Business Context and Reporting Period
This filing is for Investors Real Estate Trust (IRET), not a registrant identified as Centerspace. It reports the unaudited third quarter and nine months of fiscal 2018 ended January 31, 2018, with comparative periods ended January 31, 2017. IRET operated as a multifamily REIT and owned interests in 89 multifamily properties containing 13,786 apartment homes at quarter-end.
Key Financial Metrics
- Revenue: Third-quarter revenue was $43.3 million, up 7.5% from $40.2 million; nine-month revenue was $127.4 million, up 7.3%.
- Net income: Third-quarter net income was $151.9 million versus $25.2 million; nine-month net income was $151.8 million versus a $3.1 million net loss. Results were substantially affected by gains from property dispositions.
- Continuing operations: Third-quarter income from continuing operations was $5.1 million versus $0.2 million. Nine-month continuing operations produced a $12.8 million loss versus a $47.9 million loss.
- Common earnings: Net earnings per common share were $1.12 for the quarter and $1.06 for the nine months, compared with $0.16 and $0.03, respectively. Continuing-operations earnings per share were $0.03 for the quarter and a loss of $0.16 for the nine months.
- FFO: FFO applicable to common shares and units was $5.8 million, or $0.04 per share and unit, for the quarter, compared with $12.7 million, or $0.09. Nine-month FFO was $28.3 million, or $0.21, versus $45.0 million, or $0.33.
- NOI and operations: Multifamily NOI increased 16.2% to $23.0 million in the quarter and 7.0% to $64.9 million for the nine months. Same-store occupancy was 95.2% versus 92.3% in the prior-year quarter; same-store NOI increased 5.8% for the quarter but declined 1.2% for the nine months.
- Cash flow: Nine-month operating cash flow was $42.0 million versus $55.7 million. Investing activities provided $120.1 million, while financing activities used $168.2 million. Cash and cash equivalents ended at $22.7 million versus $28.8 million at April 30, 2017.
- Debt and liquidity: Total debt was $692.9 million versus $786.0 million at April 30, 2017. Debt consisted primarily of $494.9 million of fixed-rate mortgages, $61.0 million of variable-rate mortgages, $67.0 million drawn on the revolving facility, and a $70.0 million term loan. Reported liquidity was approximately $174.9 million, including $152.2 million of revolver availability and $22.7 million of cash.
- Balance sheet: Total assets were $1.46 billion and total equity was $723.4 million at January 31, 2018. Restricted cash was $121.3 million, including $116.8 million of tax-deferred exchange proceeds.
- Dividends: Common dividends were $0.07 per share for each of the July, October, and January distributions, compared with $0.13 per share in each comparable prior-year month.
Material Changes Versus the Prior Comparable Period
- IRET substantially exited healthcare real estate, selling 27 healthcare properties during the quarter. The assets were reported as discontinued operations, generating $146.8 million of quarterly income, including a $151.4 million gain on sale.
- Quarterly sales totaled $442.8 million, including healthcare, multifamily, and other commercial properties. Nine-month property disposition proceeds totaled approximately $509.6 million, producing a $182.1 million aggregate gain before related presentation effects.
- IRET acquired a 274-unit Denver multifamily property for $90.6 million during the quarter. It acquired three apartment properties for approximately $244.4 million during the nine months.
- Depreciation and amortization increased 70.5% in the quarter and 83.8% for the nine months, primarily because estimated useful lives of real estate assets were shortened. Management estimated that this change increased nine-month depreciation by approximately $24.8 million and reduced earnings per share by $0.18.
- Preferred capital was restructured: IRET issued approximately $103.0 million of 6.625% Series C preferred shares and redeemed all $115.0 million of 7.95% Series B preferred shares.
- Quarterly FFO declined despite higher multifamily NOI, primarily because of mortgage prepayment penalties and reduced NOI from property dispositions.
- Common shares outstanding declined to approximately 120.0 million from 121.2 million at April 30, 2017, reflecting repurchases. IRET repurchased approximately 1.2 million common shares for $7.1 million during the nine months.
Guidance, Outlook, Risks, and Unusual Items
Management stated that liquidity and financial condition were sufficient to meet reasonably anticipated fiscal 2018 and fiscal 2019 requirements, but did not provide specific earnings or revenue guidance. Management intends to continue focusing on positive operating cash flow, appropriate leverage, cost control, acquisitions, and reinvestment of disposition proceeds.
- At January 31, 2018, $116.8 million of tax-deferred exchange proceeds remained restricted; replacement property was required to be acquired by June 27, 2018 to complete the exchange.
- IRET entered into a $70.0 million unsecured term loan and an interest-rate swap with a $70.0 million notional amount. A 100-basis-point increase in 30-day LIBOR was estimated to reduce annual net income by approximately $1.3 million, assuming constant spreads.
- IRET had $61.0 million of variable-rate mortgage debt and $67.0 million drawn on its revolving credit facility. Management reported compliance with debt covenants and no material mortgage defaults.
- A $16.2 million loan to a multifamily development remained subject to approximately $6.0 million of additional funding. The loan bears interest at 6% and matures in July 2023.
- Subsequent to quarter-end, IRET agreed to acquire the 390-unit Westend apartment community in Denver and paid a $10 million non-refundable earnest money deposit. Closing was expected in the fourth quarter of fiscal 2018.
- Key risks include multifamily rental demand, occupancy and rental-rate changes, property valuation, refinancing and interest-rate risk, disposition and tax-deferred exchange execution, capital expenditure requirements, REIT qualification, environmental matters, insurance costs, and the ability to integrate acquisitions.
- Management disclosed ordinary-course litigation and potential environmental liabilities but stated that no material adverse outcome was currently expected. Twenty-six properties containing 4,212 apartment units were subject to restrictions on taxable dispositions.
Important Facts for Investors to Verify
- Confirm the registrant identity: the supplied filing is for Investors Real Estate Trust, while the request identifies Centerspace.
- Separate recurring multifamily performance from the $146.8 million of discontinued-operation income and disposition gains when assessing earnings quality.
- Review the impact of shortened depreciable lives on reported earnings, FFO adjustments, asset values, and future depreciation expense.
- Verify the use and timing of the $116.8 million tax-deferred exchange proceeds and the June 27, 2018 replacement-property deadline.
- Reconcile reported liquidity, revolver borrowing capacity, debt maturities, variable-rate exposure, and interest-rate swap terms.
- Assess whether the $0.07 common dividend was sustainable relative to recurring cash flow and FFO, given the reduction from $0.13 per share.
- Review the Westend acquisition deposit, expected closing, financing plans, and risks associated with the proposed transaction.