.3 million at January 31, 2013, compared with $40.0 million at April 30, 2012.
- Investing activities used $95.9 million, primarily for acquisitions and real estate improvements of $103.0 million.
- Financing activities provided $63.0 million, including $111.4 million of net Series B preferred-share proceeds.
- Mortgage debt was $1.042 billion and the revolving line of credit was $10.0 million. Total liabilities were $1.118 billion and total equity was $698.3 million.
- Mortgage debt carried a weighted-average interest rate of 5.65%; approximately 96.4% was fixed-rate. Mortgage maturities extend through July 2036.
- The $60.0 million secured revolving facility had $10.0 million outstanding, a 5.15% interest rate, and reported covenant compliance.
- Common distributions were $0.13 per share for each quarter shown. The March 2013 declaration maintained the $0.13 quarterly common distribution and declared Series A and Series B preferred distributions.
Material Changes Versus the Prior Comparable Period
- Revenue growth was driven primarily by fiscal 2013 acquisitions and properties placed in service, higher multifamily occupancy and rents, increased tenant reimbursements, and lower tenant concessions.
- Quarterly NOI increased in every reportable segment. Multifamily NOI rose 27.9%, commercial medical NOI rose 6.0%, commercial industrial NOI rose 9.5%, commercial retail NOI rose 4.7%, and commercial office NOI rose 0.9%.
- Nine-month NOI growth included a $2.3 million gain from involuntary conversion related to insurance proceeds for the Chateau Apartments fire.
- Net income available to common shareholders increased despite an additional $4.6 million of preferred dividends during the nine months, primarily because of higher NOI, discontinued-operation gains and the involuntary-conversion gain.
- Mortgage debt declined $7.1 million from April 30, 2012, while common shares increased to 94.4 million from 89.5 million and 4.6 million Series B preferred shares were issued.
- Property owned increased to $2.008 billion from $1.892 billion. The company acquired multifamily properties and land, completed several development projects, and disposed of properties producing a $3.5 million nine-month gain.
- Stabilized multifamily occupancy was 94.0%, commercial medical 94.6%, industrial 95.8%, retail 87.9% and office 78.4%. Commercial office occupancy remained the weakest segment despite a modest improvement.
Outlook, Commentary, Risks and Unusual Items
- Management reported no formal earnings or financial guidance in the filing.
- Management expected liquidity from operating cash flow, refinancing, credit facilities, property sales and additional equity or debt issuance to support distributions, capital expenditures, development and acquisitions.
- Management cautioned that conservative commercial real estate underwriting could limit cash-out refinancing and financing availability. Changes to the roles or lending practices of Freddie Mac and Fannie Mae could increase borrowing costs or restrict multifamily financing.
- Commercial office demand, occupancy and rental rates remained challenging. Increased leasing activity could require significant tenant-improvement and leasing-commission expenditures.
- The company had approximately $10.4 million of tenant-improvement commitments expected within the following 12 months and multiple active development projects, including Southgate Apartments and River Ridge Apartments.
- Insurance claims related to the Minot flood and Chateau fire remained subject to final settlement. The company expected to rebuild the destroyed Chateau building, but had no firm cost estimate or completion date.
- Subsequent to quarter-end, the company signed agreements for proposed acquisitions totaling approximately $39.6 million, subject to closing conditions. It also entered a proposed 288-unit Williston, North Dakota joint venture with an estimated total cost of $62.4 million; completion was contingent and not assured.
- Other risks included interest-rate and refinancing risk, tenant credit risk, environmental liabilities, litigation, property impairment, development execution, occupancy and rental-rate volatility, and restrictions on taxable property dispositions.
- No material litigation, defaults or material covenant compliance issues were reported. Disclosure controls were deemed effective.
Important Facts for Investors to Verify
- Confirm the issuer identity: the supplied filing is for Investors Real Estate Trust, while the request identifies Centerspace.
- Verify the intended reporting period, because the filing is for the quarter ended January 31, 2013, rather than a calendar third quarter.
- Assess recurring operating performance separately from the $2.3 million insurance-related involuntary-conversion gain and $3.5 million of property-disposition gains.
- Review debt maturities, refinancing assumptions, fixed-versus-variable exposure and the $60.0 million revolving facility covenants.
- Evaluate the sustainability of distributions relative to FFO, operating cash flow, preferred dividends, development spending and tenant-improvement commitments.
- Monitor commercial office occupancy, multifamily lease-up at newly acquired properties, and the execution and funding of announced developments and pending acquisitions.