Business Context and Reporting Period
Investors Real Estate Trust, the predecessor entity associated with Centerspace, is a REIT focused on owning, managing, acquiring, redeveloping, and developing apartment communities. The filing covers the three months ended July 31, 2018, the first quarter of fiscal 2019; the filing does not identify the period as “2018 Q1.” At quarter-end, the company owned interests in 87 apartment communities containing 13,703 apartment homes and operated as a single reportable segment.
Key Financial Metrics
| Metric | Three Months Ended July 31, 2018 | Prior Comparable Period |
|---|---|---|
| Revenue | $45.9 million | $41.0 million |
| Operating income (loss) | $2.3 million | $(8.0) million |
| Net income (loss) | $3.7 million | $(13.3) million |
| Net income available to common shareholders | $1.2 million | $(13.6) million |
| Basic and diluted EPS | $0.01 | $(0.11) |
| Net operating income | $26.4 million | $23.5 million |
| FFO applicable to common shares and units | $10.6 million, or $0.08 per share and unit | $13.1 million, or $0.10 |
| Operating cash flow | $14.7 million | $15.7 million |
| Cash, cash equivalents, and restricted cash | $20.4 million | $27.5 million |
| Total debt | $666.6 million | $706.1 million at April 30, 2018 |
| Common distribution | $0.07 per share | $0.07 per share |
Revenue increased 12.1%. NOI increased 12.6% and represented approximately 57.5% of revenue. Operating income represented approximately 5.1% of revenue, while net income represented approximately 8.1%; these margins benefited materially from a $9.2 million gain on property sales.
Material Changes Versus the Prior Comparable Period
- Same-store apartment revenue increased 3.0%, while same-store NOI increased 2.8%. Same-store occupancy declined to 94.0% from 94.5%.
- Total occupancy was 93.6%, compared with 93.7%; non-same-store occupancy improved to 90.3% from 83.9%.
- Revenue growth was driven primarily by properties acquired in fiscal 2018 and same-store growth. The company made no property acquisitions during the quarter, compared with $61.5 million of acquisitions in the prior-year quarter.
- The company sold three apartment communities, two commercial properties, and two parcels of land for $49.1 million, generating a $9.2 million gain. Net proceeds after debt repayment were $20.3 million, with $1.9 million distributed to joint venture partners.
- Depreciation and amortization declined 26.5% to $18.6 million. The prior-year period included approximately $9.0 million of additional depreciation from a change in estimated useful lives.
- FFO declined 19.2%, primarily because property dispositions reduced operating income despite the improvement in GAAP net income.
- Mortgage debt declined by approximately $45.5 million, and all $466.6 million of mortgage debt was fixed-rate at quarter-end, compared with 95.6% at April 30, 2018.
Cash Flow, Debt, and Liquidity
- Operating activities provided $14.7 million of cash. Investing activities provided $43.9 million, primarily from $49.3 million of property-sale proceeds. Financing activities used $54.4 million, including $46.2 million of mortgage principal repayments and $12.1 million of common, preferred, and noncontrolling-interest distributions.
- The $300.0 million revolving credit facility had $130.0 million drawn and approximately $170.0 million of additional borrowing capacity. Including cash and a $6.0 million operating line, reported total liquidity was approximately $192.3 million.
- Debt consisted of a $130.0 million revolving line, a $70.0 million term loan, and $466.6 million of mortgages. Management stated that it was in compliance with applicable debt covenants and that no material mortgage defaults or compliance issues existed.
- The company estimated that a 100-basis-point increase in 30-day LIBOR would reduce annual net income by approximately $2.0 million. A $70.0 million interest-rate swap hedged the term loan.
Guidance, Outlook, Commentary, Risks, and Unusual Items
- Management stated that financial condition and liquidity were sufficient to meet reasonably anticipated liquidity demands during fiscal 2019 and fiscal 2020. No quantitative earnings or FFO guidance was provided.
- Subsequent to quarter-end, the company amended its unsecured credit facility, increasing total commitments from $370.0 million to $395.0 million, extending maturities, adding a new $75.0 million term loan maturing in August 2025, reducing certain pricing margins, and entering into additional interest-rate swaps.
- Effective May 1, 2018, the company adopted new revenue-recognition and nonfinancial-asset disposition guidance using the modified retrospective method. The adoption resulted in a $627,000 increase to opening retained earnings related to a previously deferred gain on a property sale.
- The company corrected an immaterial prior-period equity misstatement involving noncontrolling interests. Management stated that the correction did not affect assets, liabilities, revenue, net income, common shares, or EPS.
- Key risks include apartment occupancy and rental-rate changes, operating-cost inflation, real estate valuations, refinancing and interest-rate exposure, access to capital, property disposition restrictions, environmental liabilities, casualty insurance availability, REIT qualification, cyber risk, and the ability to fund capital expenditures and distributions.
- Management reported no material legal proceedings, no material changes to previously disclosed risk factors, and no new impairment charges during the quarter.
Investor Verification Checklist
- Verify the company identity and reporting-period labeling, because the filing is for Investors Real Estate Trust and the quarter ended July 31, 2018, rather than a filing explicitly labeled Centerspace 2018 Q1.
- Separate recurring apartment operations from the $9.2 million property-sale gain and other disposition-related effects when assessing earnings quality.
- Reconcile the decline in FFO with the increase in GAAP net income and evaluate the effect of property dispositions on future NOI.
- Review the post-quarter-end $395.0 million unsecured facility amendment, new $75.0 million term loan, maturities, pricing, and associated interest-rate swaps.
- Assess refinancing exposure, including scheduled mortgage principal payments of $466.6 million and the approximately $2.0 million annualized sensitivity to a 100-basis-point LIBOR increase.
- Monitor same-store occupancy, rental-rate growth, expense growth, capital expenditures, and the sustainability of the $0.07 quarterly common distribution.