Business Context and Reporting Period
This Form 10-Q is for Investors Real Estate Trust (IRET), not an entity identified in the filing as Centerspace. It covers the three and nine months ended January 31, 2014, representing the third quarter of fiscal 2014. IRET is a self-advised REIT that owns and leases multifamily and commercial real estate, primarily in North Dakota and Minnesota. At quarter-end, the portfolio included 92 multifamily properties with 10,725 units and 165 commercial properties totaling approximately 10.4 million square feet.
Key Financial Metrics
| Metric | Three Months Ended January 31, 2014 | Year-over-Year Change | Nine Months Ended January 31, 2014 | Year-over-Year Change |
|---|---|---|---|---|
| Total revenue | $67.6 million | +7.2% | $198.5 million | +8.0% |
| Net operating income | $43.2 million | +14.5% | $122.1 million | +8.0% |
| Income from continuing operations | $3.6 million | -21.4% | $11.1 million | -12.2% |
| Net income | $4.1 million | -33.9% | $17.6 million | -3.2% |
| Net income available to common shareholders | $0.6 million | -74.5% | $6.7 million | -26.5% |
| Net income per common share | $0.00 | From $0.03 | $0.06 | From $0.10 |
| FFO applicable to common shares and units | $22.7 million | +23.0% | $62.4 million | +9.9% |
| Cash flow from operating activities | Not separately provided for the quarter | — | $60.1 million | +$4.9 million |
Reported quarterly NOI margin was approximately 63.9% and nine-month NOI margin was approximately 61.5%, calculated as NOI divided by total revenue. These are supplemental, non-GAAP measures and should not be treated as GAAP operating cash flow.
Balance Sheet, Debt and Liquidity
- Total assets were $1.90 billion at January 31, 2014, including $1.71 billion of real estate investments.
- Mortgages payable were $1.01 billion, down $40.7 million, or 3.9%, from April 30, 2013. The weighted-average mortgage rate was 5.48%; approximately 99.2% of mortgage debt was fixed-rate.
- The revolving line of credit had a $72.0 million commitment, $22.5 million outstanding, and a 4.75% interest rate. Management reported compliance with applicable covenants.
- Cash and cash equivalents were $53.5 million, down from $94.1 million at April 30, 2013.
- Mortgage maturities totaled $22.8 million during the remainder of fiscal 2014, $92.0 million in fiscal 2015, $92.4 million in fiscal 2016, and $216.3 million in fiscal 2017.
- Common distributions remained $0.1300 per share per quarter. Preferred distributions totaled $8.6 million during the nine months.
Material Changes Versus the Prior Comparable Period
- Revenue increased due to acquisitions, newly completed developments, higher multifamily rents, and improved office and healthcare occupancy.
- NOI increased substantially, but net income declined because of higher depreciation and amortization, a $4.8 million impairment charge, higher administrative costs, and lower income from discontinued operations in the quarter.
- The nine-month common-share result was pressured by a 36.0% increase in preferred dividends, from $6.4 million to $8.6 million, despite relatively stable net income attributable to IRET.
- Physical occupancy at January 31, 2014 was 91.8% for multifamily, 80.4% for office, 96.5% for healthcare, 86.2% for industrial, and 86.9% for retail. Industrial occupancy fell from 94.4%, principally because of the expiration of a 147,600-square-foot lease.
- The company sold 20 properties during the nine months for aggregate sales proceeds of $80.9 million and recorded a $7.0 million gain. It acquired eight investment properties and placed three multifamily developments in service.
- Cash used in investing activities was $88.8 million, primarily reflecting $97.3 million of development and redevelopment spending. Financing activities used $12.0 million, compared with $63.0 million of financing cash inflow in the prior-year period, which benefited from a Series B preferred offering.
Guidance, Outlook, Risks and Unusual Items
- Management expects a slow and uneven recovery in the commercial office segment because of weak job and wage growth, tenant space-density initiatives, and downsizing upon lease renewal.
- Multifamily demand remained strong, but management expects increased competition as new housing supply is completed. Cypress Court was 66.7% occupied and River Ridge was 81.5% occupied at quarter-end.
- Management’s strategic plan emphasizes dispositions of older, less attractive, or capital-intensive commercial properties; new investment in healthcare, senior housing, and multifamily assets; a reduced focus on retail; and greater portfolio efficiency.
- Development projects in progress had anticipated total costs of approximately $227.7 million, of which $89.1 million had been incurred. The company also had $7.3 million of tenant-improvement commitments expected within approximately 12 months.
- A December 2013 fire destroyed two unoccupied buildings at Chateau Apartments. IRET recorded a $7.1 million asset write-down and corresponding insurance receivable, expects insurance to cover rebuilding costs, and estimates approximately $882,000 of lost net operating income not covered by insurance.
- IRET recorded $6.7 million of real estate impairment losses for the nine months, including a $4.8 million charge related to a Roseville, Minnesota industrial property planned for redevelopment.
- Liquidity could be pressured by weaker occupancy, rental rates, refinancing constraints, conservative lending standards, higher interest rates, development spending, and the need to fund distributions. Management noted potential cash-preservation measures could include reducing development, capital improvements, or distributions.
- Pending acquisitions, dispositions, development projects, environmental matters, tenant improvement obligations, and purchase options remain subject to closing conditions or other contingencies.
- Subsequent to quarter-end, the company acquired a senior housing property for approximately $7.1 million and signed agreements to sell two office properties for aggregate proposed proceeds of $10.3 million.
Investor Verification Priorities
- Verify the issuer and period: the supplied filing identifies Investors Real Estate Trust and a January 31, 2014 quarter-end, while the request metadata identifies Centerspace and “2013 Q3.”
- Reconcile GAAP net income and common-share earnings with FFO, NOI, impairment charges, gains on property sales, and discontinued operations.
- Review debt maturities, refinancing assumptions, line-of-credit covenants, fixed-versus-variable-rate exposure, and the fair value of mortgage debt.
- Assess occupancy and lease rollover risk, especially the industrial vacancy caused by the 147,600-square-foot lease expiration and the low office occupancy rate.
- Evaluate the funding and execution risk of approximately $138.6 million of remaining development costs, plus tenant-improvement commitments.
- Confirm insurance recovery, rebuilding timing, and uninsured lost income related to the Chateau fire.
- Assess whether preferred dividends, common distributions, and capital requirements are adequately supported by recurring operating cash flow rather than property-sale proceeds.