Business Context and Reporting Period
The filing is Investors Real Estate Trust’s unaudited Form 10-Q for the quarter ended July 31, 2013, the first quarter of fiscal 2014. The request identifies the company as CENTERSPACE, but the filing registrant is Investors Real Estate Trust (IRET). IRET is a self-advised REIT owning and leasing multifamily and commercial real estate, primarily in North Dakota and Minnesota. At July 31, 2013, it owned 88 multifamily properties with 10,351 units and 175 commercial properties totaling approximately 12.0 million rentable square feet.
Financial Results and Key Metrics
| Metric | Q1 FY2014 | Q1 FY2013 | Change |
|---|---|---|---|
| Total revenue | $67.2 million | $61.0 million | +10.2% |
| Operating income | $16.1 million | $17.8 million | -9.2% |
| Net income | $3.2 million | $2.0 million | +61.1% |
| Net income attributable to IRET | $3.1 million | $1.7 million | +83.3% |
| Net income available to common shareholders | $0.2 million | $1.1 million | -81.7% |
| FFO applicable to common shares and units | $19.7 million | $17.6 million | +11.7% |
| FFO per share and unit | $0.16 | $0.16 | Flat |
| Operating cash flow | $17.3 million | $13.7 million | +$3.5 million |
Revenue increased due to acquisitions and development projects placed in service, higher stabilized-property rents and tenant reimbursements. The operating margin was approximately 24.0% versus 29.2% in the prior-year quarter; the decline reflected higher depreciation and amortization, operating costs, and a $1.5 million real estate impairment charge. Net income benefited from $1.7 million of discontinued operations, including a $1.9 million gain on property sales, and a $1.0 million gain on involuntary conversion.
Net income available to common shareholders declined primarily because preferred dividends increased to $2.9 million from $0.6 million, while depreciation, amortization and impairment charges also increased. Basic and diluted net income per common share was approximately $0.00 versus $0.01.
Balance Sheet, Debt and Liquidity
- Total assets were $1.897 billion at July 31, 2013, compared with $1.890 billion at April 30, 2013.
- Cash and cash equivalents were $93.2 million, compared with $94.1 million at fiscal year-end and $37.0 million at July 31, 2012.
- Mortgage debt was $1.030 billion, down $18.8 million from April 30, 2013. The weighted-average mortgage interest rate was 5.54%, and approximately 98.5% of mortgage debt was fixed-rate.
- The secured revolving credit facility had $60.0 million of commitments and $10.0 million outstanding at quarter-end. Management reported compliance with its covenants, including a 1.25x aggregate debt-service-coverage requirement.
- Total liabilities were $1.125 billion and total equity was $771.3 million. Mortgage debt had an estimated fair value of $1.143 billion versus a carrying amount of $1.030 billion.
- Cash flow used in investing was $14.0 million, including $26.5 million for development and redevelopment and $7.2 million for property improvements, partly offset by $21.3 million of proceeds from discontinued-property sales.
- Cash flow used in financing was $4.3 million, reflecting $22.9 million of mortgage principal payments, distributions and other financing outflows, partly offset by debt and equity proceeds.
Material Changes Versus the Prior Comparable Period
- Revenue increased 10.2%, while total real estate net operating income increased 11.8% to $40.6 million. Stabilized-property NOI increased 2.5% to $35.4 million.
- Multifamily revenue increased 15.9% and total multifamily NOI increased 22.4%, supported by rent increases and additional units, although stabilized multifamily NOI declined slightly and occupancy decreased to 92.9% from 93.0%.
- Commercial office occupancy improved to 80.2% from 79.0%, and office NOI increased 3.4%.
- Healthcare NOI increased 7.3%, with occupancy improving to 95.4% from 95.2%.
- Industrial NOI increased 27.7%, but occupancy declined to 87.5% from 88.5%.
- Retail occupancy fell to 79.7% from 87.1% following the departure of an anchor tenant; retail NOI declined 2.2%. A replacement anchor lease began August 1, 2013.
- IRET acquired a 71-unit multifamily property and land for total stated acquisition costs of approximately $6.4 million, compared with $52.4 million of multifamily acquisitions in the prior-year quarter.
- IRET sold four commercial industrial properties and one retail property for $21.8 million, recognizing a $1.9 million gain, compared with $1.0 million of sales proceeds and a $73,000 loss in the prior-year quarter.
- Shares outstanding increased to 104.2 million from 101.5 million, primarily from the distribution reinvestment and share purchase plan. Quarterly common distributions remained $0.13 per share.
Guidance, Outlook, Risks and Unusual Items
Management expected continued favorable multifamily performance from high occupancy, rent growth and lease-up of recently completed projects. However, results remain dependent on economic recovery, employment and wage growth, and the level of competing multifamily construction. Commercial office recovery was expected to remain challenged by weak absorption, elevated unemployment and tenant space-efficiency initiatives. Retail conditions remained modest, while healthcare was described as stable and industrial demand as generally healthy but without corresponding rent growth.
IRET planned selective dispositions of non-core industrial and retail assets, using proceeds to deleverage and fund multifamily and healthcare acquisitions and development. Development projects in progress had estimated total costs of $213.6 million, of which $77.4 million had been incurred. Management disclosed that projects are subject to construction, financing, leasing and other contingencies and may not be completed on expected terms or schedules.
- The company recorded a $1.5 million impairment on four commercial properties based on market offers and its intent to dispose of them.
- A $966,000 gain on involuntary conversion arose from insurance proceeds related to the Chateau Apartments fire; final insurance settlement was expected upon rebuilding.
- IRET sold an assisted-living property for $7.9 million in cash plus a $29.0 million contract for deed, but accounted for the transaction as a financing because of continuing involvement.
- Approximately $8.3 million of tenant improvements were contractually committed within the following 12 months.
- Mortgage maturities and refinancing needs remain important liquidity considerations. Management cautioned that conservative lending standards could reduce access to cash-out refinancing, and changes to Freddie Mac or Fannie Mae programs could increase multifamily borrowing costs or restrict financing availability.
- Potential exposure includes interest-rate changes, tenant credit and lease rollover, environmental liabilities, property insurance claims, development execution, and restrictions on taxable dispositions. No material litigation or debt defaults were reported.
- After quarter-end, IRET established a common-share ATM program allowing up to $75.0 million of gross sales; no shares had been issued under the program as of the filing date.
Most Important Facts to Verify
- Confirm the applicable issuer: the supplied filing is for Investors Real Estate Trust, not CENTERSPACE.
- Reconcile common-shareholder earnings with FFO: common earnings were only $0.2 million, while FFO was $19.7 million and included substantial noncash depreciation, amortization and impairment adjustments.
- Review debt maturities, refinancing assumptions and compliance with the revolving credit facility’s coverage and deposit covenants.
- Assess retail and commercial occupancy trends, particularly the 7.4 percentage-point decline in all-property retail occupancy and the commercial lease-expiration schedule.
- Evaluate the funding requirements and completion risks for the $213.6 million development pipeline and the $8.3 million tenant-improvement commitments.
- Confirm the effect of property dispositions, discontinued operations, impairment charges and the Chateau insurance recovery on recurring operating performance.
- Review subsequent acquisitions, dispositions, development commitments and the $75.0 million ATM authorization disclosed after quarter-end.