Investors Real Estate Trust (IRET) — Form 10-Q Summary
Note: The provided filing is for Investors Real Estate Trust, now associated with Centerspace, rather than a filing labeled “Centerspace.” The reporting period ended September 30, 2019. Fiscal years began using a calendar year-end effective January 1, 2019.
Business Context and Reporting Period
IRET was a REIT focused primarily on owning, managing, acquiring, developing, and redeveloping multifamily apartment communities in Midwest and Western U.S. markets. At September 30, 2019, it owned interests in 84 communities containing 13,336 apartment homes and operated as one reportable segment.
Financial Performance and Position
| Metric | Three Months Ended September 30, 2019 | Year-over-Year Change | Nine Months Ended September 30, 2019 | Year-over-Year Change |
|---|---|---|---|---|
| Revenue | $47.4 million | +4.5% | $140.0 million | +4.0% |
| Net income | $34.7 million | Up from $3.4 million | $32.0 million | Up from $(13.2) million |
| Net income available to common shareholders | $29.9 million | Up from $0.9 million | $24.9 million | Up from $(16.0) million |
| Diluted EPS | $2.54 | Up from $0.08 | $2.11 | Up from $(1.34) |
| Net operating income | $27.5 million | +6.2% | $80.5 million | +4.6% |
| FFO applicable to common shares and Units | $12.2 million | +10.8% | $41.1 million | +29.7% |
| Operating cash flow | Not separately provided for the quarter | — | $51.6 million | +19.6% |
Same-store revenue increased 4.0% in the quarter and 3.7% for the nine-month period. Same-store weighted average occupancy improved to 93.3% from 91.9% in the quarter and to 94.3% from 93.4% for the nine-month period. Same-store NOI increased 5.3% in the quarter and 4.4% year to date.
Net income benefited substantially from $39.1 million of third-quarter gains and $39.8 million of year-to-date gains on real estate and other investment sales, as well as a $6.6 million year-to-date construction-defect litigation settlement gain. These items are not indicative of recurring operating performance.
Liquidity, Debt, and Capital Resources
- Total assets were $1.40 billion at September 30, 2019, compared with $1.34 billion at December 31, 2018.
- Total debt was $735.9 million, compared with $648.5 million at December 31, 2018. Debt consisted of $103.1 million of revolving lines, $145.0 million of term loans, $125.0 million of unsecured senior notes, and $362.7 million of mortgages.
- Liquidity was approximately $155.4 million, including $8.5 million of cash and $146.9 million of additional revolving credit availability. This was down from approximately $188.8 million at December 31, 2018.
- The unsecured credit facility had $250.0 million of commitments, with maturity on August 31, 2022 and one 12-month extension option. Management stated that the company was in compliance with applicable debt covenants.
- In September 2019, IRET issued $75.0 million of Series A senior notes due 2029 at 3.84% and $50.0 million of Series B notes due 2028 at 3.69%. An additional $25.0 million remained available under the private shelf agreement.
- During the nine months, IRET generated $51.6 million of operating cash flow, used $74.6 million in investing activities, and generated $15.6 million from financing activities. Cash, cash equivalents, and restricted cash declined to $11.8 million from $19.3 million at December 31, 2018.
Material Changes Versus the Prior Comparable Period
- Third-quarter revenue increased $2.0 million, driven by same-store growth and newly acquired communities, partly offset by lower revenue from dispositions and other properties.
- NOI increased $1.6 million in the quarter and $3.6 million year to date, reflecting stronger same-store performance and contributions from non-same-store properties.
- Interest expense declined 6.1% in the quarter and 7.5% year to date, primarily because of lower-cost replacement debt and lower average indebtedness.
- No real estate impairment charges were recorded in 2019, compared with $17.8 million in the first nine months of 2018.
- IRET acquired two apartment communities in the third quarter for $125.3 million: FreightYard Townhomes and Flats in Minneapolis, Minnesota, and Lugano at Cherry Creek in Denver, Colorado.
- IRET sold six apartment communities and one parcel of land in the third quarter for approximately $85.0 million, recognizing an aggregate gain of approximately $38.9 million.
- Common shares outstanding declined to 11.625 million from 11.942 million at December 31, 2018, following $18.0 million of common-share repurchases during the nine-month period.
- The company adopted the new lease accounting standard effective January 1, 2019; management reported no material impact on the financial statements.
Guidance, Outlook, Risks, and Unusual Items
Management stated that liquidity and financial condition were sufficient to meet reasonably anticipated liquidity needs during 2019 and 2020. No quantitative earnings or FFO guidance was provided in the filing.
Key risks include exposure to multifamily rental demand, occupancy and rental-rate changes, concentration in Midwest and Western markets, acquisition and disposition execution, refinancing and interest-rate risk, debt covenant compliance, capital expenditure requirements, insurance and weather-related losses, environmental liabilities, REIT qualification requirements, cybersecurity, and the ability to maintain common distributions.
Weather-related events caused $911,000 of casualty losses during the first nine months, including $641,000 representing insurance deductibles or annual stop-loss amounts. Management expected much of the insured damage to be covered, but certain water-related losses were uninsured.
At September 30, 2019, management reported no material pending legal proceedings, no material mortgage defaults, no significant off-balance-sheet arrangements, and no material changes to previously disclosed risk factors. Subsequent to quarter-end, IRET sold five apartment communities in Bismarck, North Dakota for $24.0 million and a commercial property in Woodbury, Minnesota for $5.8 million.
Most Important Facts for Investors to Verify
- Verify the issuer identity and corporate successor relationship because the filing names Investors Real Estate Trust, while the request identifies Centerspace.
- Separate recurring operating results from substantial nonrecurring gains on property sales and the litigation settlement when assessing earnings quality.
- Review leverage, debt maturities, interest-rate swaps, covenant requirements, and the reduction in available liquidity.
- Evaluate whether same-store occupancy and NOI growth can continue amid higher insurance, taxes, and other operating costs.
- Assess the strategic and financial impact of the 2019 acquisitions, dispositions, share repurchases, and subsequent property sales.
- Confirm the sustainability of common and preferred distributions against recurring FFO and operating cash flow.