Investors Real Estate Trust (IRET) — Form 10-Q Summary
Filing-period note: The request identifies CENTERSPACE and 2011 Q2, but the supplied filing is for Investors Real Estate Trust, dated December 12, 2011, covering the quarter and six months ended October 31, 2011, in fiscal 2012. All amounts are in thousands unless otherwise stated.
Business context and reporting period
IRET was a self-advised REIT owning and leasing multifamily and commercial real estate, primarily in North Dakota and Minnesota, with additional properties in other upper Midwest and western states. At October 31, 2011, the portfolio included 81 multifamily properties with 8,885 units and 184 commercial properties totaling approximately 12.3 million rentable square feet.
The filing presents unaudited results for the three and six months ended October 31, 2011, compared with the corresponding periods ended October 31, 2010. The fiscal year ends April 30.
Financial performance and key metrics
| Metric | Three months ended October 31, 2011 | Three months ended October 31, 2010 | Six months ended October 31, 2011 | Six months ended October 31, 2010 |
|---|---|---|---|---|
| Total revenue | $60.7 million | $58.8 million | $120.3 million | $118.0 million |
| Net operating income | $34.9 million | $34.5 million | $69.6 million | $69.4 million |
| NOI margin | 57.5% | 58.7% | 57.8% | 58.8% |
| Income from continuing operations | $0.9 million | $1.6 million | $2.4 million | $3.6 million |
| Net income | $1.5 million | $7.1 million | $3.1 million | $9.5 million |
| Net income available to common shareholders | $0.7 million | $5.2 million | $1.5 million | $6.6 million |
| Net income per common share | $0.01 | $0.07 | $0.02 | $0.09 |
| FFO applicable to common shares and units | $15.2 million | $16.0 million | $31.0 million | $32.9 million |
| FFO per share and unit | $0.15 | $0.17 | $0.31 | $0.34 |
Revenue increased 3.2% for the quarter and 1.9% year to date, primarily from properties acquired in fiscal 2011 and 2012. NOI was broadly stable, but margins declined because of higher concessions, utilities, insurance and property-management costs.
Six-month net cash provided by operating activities was $24.2 million, compared with $18.6 million in the prior-year period. Investing cash flow was negative $66.3 million, reflecting $77.1 million of acquisitions and improvements. Financing cash flow was positive $33.6 million, including $70.7 million of mortgage proceeds and $17.0 million of revolving-credit proceeds. Cash decreased to $32.7 million from $41.2 million at April 30, 2011.
At October 31, 2011, total assets were $1.665 billion, total liabilities were $1.127 billion, mortgages payable were $1.040 billion and the revolving line of credit balance was $47.0 million. Mortgage debt carried a weighted-average interest rate of 5.86%; approximately 99.4% of mortgage debt was fixed rate. Total debt, including the revolver, was approximately $1.087 billion.
Common shares outstanding increased to 83.7 million from 80.5 million at April 30, 2011, primarily through the distribution reinvestment and share purchase plan and conversions of operating-partnership units. The common distribution was $0.1300 per share for the October payment, compared with $0.1715 in the comparable prior-year payment.
Material changes versus the prior comparable period
- Revenue rose $1.8 million for the quarter and $2.3 million for the six-month period, while NOI rose only $0.4 million and $0.2 million, respectively.
- Net income fell $5.6 million for the quarter and $6.4 million year to date, primarily because prior-year results included substantially larger gains from discontinued-property sales.
- Income from discontinued operations declined to $0.6 million for the quarter and $0.6 million year to date, compared with $5.5 million and $5.8 million, respectively, in the prior-year periods.
- FFO declined 5.3% for the quarter and 5.6% year to date, despite higher revenue, reflecting increased operating, corporate and other expenses.
- Physical occupancy improved in multifamily, medical and industrial properties, but commercial-office occupancy declined. All-property occupancy was 94.6% for multifamily, 78.0% for office, 96.2% for medical, 92.3% for industrial and 85.8% for retail.
- Tenant concessions increased to $2.2 million for the quarter and $3.4 million year to date, compared with $1.0 million and $2.1 million in the prior-year periods.
- The company acquired or placed in service properties and projects with total six-month acquisition cost of approximately $58.3 million, including Idaho senior housing projects, multifamily properties in Minnesota and South Dakota, and the Trinity medical clinic. It sold one Montana retail property for approximately $2.2 million and recorded a $0.6 million gain.
Guidance, outlook, risks and unusual items
- Management stated that operating cash flow, cash on hand, refinancing and credit facilities were expected to support operating needs and distributions, but warned that weaker property performance or reduced refinancing availability could require scaling back development, capital improvements or distributions.
- Approximately $13.1 million of mortgage debt was scheduled to mature in the third and fourth quarters of fiscal 2012; the company had applications or commitments to refinance approximately $6.1 million at October 31, 2011.
- The $50.0 million revolving facility could expand to $60.0 million; subsequent to quarter-end, the commitment reached $60.0 million. Borrowings were $49.0 million as of December 12, 2011, versus $47.0 million at quarter-end. Management believed the company was in compliance with covenants.
- June 2011 flooding damaged the Arrowhead Shopping Center and Chateau Apartments in Minot. The company had recognized $4.3 million of insurance proceeds, expected an additional $474,000 of business-interruption reimbursement subject to accounting conditions, and estimated a future involuntary-conversion gain of approximately $2.6 million. These estimates remained subject to revision.
- Development and expansion commitments included approximately $7.8 million of tenant improvements over the following 12 months and multiple projects with stated estimated costs, including a $17.3 million Rochester apartment project, a $19.5 million Williston joint venture and a $5.8 million Minot industrial-office build-to-suit.
- Management cited commercial-office leasing weakness, economic uncertainty, conservative commercial-real-estate lending, refinancing risk and potential changes to Freddie Mac and Fannie Mae multifamily financing as principal risks. The company did not use interest-rate derivatives.
- No material litigation, impairment losses or debt defaults were reported. The company stated that disclosure controls were effective and that there were no material changes in internal control over financial reporting.
- Subsequent to quarter-end, IRET acquired a 36-unit Minnesota multifamily property for approximately $3.5 million and signed agreements for potential acquisitions totaling approximately $16.2 million, subject to closing conditions.
Important facts for investors to verify
- Confirm the issuer identity: the supplied filing is for Investors Real Estate Trust, not an entity identified as CENTERSPACE.
- Review debt maturities, refinancing commitments, revolver capacity, covenant compliance and the effect of the additional post-quarter-end borrowing.
- Assess whether commercial-office occupancy and increased concessions improve, and whether higher utilities, insurance and property-management costs moderate.
- Monitor flood restoration, insurance reimbursements and the estimated $2.6 million involuntary-conversion gain.
- Reconcile distributions with FFO, operating cash flow and the company’s increasing leverage and development commitments.
- Evaluate the provisional purchase-price allocations and operating performance of the Idaho senior housing acquisitions and other newly acquired properties.