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CENTERSPACE - Quarter Report: 2011 January (Form 10-Q)

iretform10q-03142011.htm
 
 

 


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C.
20549
 
Form 10-Q
 
Quarterly Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
 
For Quarter Ended January 31, 2011
 
Commission File Number 0-14851
 
INVESTORS REAL ESTATE TRUST
(Exact name of registrant as specified in its charter)
 
North Dakota
45-0311232
(State or other jurisdiction of
(I.R.S. Employer Identification No.)
incorporation or organization)
 
Post Office Box 1988
3015 16th Street SW, Suite 100
Minot, ND 58702-1988
(Address of principal executive offices) (Zip code)
 
(701) 837-4738
(Registrant’s telephone number, including area code)
 
N/A
(Former name, former address, and former fiscal year, if changed since last report.)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements for at least the past 90 days.
 
Yes R                           No £
 
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
Yes £                           No £
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer £                                                           Accelerated filer R
Non-accelerated filer £                                                           Smaller Reporting Company £
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
 
Yes £                           No R
 
Registrant is a North Dakota Real Estate Investment Trust. As of March 7, 2011, it had 80,056,089 common shares of beneficial interest outstanding.


 
 

 

TABLE OF CONTENTS
 
 
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PART I
ITEM 1. FINANCIAL STATEMENTS - THIRD QUARTER - FISCAL 2011
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
   
(in thousands, except share data)
 
 
 
January 31, 2011
   
April 30, 2010
 
ASSETS
           
Real estate investments
           
Property owned
  $ 1,763,585     $ 1,800,519  
Less accumulated depreciation
    (319,235 )     (308,626 )
      1,444,350       1,491,893  
Development in progress
    4,231       2,831  
Unimproved land
    7,470       6,007  
Mortgage loans receivable, net of allowance of $3 and $3, respectively
    157       158  
Total real estate investments
    1,456,208       1,500,889  
Other assets
               
Cash and cash equivalents
    30,907       54,791  
Marketable securities – available-for-sale
    325       420  
Receivable arising from straight-lining of rents, net of allowance of $982 and $912, respectively
    18,656       17,320  
Accounts receivable, net of allowance of $272 and $257, respectively
    8,864       4,916  
Real estate deposits
    254       516  
Prepaid and other assets
    2,852       1,189  
Intangible assets, net of accumulated amortization of $45,218 and $39,571, respectively
    51,543       50,700  
Tax, insurance, and other escrow
    18,467       9,301  
Property and equipment, net of accumulated depreciation of $1,223 and $924, respectively
    1,332       1,392  
Goodwill
    1,127       1,388  
Deferred charges and leasing costs, net of accumulated amortization of $14,309 and $13,131, respectively
    19,737       18,108  
TOTAL ASSETS
  $ 1,610,272     $ 1,660,930  
                 
LIABILITIES AND EQUITY
               
LIABILITIES
               
Accounts payable and accrued expenses
  $ 35,633     $ 38,514  
Revolving lines of credit
    10,000       6,550  
Mortgages payable
    998,929       1,057,619  
Other
    8,423       1,320  
TOTAL LIABILITIES
    1,052,985       1,104,003  
COMMITMENTS AND CONTINGENCIES (NOTE 6)
               
REDEEMABLE NONCONTROLLING INTERESTS –
CONSOLIDATED REAL ESTATE ENTITIES
    1,237       1,812  
EQUITY
               
Investors Real Estate Trust shareholders’ equity
               
Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 1,150,000 shares issued and outstanding at January 31, 2011 and April 30, 2010, aggregate liquidation preference of $28,750,000)
    27,317       27,317  
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 79,845,749 shares issued and outstanding at January 31, 2011, and 75,805,159 shares issued and outstanding at April 30, 2010)
    616,701       583,618  
Accumulated distributions in excess of net income
    (223,684 )     (201,412 )
Total Investors Real Estate Trust shareholders’ equity
    420,334       409,523  
Noncontrolling interests – Operating Partnership (20,047,190 units at January 31, 2011 and 20,521,365 units at April 30, 2010)
    126,335       134,970  
Noncontrolling interests – consolidated real estate entities
    9,381       10,622  
Total equity
    556,050       555,115  
TOTAL LIABILITIES AND EQUITY
  $ 1,610,272     $ 1,660,930  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
for the three and nine months ended January 31, 2011 and 2010
 
   
Three Months Ended
January 31
   
Nine Months Ended
January 31
 
   
(in thousands, except per share data)
 
   
2011
   
2010
   
2011
   
2010
 
REVENUE
                       
Real estate rentals
  $ 47,849     $ 46,374     $ 143,498     $ 138,389  
Tenant reimbursement
    12,354       10,960       34,785       33,712  
TOTAL REVENUE
    60,203       57,334       178,283       172,101  
EXPENSES
                               
Depreciation/amortization related to real estate investments
    13,902       13,907       41,603       41,254  
Utilities
    4,775       4,370       13,184       12,388  
Maintenance
    8,358       7,282       22,001       20,464  
Real estate taxes
    7,780       7,504       23,068       22,759  
Insurance
    646       910       1,866       2,692  
Property management expenses
    5,478       4,619       15,535       12,606  
Administrative expenses
    1,716       1,683       5,055       4,404  
Advisory and trustee services
    134       107       482       371  
Other expenses
    441       536       1,357       1,468  
Amortization related to non-real estate investments
    689       590       1,978       1,710  
Impairment of real estate investments
    0       0       0       708  
TOTAL EXPENSES
    43,919       41,508       126,129       120,824  
Gain on involuntary conversion
    0       1,660       0       1,660  
Interest expense
    (15,888 )     (16,534 )     (48,395 )     (49,306 )
Interest income
    75       138       194       264  
Other income
    32       112       217       239  
Income from continuing operations
    503       1,202       4,170       4,134  
Income (loss) from discontinued operations
    14,085       (838 )     19,871       (1,001 )
NET INCOME
    14,588       364       24,041       3,133  
Net (income) loss attributable to noncontrolling interests – Operating Partnership
    (2,793 )     39       (4,485 )     (381 )
Net loss attributable to noncontrolling interests – consolidated real estate entities
    38       49       82       2  
Net income attributable to Investors Real Estate Trust
    11,833       452       19,638       2,754  
Dividends to preferred shareholders
    (593 )     (593 )     (1,779 )     (1,779 )
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS
  $ 11,240     $ (141 )   $ 17,859     $ 975  
Earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted
    .00       .01       .03       .03  
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
    .14       (.01 )     .20       (.01 )
NET INCOME PER COMMON SHARE – BASIC AND DILUTED
  $ .14     $ .00     $ .23     $ .02  
DIVIDENDS PER COMMON SHARE
  $ .1715     $ .1715     $ .5145     $ .5130  

 
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)
for the nine months ended January 31, 2011 and 2010
 
   
(in thousands)
 
   
NUMBER
OF
PREFERRED
SHARES
   
PREFERRED
SHARES
   
NUMBER
OF COMMON
SHARES
   
COMMON
SHARES
   
ACCUMULATED
DISTRIBUTIONS
IN EXCESS OF
NET INCOME
   
NONCONTROLLING
INTERESTS
   
TOTAL
EQUITY
 
Balance April 30, 2009
    1,150     $ 27,317       60,304     $ 461,648     $ (155,956 )   $ 160,398     $ 493,407  
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
                                    2,754       336       3,090  
Distributions – common shares and units
                                    (34,359 )     (10,720 )     (45,079 )
Distributions – preferred shares
                                    (1,779 )             (1,779 )
Distribution reinvestment plan
                    923       7,821                       7,821  
Shares issued
                    12,463       99,022                       99,022  
Partnership units issued
                                            2,888       2,888  
Redemption of units for common shares
                    277       1,678               (1,678 )     0  
Adjustments to redeemable noncontrolling interests
                            (134 )                     (134 )
Other
                    (1 )     (596 )             (814 )     (1,410 )
Balance January 31, 2010
    1,150     $ 27,317       73,966     $ 569,439     $ (189,340 )   $ 150,410     $ 557,826  
                                                         
                                                         
                                                         
Balance April 30, 2010
    1,150     $ 27,317       75,805     $ 583,618     $ (201,412 )   $ 145,592     $ 555,115  
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
                                    19,638       4,408       24,046  
Distributions – common shares and units
                                    (40,131 )     (10,365 )     (50,496 )
Distributions – preferred shares
                                    (1,779 )             (1,779 )
Distribution reinvestment plan
                    998       8,356                       8,356  
Shares issued
                    2,213       18,411                       18,411  
Partnership units issued
                                            3,252       3,252  
Redemption of units for common shares
                    831       6,007               (6,007 )     0  
Adjustments to redeemable noncontrolling interests
                            570                       570  
Other
                    (1 )     (261 )             (1,164 )     (1,425 )
Balance January 31, 2011
    1,150     $ 27,317       79,846     $ 616,701     $ (223,684 )   $ 135,716     $ 556,050  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
for the nine months ended January 31, 2011 and 2010
 
   
Nine Months Ended
January 31
(in thousands)
 
 
 
2011
   
2010
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net Income
  $ 24,041     $ 3,133  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    45,951       45,754  
Gain on sale of real estate, land and other investments
    (19,365 )     0  
Gain on involuntary conversion
    0       (1,660 )
Impairment of real estate investments
    0       1,678  
Bad debt expense
    487       1,078  
Changes in other assets and liabilities:
               
Increase in receivable arising from straight-lining of rents
    (1,441 )     (1,213 )
Increase in accounts receivable
    (4,033 )     (2,765 )
Increase in prepaid and other assets
    (1,663 )     (852 )
Decrease (increase) in tax, insurance and other escrow
    630       (2,783 )
Increase in deferred charges and leasing costs
    (5,015 )     (3,244 )
(Decrease) increase in accounts payable, accrued expenses, and other liabilities
    (1,208 )     3,773  
Net cash provided by operating activities
    38,384       42,899  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from real estate deposits
    2,297       1,612  
Payments for real estate deposits
    (2,035 )     (2,502 )
Principal proceeds on mortgage loans receivable
    1       1  
Proceeds from sale of marketable securities – available-for-sale
    95       0  
Increase in restricted cash
    0       (36,500 )
Increase in restricted construction accounts
    (9,796 )     0  
Proceeds from sale of real estate - discontinued operations
    81,539       103  
Proceeds from sale of real estate and other investments
    0       35  
Insurance proceeds received
    329       705  
Payments for acquisitions and improvements of real estate investments
    (55,437 )     (72,947 )
Net cash provided (used) by investing activities
    16,993       (109,493 )
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from mortgages payable
    97,654       122,265  
Principal payments on mortgages payable
    (160,632 )     (99,362 )
Principal payments on revolving lines of credit and other debt
    (25,650 )     (15,538 )
Proceeds from revolving lines of credit and other debt
    36,300       15,500  
Proceeds from sale of common shares, net of issue costs
    18,158       98,872  
Repurchase of fractional shares and partnership units
    (10 )     (10 )
Payments for acquisition of noncontrolling interests – consolidated real estate entities
    (425 )     (475 )
Distributions paid to common shareholders, net of reinvestment of $7,831 and $7,242, respectively
    (32,300 )     (27,117 )
Distributions paid to preferred shareholders
    (1,779 )     (1,779 )
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership, net of reinvestment of $525 and $579, respectively
    (9,840 )     (10,141 )
Distributions paid to noncontrolling interests – consolidated real estate entities
    (737 )     (926 )
Distributions paid to redeemable noncontrolling interests – consolidated real estate entities
    0       (149 )
Net cash (used) provided by financing activities
    (79,261 )     81,140  
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS
    (23,884 )     14,546  
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    54,791       33,244  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 30,907     $ 47,790  


(continued)


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)
for the nine months ended January 31, 2011 and 2010
 
   
Nine Months Ended
January 31
(in thousands)
 
 
 
2011
   
2010
 
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE PERIOD
           
Distribution reinvestment plan
  $ 7,831     $ 7,242  
Operating partnership distribution reinvestment plan
    525       579  
Assets acquired through the issuance of operating partnership units
    3,252       2,888  
Operating partnership units converted to shares
    6,007       1,678  
Real estate investment acquired through assumption of indebtedness and accrued costs
    4,288       0  
Adjustments to accounts payable included within real estate investments
    (1,421 )     418  
Fair value adjustments to redeemable noncontrolling interests
    (570 )     134  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest on mortgages
    48,340       50,560  
Interest other
    892       470  
    $ 49,232     $ 51,030  
 
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.



INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)
for the nine months ended January 31, 2011 and 2009
 
NOTE 1 • ORGANIZATION
 
Investors Real Estate Trust (“IRET” or the “Company”) is a self-advised real estate investment trust engaged in acquiring, owning and leasing multi-family and commercial real estate. IRET has elected to be taxed as a Real Estate Investment Trust (“REIT”) under Sections 856-860 of the Internal Revenue Code of 1986, as amended. As a REIT, we are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income, except for taxes on undistributed REIT taxable income and taxes on the income generated by our taxable REIT subsidiary (“TRS”). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. We have considered estimated future taxable income and have determined that there were no material income tax provisions or material net deferred income tax items for our TRS for the quarters and periods ended January 31, 2011 and 2010.  IRET’s multi-family residential properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Colorado, Idaho, Iowa, Kansas, Montana, Missouri, Nebraska, South Dakota, Michigan, Wisconsin and Wyoming. As of January 31, 2011, IRET owned 74 multi-family residential properties with 8,593 apartment units and 176 commercial properties, consisting of office, medical, industrial and retail properties, totaling 12.2 million net rentable square feet. IRET conducts a majority of its business activities through its consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the “Operating Partnership”), as well as through a number of other consolidated subsidiary entities.
 
All references to IRET or the Company refer to Investors Real Estate Trust and its consolidated subsidiaries.
 
NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
The accompanying condensed consolidated financial statements include the accounts of IRET and all subsidiaries in which it maintains a controlling interest. All intercompany balances and transactions are eliminated in consolidation. The Company’s fiscal year ends April 30th.
 
The accompanying condensed consolidated financial statements include the accounts of IRET and its interest in the Operating Partnership. The Company’s interest in the Operating Partnership was 79.9% and 78.7%, respectively, as of January 31, 2011 and April 30, 2010. The limited partners in the Operating Partnership have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, IRET has the choice of redeeming the limited partners’ interests (“Units”) for IRET common shares of beneficial interest, on a one-for-one basis, or making a cash payment to the unitholder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units (provided, however, that in general not more than two redemptions by a limited partner may occur during each calendar year, and each limited partner may not exercise the redemption for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for all of the Units held by such limited partner). The Operating Partnership and some limited partners have contractually agreed to a holding period of greater than one year and/or a greater number of redemptions during a calendar year.
 
The condensed consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into IRET’s other operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership and income and expenses.
 
UNAUDITED INTERIM FINANCIAL STATEMENTS
 
The interim condensed consolidated financial statements of IRET have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments,
 



consisting solely of normal recurring adjustments, necessary for the fair presentation of the Company’s financial position, results of operations and cash flows for the interim periods have been included.
 
The current period’s results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended April 30, 2010, as filed with the SEC on July 14, 2010, as amended by the Current Report on Form 8-K filed with the SEC on March 14, 2011.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In January 2010, the Financial Accounting Standards Board (“FASB”) issued an update to Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, adding new requirements for disclosures about transfers into and out of Levels 1 and 2 fair value measurements and additional disclosures about activity within Level 3 fair value measurements. To date, other than impairment, we have not had any transfers in and out of Level 1 fair value measurements, nor do we have any Level 2 or Level 3 fair value measurements. Therefore, the application of this update did not have any impact on the fair value disclosures included in our consolidated financial statements.
 
In July 2010, the FASB issued an update to existing guidance contained in ASC 310, Receivables.  The new guidance requires companies to provide more information about the credit quality of their financing receivables in the disclosures to financial statements, including, but not limited to, significant purchases and sales of financing receivables, aging information and credit quality indicators.  The adoption of this accounting guidance by the Company in the third quarter of fiscal year 2011 did not have a significant impact on the Company’s consolidated financial statements.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
The Company periodically evaluates its long-lived assets, including its investments in real estate, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal and environmental concerns. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset. If our anticipated holding period for properties, the estimated fair value of properties or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. During the nine months ended January 31, 2011, the Company incurred no losses due to impairment. During the nine months ended January 31, 2010, the Company incurred a loss of approximately $1.7 million due to impairment of three properties. The Company recorded a charge for impairment of approximately $818,000 on a retail property in Ladysmith, Wisconsin, based upon receipt of a market offer to purchase and the Company’s probable intention to dispose of the property. The Company recorded a charge for impairment of approximately $152,000 on its former headquarters building in Minot, North Dakota, based upon receipt and acceptance of a market offer to purchase. These two properties were subsequently sold and the related impairment charges for fiscal year 2010 are reported in discontinued operations. See Note 7 for additional information. The Company also recorded an impairment charge of approximately $708,000 on a commercial retail property located in Kentwood, Michigan. This property’s tenant vacated the premises but continued to pay rent under a lease agreement that expired on October 29, 2010. Broker representations and market data for this commercial retail property provided the basis for the impairment charge.
 
COMPENSATING BALANCES AND LINE OF CREDIT
 
The Company maintains compensating balances, not restricted as to withdrawal, with several financial institutions in connection with financing received from those institutions and/or to ensure future credit availability, as follows: Dacotah Bank, Minot, North Dakota, a deposit of $350,000; United Community Bank, Minot, North Dakota, deposit of $275,000; Commerce Bank, A Minnesota Banking Corporation, deposit of $250,000; First International Bank, Watford City, North Dakota, deposit of $6.0 million, and Peoples State Bank of Velva, North Dakota, deposit of $150,000.
 


As of January 31, 2011, the Company had one secured line of credit with First International Bank and Trust, Watford City, North Dakota, as lead bank. This line of credit had, as of January 31, 2011, lending commitments of $50.0 million, with the capacity to grow to $60.0 million. Participants in the line of credit include several banks whose previous separate credit lines to the Company were terminated during the second quarter of fiscal year 2011 following their consolidation into the First International Bank-led facility. Participants in this secured credit facility as of January 31, 2011 included, in addition to First International Bank, the following financial institutions:  The Bank of North Dakota; First Western Bank and Trust; Dacotah Bank; United Community Bank of North Dakota: American State Bank & Trust Company and Town & Country Credit Union. As of January 31, 2011, the Company had advanced $10.0 million under the line of credit. The line of credit has a minimum outstanding principal balance requirement of $10.0 million. The facility includes customary loan covenants including restrictions regarding minimum debt-service ratios to be maintained in the aggregate and individually on properties in the collateral pool, and the Company is also required to maintain minimum depository account(s) totaling $6.0 million with First International, of which $1.5 million is to be held in a non-interest bearing account. As of January 31, 2011, the Company was in compliance with the facility covenants.
 
IDENTIFIED INTANGIBLE ASSETS AND INTANGIBLE LIABILITIES AND GOODWILL
 
Upon acquisition of real estate, the Company records the intangible assets and liabilities acquired (for example, if the leases in place for the real estate property acquired carry rents above the market rent, the difference is classified as an intangible asset) at their estimated fair value separate and apart from goodwill. The Company amortizes identified intangible assets and liabilities that are determined to have finite lives based on the period over which the assets and liabilities are expected to affect, directly or indirectly, the future cash flows of the real estate property acquired (generally the life of the lease). In the nine months ended January 31, 2011 and 2010, respectively, the Company added approximately $6.5 million and $7.5 million of new intangible assets and $32,000 and $20,000 of new intangible liabilities. The weighted average lives of the intangible assets and intangible liabilities acquired in the nine months ended January 31, 2011 and 2010 are 9.5 years and 17.4 years, respectively. Amortization of intangibles related to above or below-market leases is recorded in real estate rentals in the consolidated statements of operations. Amortization of other intangibles is recorded in depreciation/amortization related to real estate investments in the consolidated statements of operations. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its estimated fair value.
 
The Company’s identified intangible assets and intangible liabilities at January 31, 2011 and April 30, 2010 were as follows:
 
   
(in thousands)
 
 
 
January 31, 2011
   
April 30, 2010
 
Identified intangible assets (included in intangible assets):
           
Gross carrying amount
  $ 96,761     $ 90,271  
Accumulated amortization
    (45,218 )     (39,571 )
Net carrying amount
  $ 51,543     $ 50,700  
                 
Indentified intangible liabilities (included in other liabilities):
               
Gross carrying amount
  $ 1,292     $ 1,260  
Accumulated amortization
    (1,069 )     (940 )
Net carrying amount
  $ 223     $ 320  

The effect of amortization of acquired below-market leases and acquired above-market leases on rental income was approximately $(19,000) and $(12,000) for the three months ended January 31, 2011 and 2010, respectively, and $(36,000) and $(38,000) for the nine months ended January 31, 2011 and 2010. The estimated annual amortization of acquired below-market leases, net of acquired above-market leases for each of the five succeeding fiscal years is as follows:
 
Year Ended April 30,
 
(in thousands)
 
2012
  $ 45  
2013
    32  
2014
    35  
2015
    18  
2016
    14  
 

 


 
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $1.7 million and $2.1 million for the three months ended January 31, 2011 and 2010, respectively, and $5.5 million and $6.7 million for the nine months ended January 31, 2011 and 2010. The estimated annual amortization of all other identified intangible assets for each of the five succeeding fiscal years is as follows:
 
Year Ended April 30,
 
(in thousands)
 
2012
  $ 5,521  
2013
    4,546  
2014
    4,140  
2015
    3,783  
2016
    3,566  

The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill.  The Company’s goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill book values as of January 31, 2011 and April 30, 2010 were $1.1 million and $1.4 million, respectively. The annual review at April 30, 2010 indicated no impairment and there was no indication of impairment at January 31, 2011. During the nine months ended January 31, 2011, the Company disposed of four multi-family residential properties that had goodwill assigned, and as a result, approximately $261,000 of goodwill was derecognized.
 
MARKETABLE SECURITIES
 
 
IRET’s investments in marketable securities are classified as “available-for-sale.” The securities classified as “available-for-sale” represent investments in debt securities which the Company intends to hold for an indefinite period of time. These securities are valued at current fair value with the resulting unrealized gains and losses excluded from earnings and reported as a separate component of equity until realized. GAAP establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based upon our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement. At January 31, 2011, our marketable securities are carried at fair value measured on a recurring basis. Fair values are determined through the use of unadjusted quoted prices in active markets, which are inputs that are classified as Level 1 in the valuation hierarchy. Gains or losses on these securities are computed based on the amortized cost of the specific securities when sold.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
RECLASSIFICATIONS
 
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. The Company reports, in discontinued operations, the results of operations of a property that has either been disposed of or is classified as held for sale and the related gains or losses, and as a result of discontinued operations, retroactive reclassifications that change prior period numbers have been made.  See Note 7 for additional information. During the third quarter of fiscal year 2011, the Company sold a small industrial property in Waconia, Minnesota and three multi-family residential properties in Colorado, the Pinecone and Miramont Apartments in Fort Collins, Colorado and the Neighborhood Apartments in Colorado Springs, Colorado.  During the second quarter of fiscal year 2011 the Company sold three properties, a small retail property in Ladysmith, Wisconsin, a patio home property in Fargo, North Dakota, and its 504-unit Dakota Hill multi-family residential property in Irving, Texas. During fiscal year 2010, the Company sold its former headquarters property in Minot, North Dakota, and disposed of a small apartment property in Grafton, North Dakota.  The results of operations for these properties are included in discontinued operations in the condensed consolidated statements of operations.
 



NOTE 3 • EARNINGS PER SHARE
 
Basic earnings per share is computed by dividing net income available to common shareholders by the weighted average number of common shares outstanding during the period. The Company has no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings. While Units can be exchanged for common shares on a one-for-one basis after a minimum holding period of one year, the exchange of Units for common shares has no effect on net income per share, as Unitholders and common shareholders effectively share equally in the net income of the Operating Partnership. The following table presents a reconciliation of the numerator and denominator used to calculate basic and diluted earnings per share reported in the condensed consolidated financial statements for the three and nine months ended January 31, 2011 and 2010:
 
   
Three Months Ended
January 31
   
Nine Months Ended
January 31
 
   
(in thousands, except per share data)
 
 
 
2011
   
2010
   
2011
   
2010
 
NUMERATOR
                       
Income from continuing operations – Investors Real Estate Trust
  $ 552     $ 1,106     $ 3,742     $ 3,536  
Income (loss) from discontinued operations – Investors Real Estate Trust
    11,281       (654 )     15,896       (782 )
Net income attributable to Investors Real Estate Trust
    11,833       452       19,638       2,754  
Dividends to preferred shareholders
    (593 )     (593 )     (1,779 )     (1,779 )
Numerator for basic earnings per share – net income available to common shareholders
    11,240       (141 )     17,859       975  
Noncontrolling interests – Operating Partnership
    2,793       (39 )     4,485       381  
Numerator for diluted earnings per share
  $ 14,033     $ (180 )   $ 22,344     $ 1,356  
DENOMINATOR
                               
Denominator for basic earnings per share weighted average shares
    79,398       73,607       78,140       67,375  
Effect of convertible operating partnership units
    19,957       20,909       20,171       20,909  
Denominator for diluted earnings per share
    99,355       94,516       98,311       88,284  
Earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted
  $ .00     $ .01     $ .03     $ .03  
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
    .14       (.01 )     .20       (.01 )
NET INCOME PER COMMON SHARE – BASIC & DILUTED
  $ .14     $ .00     $ .23     $ .02  
 
NOTE 4 • EQUITY
 
During the first quarter of fiscal year 2011, the Company sold 1.8 million common shares under its continuous offering program with Robert W. Baird & Co., Incorporated (“Baird”) as sales agent, for net proceeds of approximately $15.0 million, before offering expenses but after underwriting discounts.  The Company sold no shares under this program during the second and third quarters of fiscal year 2011. As of January 31, 2011, the Company had available securities in the aggregate amount of approximately $18.2 million reserved for issuance under its continuous offering program with Baird. The Company sold no shares under this program during the nine months ended January 31, 2010.
 
During the nine months ended January 31, 2011 and 2010, respectively, approximately 831,000 Units and 277,000 Units were converted to common shares, with a total value of approximately $6.0 million and $1.7 million included in equity, and approximately 15,000 common shares and 9,000 common shares were issued under the Company’s 401(k) plan, with a total value of approximately $125,000 and $73,000 included in equity. Under the Company’s Distribution Reinvestment and Share Purchase Plan, approximately 1.2 million common shares and 1.0 million common shares were issued during the nine months ended January 31, 2011 and 2010, respectively, with a total value of $10.1 million and $8.8 million included in equity.
 
During the nine months ended January 31, 2011, the Company purchased the noncontrolling interests (i.e., the limited partnership interests) of certain of its joint venture partners (partners in the Company’s Brenwood office property, Dixon industrial property, and Candlelight apartments property); the purchase prices of those buyouts are included in the Condensed Consolidated Statements of Equity in the line labeled “Other”, along with amounts deducted for fractional shares repurchased and joint venture distributions. During the nine months ended January 31, 2010, the Company purchased the noncontrolling interests of one of its partners in the Company’s TCA office property; the purchase price of that buyout is included in the Condensed
 



Consolidated Statements of Equity in the line labeled “Other”, along with amounts deducted for fractional shares repurchased and joint venture distributions.
 
NOTE 5 • SEGMENT REPORTING
 
IRET reports its results in five reportable segments: multi-family residential properties, commercial office, commercial medical (including senior housing), commercial industrial and commercial retail properties. The Company’s reportable segments are aggregations of similar properties. The accounting policies of each of these segments are the same as those described in Note 2.
 
IRET measures the performance of its segments based on net operating income (“NOI”), which the Company defines as total real estate revenues less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance and property management expenses). IRET believes that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.
 
The revenues and net operating income for these reportable segments are summarized as follows for the three and nine month periods ended January 31, 2011 and 2010, along with reconciliations to the condensed consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the condensed consolidated financial statements.
 

 
(in thousands)
 
Three Months Ended January 31, 2011
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Real estate revenue
  $ 16,884     $ 19,343     $ 16,993     $ 3,349     $ 3,634     $ 60,203  
Real estate expenses
    8,903       9,507       5,894       1,203       1,530       27,037  
Net operating income
  $ 7,981     $ 9,836     $ 11,099     $ 2,146     $ 2,104       33,166  
Depreciation/amortization
                                            (14,591 )
Administrative, advisory and trustee services
                                            (1,850 )
Other expenses
                                      (441 )
Interest expense
                                            (15,888 )
Interest and other income
                                            107  
Income from continuing operations
                                            503  
Income from discontinued operations
                                            14,085  
Net income
    $ 14,588  

 
(in thousands)
 
Three Months Ended January 31, 2010
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Real estate revenue
  $ 16,315     $ 20,303     $ 14,218     $ 3,186     $ 3,312     $ 57,334  
Real estate expenses
    8,605       9,225       4,483       1,050       1,322       24,685  
Gain on involuntary conversion
    1,660       0       0       0       0       1,660  
Net operating income
  $ 9,370     $ 11,078     $ 9,735     $ 2,136     $ 1,990       34,309  
Depreciation/amortization
                                            (14,497 )
Administrative, advisory and trustee services
                                      (1,790 )
Other expenses
                                            (536 )
Interest expense
                                            (16,534 )
Interest and other income
                                            250  
Income from continuing operations
                                            1,202  
Loss from discontinued operations
                                            (838 )
Net income
    $ 364  




 
(in thousands)
 
Nine Months Ended January 31, 2011
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Real estate revenue
  $ 49,596     $ 58,839     $ 49,547     $ 9,890     $ 10,411     $ 178,283  
Real estate expenses
    25,247       27,082       16,563       3,123       3,639       75,654  
Net operating income
  $ 24,349     $ 31,757     $ 32,984     $ 6,767     $ 6,772       102,629  
Depreciation/amortization
                                            (43,581 )
Administrative, advisory and trustee services
                                            (5,537 )
Other expenses
                                      (1,357 )
Interest expense
                                            (48,395 )
Interest and other income
                                            411  
Income from continuing operations
                                            4,170  
Income from discontinued operations
                                            19,871  
Net income
    $ 24,041  

 
(in thousands)
 
Nine Months Ended January 31, 2010
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Real estate revenue
  $ 49,210     $ 61,952     $ 41,157     $ 9,806     $ 9,976     $ 172,101  
Real estate expenses
    24,354       27,751       12,137       3,161       3,506       70,909  
Gain on involuntary conversion
    1,660       0       0       0       0       1,660  
Net operating income
  $ 26,516     $ 34,201     $ 29,020     $ 6,645     $ 6,470       102,852  
Depreciation/amortization
                                            (42,964 )
Administrative, advisory and trustee services
                                      (4,775 )
Other expenses
                                            (1,468 )
Impairment of real estate investment
                                            (708 )
Interest expense
                                            (49,306 )
Interest and other income
                                            503  
Income from continuing operations
                                            4,134  
Loss from discontinued operations
                                            (1,001 )
Net income
    $ 3,133  

Segment Assets and Accumulated Depreciation
 
Segment assets are summarized as follows as of January 31, 2011, and April 30, 2010, along with reconciliations to the condensed consolidated financial statements:
 
   
(in thousands)
 
As of January 31, 2011
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Segment Assets
                                   
Property owned
  $ 480,827     $ 594,335     $ 447,011     $ 116,919     $ 124,493     $ 1,763,585  
Less accumulated depreciation/amortization
    (116,632 )     (100,333 )     (62,402 )     (17,016 )     (22,852 )     (319,235 )
Total property owned
  $ 364,195     $ 494,002     $ 384,609     $ 99,903     $ 101,641       1,444,350  
Cash and cash equivalents
                                            30,907  
Marketable securities
                                            325  
Receivables and other assets
                                            122,832  
Development in progress
                                            4,231  
Unimproved land
                                            7,470  
Mortgage loans receivable, net of allowance
                                            157  
Total Assets
                                          $ 1,610,272  




   
(in thousands)
 
As of April 30, 2010
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Segment assets
                                   
Property owned
  $ 556,867     $ 582,943     $ 430,229     $ 113,249     $ 117,231     $ 1,800,519  
Less accumulated depreciation/amortization
    (129,922 )     (88,656 )     (53,641 )     (15,481 )     (20,926 )     (308,626 )
Total property owned
  $ 426,945     $ 494,287     $ 376,588     $ 97,768     $ 96,305       1,491,893  
Cash and cash equivalents
                                            54,791  
Marketable securities
                                            420  
Receivables and other assets
                                            104,830  
Development in progress
                                            2,831  
Unimproved land
                                            6,007  
Mortgage loans receivable, net of allowance
                                            158  
Total Assets
    $ 1,660,930  
 
NOTE 6 • COMMITMENTS AND CONTINGENCIES
 
Litigation. IRET is involved in various lawsuits arising in the normal course of business. Management believes that such matters will not have a material effect on the Company’s condensed consolidated financial statements.
 
Insurance. IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties and are sufficient to achieve IRET’s risk management objectives.
 
Purchase Options. The Company has granted options to purchase certain IRET properties to tenants in these properties, under lease agreements. In general, the options grant the tenant the right to purchase the property at the greater of such property’s appraised value or an annual compounded increase of a specified percentage of the initial cost of the property to IRET. As of January 31, 2011, the total property cost of the 28 properties subject to purchase options was approximately $209.0 million, and the total gross rental revenue from these properties was approximately $15.2 million for the nine months ended January 31, 2011.
 
Environmental Matters. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around or under the property. While IRET currently has no knowledge of any material violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company’s properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to the Company.
 
Restrictions on Taxable Dispositions. Approximately 131 of IRET’s properties, consisting of approximately 7.5 million square feet of the Company’s combined commercial segments’ properties and 3,820 apartment units, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties. The real estate investment amount of these properties (net of accumulated depreciation) was approximately $850.3 million at January 31, 2011. The restrictions on taxable dispositions are effective for varying periods. The terms of these agreements generally prevent the Company from selling the properties in taxable transactions. The Company does not believe that the agreements materially affect the conduct of the Company’s business or decisions whether to dispose of restricted properties during the restriction period because the Company generally holds these and the Company's other properties for investment purposes, rather than for sale. Historically, however, where IRET has deemed it to be in the shareholders’ best interests to dispose of restricted properties, it has done so through transactions structured as tax-deferred transactions under Section 1031 of the Internal Revenue Code.
 
Joint Venture Buy/Sell Options. Certain of IRET's joint venture agreements contain buy/sell options in which each party under certain circumstances has the option to acquire the interest of the other party, but do not generally require that the Company buy its partners’ interests. IRET has one joint venture which allows IRET’s unaffiliated partner, at its election, to require that IRET buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. The Company is not aware of any intent on the part of this partner to exercise its option.
 


Tenant Improvements. In entering into leases with tenants, IRET may commit itself to fund improvements or build-outs of the rented space to suit tenant requirements. These tenant improvements are typically funded at the beginning of the lease term, and IRET is accordingly exposed to some risk of loss if a tenant defaults prior to the expiration of the lease term, and the rental income that was expected to cover the cost of the tenant improvements is not received. As of January 31, 2011, the Company is committed to fund approximately $5.6 million in tenant improvements, within approximately the next 12 months.
 
Development, Expansion and Renovation Projects. The Company has several development, expansion and renovation projects currently underway, as follows:
 
Multi-Family Conversion, Minot, North Dakota: The Company is converting an existing approximately 15,000 square foot commercial office building in Minot, North Dakota to a 24-unit multi-family residential property, for an estimated total cost of $2.2 million and an expected completion date in the first quarter of the Company’s fiscal year 2012; as of January 31, 2011, the Company has incurred approximately $185,000 of these project costs.
 
Buffalo Mall Theaters, Jamestown, North Dakota: The Company has committed to fund the construction of six movie theaters at its existing Buffalo Mall property in Jamestown, North Dakota, for an estimated construction cost of $2.1 million and expected completion in the first quarter of fiscal year 2012.  As of January 31, 2011, the Company had incurred approximately $746,000 of these construction costs.
 
Senior Housing Memory Care Conversion, Cheyenne, Wyoming: The Company has committed and funded construction and remodeling costs to convert a portion of  the Company’s existing Wyoming senior housing facility at Cheyenne to incorporate a specialized memory care unit. As of January 31, 2011, the Company had incurred $309,000, the total expected cost of the memory-care conversion and is awaiting a certificate of occupancy.
 
Trinity Hospital Build-to-Suit, Minot, North Dakota: The Company has committed to construct an approximately 22,000 square-foot, one-story medical clinic for Trinity Health, a non-profit healthcare organization based in Minot, North Dakota, on land owned by the Company adjacent to the Company’s existing headquarters building in Minot. Construction of this build-to-suit facility began in the second quarter of fiscal year 2011, with completion and occupancy by Trinity expected in the first quarter of fiscal year 2012.  Estimated total project costs (excluding the value of the land) are $6.2 million, of which, as of January 31, 2011, the Company had incurred $726,000.
 
Georgetown Square Condominiums, Grand Chute, Wisconsin: At the Company’s  Georgetown Square Condominium project in Grand Chute, Wisconsin (formerly known as Fox River), IRET is currently renovating and upgrading the eight existing condominium units, and is evaluating the construction of additional units, based on market needs. The Company estimates total renovation costs for the existing eight units at a maximum of $280,000.
 
Construction interest capitalized for the three month periods ended January 31, 2011 and 2010, respectively, was approximately $52,000 and $0 for development projects completed and in progress. Construction interest capitalized for the nine month periods ended January 31, 2011 and 2010, respectively, was approximately $85,000 and $0 for development projects completed and in progress.
 
NOTE 7 • DISCONTINUED OPERATIONS
 
The Company reports in discontinued operations the results of operations of a property that has either been disposed of or is classified as held for sale. During the third quarter of fiscal year 2011 the Company sold an industrial property in Waconia, Minnesota, and three multi-family residential properties (the Company’s Miramont, Neighborhood and Pinecone Apartment complexes) located in Fort Collins and Colorado Springs, Colorado.  During the second quarter of fiscal year 2011 the Company sold three properties, a small retail property in Ladysmith, Wisconsin, a patio home property in Fargo, North Dakota, and its 504-unit Dakota Hill multi-family residential property in Irving, Texas. During fiscal year 2010, the Company sold its former headquarters property in Minot, North Dakota, and disposed of a small apartment property in Grafton, North Dakota.  See Note 8 for additional information on the properties sold during fiscal year 2011. The Company also reports any gains or losses from the sale of a property in discontinued operations. There were no properties held for sale as of January 31, 2011 or 2010. The following information shows the effect on net income and the gains or losses from the sale of properties classified as discontinued operations for the three months and nine months ended January 31, 2011 and 2010:
 



 
   
Three Months Ended
January 31
   
Nine Months Ended
January 31
 
   
(in thousands)
 
   
2011
   
2010
   
2011
   
2010
 
REVENUE
                       
Real estate rentals
  $ 247     $ 2,787     $ 5,901     $ 8,394  
Tenant reimbursement
    0       9       36       52  
TOTAL REVENUE
    247       2,796       5,937       8,446  
EXPENSES
                               
Depreciation/amortization related to real estate investments
    41       579       1,142       1,732  
Utilities
    60       207       558       735  
Maintenance
    74       302       708       943  
Real estate taxes
    16       364       638       1,004  
Insurance
    0       72       110       218  
Property management expenses
    101       379       843       1,101  
Other expenses
    0       0       1       0  
Amortization related to non-real estate investments
    0       2       4       6  
Impairment of real estate investments
    0       818       0       970  
TOTAL EXPENSES
    292       2,723       4,004       6,709  
Interest expense
    169       (913 )     (1,432 )     (2,742 )
Interest income
    0       2       5       4  
Income (loss) from discontinued operations before gain on sale
    124       (838 )     506       (1,001 )
Gain on sale of discontinued operations
    13,961       0       19,365       0  
INCOME (LOSS) FROM DISCONTINUED OPERATIONS
  $ 14,085     $ (838 )   $ 19,871     $ (1,001 )

NOTE 8 • ACQUISITIONS AND DISPOSITIONS
 
PROPERTY ACQUISITIONS
 
During the third quarter of fiscal year 2011, the Company acquired three properties: on November 10, 2010, the Company acquired the approximately 108,503 square foot Edgewood Vista assisted living facility in Minot, North Dakota, for approximately $15.2 million, consisting of cash of approximately $9.6 million ($7.4 million of which was paid to the current tenant in the property to acquire the option to purchase the property) and the assumption of existing debt of approximately $5.6 million; on December 10, 2010, the Company acquired an approximately 47,709 square foot retail/office property in Minot, North Dakota, for a purchase price, paid in cash, of $8.3 million; and on December 16, 2010, the Company acquired an approximately 58,574 square foot office property in Omaha, Nebraska, for a purchase price of approximately $8.3 million, of which approximately $5.3 million was paid in cash, with the remainder paid in limited partnership units of the Company’s Operating Partnership valued at a total of $3.0 million. During the third quarter of fiscal year 2011, the Company substantially completed construction of an approximately 24,000 square foot expansion to its existing Edgewood Vista senior housing facility in Spearfish, South Dakota.  The cost to construct the addition was approximately $2.7 million, of which $2.3 million has been paid as of January 31, 2011.
 
During the third quarter of fiscal year 2010, the Company, on December 30, 2009, acquired two limited liability companies that own and operate a portfolio of five assisted living facilities in three communities in Wyoming.  The five facilities, located in Casper (two facilities), Cheyenne (two facilities) and Laramie (one facility), Wyoming, had a total of approximately 328 beds at the time of acquisition.  IRET acquired 100% of the member interests in the owner and operator of these five facilities for a total purchase price of approximately $45.0 million.  Also during the third quarter of fiscal year 2010, on November 13, 2009, the Company acquired an approximately 6.8 acre parcel of vacant land located in Fargo, North Dakota for a purchase price of approximately $395,000. The Company had no development projects placed in service during the third quarter of fiscal year 2010.
 
The Company had no acquisitions or development projects placed in service during the second quarter of fiscal year 2011. During the second quarter of fiscal year 2010, IRET acquired two properties: an approximately 42,180 square foot
 



showroom/warehouse property located in a western suburb of Des Moines, Iowa, triple-net leased to a single tenant, for which the Company paid a total of approximately $3.4 million, a portion of which was paid in Units valued at a total of approximately $2.9 million, or $10.25 per unit, with the remainder paid in cash; and an approximately 15,000 square foot, 2-story office building on 1.5 acres located near IRET’s corporate headquarters building in Minot, North Dakota, for a total of $2.4 million, a portion of which the Company paid in Units valued at a total of approximately $90,000, with the remainder paid in cash.  IRET had no development projects placed in service during the second quarter of fiscal year 2010.
 
During the first quarter of fiscal year 2011, IRET acquired, on July 15, 2010, two medical office buildings located in, respectively, Billings, Montana and Missoula, Montana, for a total purchase price of approximately $5.2 million, consisting of cash of approximately $957,000 and the assumption of existing debt with an interest rate of 7.06% and a maturity date of December 31, 2016 in the amount of approximately $4.3 million. The two medical office buildings were each constructed in 2001, and contain approximately 14,705 square feet and 14,640 square feet of leasable space, respectively. During the first quarter of fiscal year 2011, the Company completed construction of a single-tenant office/warehouse facility in Fargo, North Dakota. The cost to construct the facility was approximately $3.9 million, including the cost of the land plus imputed construction interest. During the first quarter of fiscal year 2010, IRET had no acquisitions or development projects placed in service.
 
The Company expensed approximately $142,000 and $201,000 of transaction costs related to acquisitions in the nine months ended January 31, 2011 and 2010, respectively. The Company’s acquisitions and development projects placed in service during the nine months ended January 31, 2011 and 2010 are detailed below:
 
Nine Months Ended January 31, 2011
 
   
(in thousands)
 
Acquisitions and Development Projects Placed in Service
 
Land
   
Building
   
Intangible Assets
   
Acquisition Cost
 
                         
Commercial Office
                       
58,574 sq. ft. Omaha 10802 Farnam Dr - Omaha, NE
  $ 2,462     $ 4,374     $ 1,459     $ 8,295  
                                 
Commercial Medical
                               
14,705 sq. ft. Billings 2300 Grant Road - Billings, MT
    649       1,216       657       2,522  
14,640 sq. ft. Missoula 3050 Great Northern - Missoula, MT
    640       1,331       752       2,723  
108,503 sq. ft. Edgewood Vista Minot - Minot, ND
    1,046       11,590       2,545       15,181  
23,965 sq. ft. Edgewood Vista Spearfish Expansion - Spearfish, SD1
    0       2,280       0       2,280  
      2,335       16,417       3,954       22,706  
                                 
Commercial Industrial
                               
42,244 sq. ft. Fargo 1320 45th St N - Fargo, ND2
    0       1,634       0       1,634  
                                 
Commercial Retail
                               
47,709 sq. ft. Minot 1400 31st Ave - Minot, ND
    1,026       6,143       1,081       8,250  
                                 
Total Property Acquisitions
  $ 5,823     $ 28,568     $ 6,494     $ 40,885  
 
(1)  
Expansion project placed in service January 10, 2011.
 
 
(2)  
Development property placed in service June 22, 2010.  Additional costs incurred in fiscal year 2010 totaled $2.3 million, for a total project cost at January 31, 2011 of $3.9 million.
 


Nine Months Ended January 31, 2010
 
 
   
(in thousands)
 
Acquisitions
 
Land
   
Building
   
Intangible Assets
   
Acquisition Cost
 
                         
Commercial Office
                       
15,000 sq. ft. Minot 2505 16th Street SW - Minot, ND
  $ 372     $ 1,724     $ 304     $ 2,400  
                                 
Commercial Medical
                               
65,160 sq. ft. Casper 1930 E. 12th Street (Park Place) - Casper, WY
    439       5,780       1,120       7,339  
35,629 sq. ft. Casper 3955 E. 12th Street (Meadow Wind) -
Casper, WY
    338       5,881       1,120       7,339  
47,509 sq. ft. Cheyenne 4010 N. College Drive (Aspen Wind) - Cheyenne, WY
    628       9,869       1,960       12,457  
54,072 sq. ft. Cheyenne 4606 N. College Drive (Sierra Hills) - Cheyenne, WY
    695       7,455       1,410       9,560  
35,629 sq. ft. Laramie 1072 N. 22nd Street (Spring Wind) -
Laramie, WY
    406       6,634       1,265       8,305  
      2,506       35,619       6,875       45,000  
                                 
Commercial Industrial
                               
42,180 sq. ft. Clive 2075 NW 94th Street - Clive, IA
    408       2,610       332       3,350  
                                 
Unimproved Land
                               
Fargo 1320 45th Street N. - Fargo, ND
    395       0       0       395  
                                 
Total Property Acquisitions
  $ 3,681     $ 39,953     $ 7,511     $ 51,145  

 
PROPERTY DISPOSITIONS
 
During the third quarter of fiscal year 2011, the Company sold a small industrial property in Waconia, Minnesota, on November 1, 2010, and three multi-family residential properties in Colorado, the Pinecone and Miramont Apartments in Fort Collins, Colorado and the Neighborhood Apartments in Colorado Springs, Colorado, on November 15, 2010, for a total sales price of $46.6 million. During the third quarter of fiscal year 2010, the Company sold its former headquarters property in Minot, North Dakota.
 
During the second quarter of fiscal year 2011, IRET sold a small retail property in Ladysmith, Wisconsin, on September 2, 2010; a patio home property in Fargo, North Dakota on September 30, 2010; and the Company’s 504-unit Dakota Hill at Valley Ranch Apartments in Irving, Texas on October 26, 2010, for a total sales price of $36.8 million. There were no dispositions in the first quarter of fiscal year 2011 or the first and second quarters of fiscal year 2010.
 


The Company’s dispositions during the nine months ended January 31, 2011 are detailed below:
 
Nine Months Ended January 31, 2011
 
   
(in thousands)
 
Dispositions
 
Sales Price
   
Book Value
and Sales Cost
   
Gain/(Loss)
 
                   
Multi-Family Residential
                 
504 unit - Dakota Hill at Valley Ranch - Irving, TX
  $ 36,100     $ 30,909     $ 5,191  
192 unit - Neighborhood Apartments - Colorado Springs, CO
    11,200       9,664       1,536  
195 unit - Pinecone Apartments - Fort Collins, CO
    15,875       10,422       5,453  
210 unit - Miramont Apartments - Fort Collins, CO
    17,200       10,732       6,468  
      80,375       61,727       18,648  
                         
Commercial Medical
                       
1,410 sq. ft. Edgewood Vista Patio Home 4330 - Fargo, ND
    205       220       (15 )
                         
Commercial Industrial
                       
29,440 sq. ft. Waconia Industrial Building - Waconia, MN
    2,300       1,561       739  
                         
Commercial Retail
                       
41,000 sq. ft. Ladysmith Pamida - Ladysmith, WI
    450       457       (7 )
                         
Total Property Dispositions
  $ 83,330     $ 63,965     $ 19,365  

 
Nine Months Ended January 31, 2010
 
   
(in thousands)
 
Dispositions
 
Sales Price
   
Book Value
and Sales Cost
   
Gain/(Loss)
 
                   
Commercial Office
                 
10,126 sq. ft. 12 S Main - Minot, ND
  $ 110     $ 110     $ 0  
                         
Total Property Dispositions
  $ 110     $ 110     $ 0  

 
NOTE 9 • MORTGAGES PAYABLE AND REVOLVING LINES OF CREDIT
 
The Company’s mortgages payable and revolving lines of credit are collateralized by substantially all of its properties owned. The majority of the Company’s mortgages payable are secured by individual properties or groups of properties, and are non-recourse to the Company, other than for standard carve-out obligations such as fraud, waste, failure to insure, environmental conditions and failure to pay real estate taxes. Interest rates on mortgages payable range from 2.82% to 8.25%, and the mortgages have varying maturity dates from the current fiscal year through June 9, 2035.
 
Of the mortgages payable, the balances of fixed rate mortgages totaled $997.3 million at January 31, 2011 and $1.0 billion at April 30, 2010. The balances of variable rate mortgages totaled $1.6 million and $29.0 million as of January 31, 2011, and April 30, 2010, respectively. The Company does not utilize derivative financial instruments to mitigate its exposure to changes in market interest rates. Most of the fixed rate mortgages have substantial pre-payment penalties. As of January 31, 2011, the weighted average rate of interest on the Company’s mortgage debt was 6.05%, compared to 6.17% on April 30, 2010. The aggregate amount of required future principal payments on mortgages payable as of January 31, 2011, is as follows:
 



 
Nine Months Ended January 31, 2011
 
(in thousands)
 
2011 (remainder)
  $ 15,053  
2012
    108,973  
2013
    49,046  
2014
    60,504  
2015
    83,289  
Thereafter
    682,064  
Total payments
  $ 998,929  

The Company’s revolving, multi-bank line of credit with First International Bank and Trust, Watford City, North Dakota, as lead bank, had, as of January 31, 2011, lending commitments of $50.0 million.  As of January 31, 2011, the line of credit was secured by mortgages on 26 properties; under the terms of the line of credit, properties may be added and removed from the collateral pool with the agreement of the lenders. The line of credit has a current interest rate of 5.65% and a minimum outstanding principal balance requirement of $10.0 million, and as of January 31, 2011, the Company had advanced $10.0 million. The facility includes customary loan covenants including restrictions regarding minimum debt-service ratios to be maintained in the aggregate and individually on properties in the collateral pool, and the Company is also required to maintain minimum depository account(s) totaling $6.0 million with First International, of which $1.5 million is to be held in a non-interest bearing account. As of January 31, 2011, the Company was in compliance with the facility covenants.
 
NOTE 10 • FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments.
 
Mortgage Loans Receivable. Fair values are based on the discounted value of future cash flows expected to be received for a loan using current rates at which similar loans would be made to borrowers with similar credit risk and the same remaining maturities. Terms are short term in nature and carrying value approximates the estimated fair value.
 
Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity.
 
Marketable Securities. The fair values of these instruments are estimated based on quoted market prices for the security. At January 31, 2011, marketable securities available-for-sale consisted of bank certificates of deposit with maturities of less than two years.
 
Other Debt. The fair value of other debt is estimated based on the discounted cash flows of the loan using current market rates.
 
Mortgages Payable. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using current market rates.
 
The estimated fair values of the Company’s financial instruments as of January 31, 2011 and April 30, 2010, are as follows:
 
   
(in thousands)
 
   
January 31, 2011
   
April 30, 2010
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
FINANCIAL ASSETS
                       
Mortgage loans receivable
  $ 157     $ 157     $ 158     $ 158  
Cash and cash equivalents
    30,907       30,907       54,791       54,791  
Marketable securities - available-for-sale
    325       325       420       420  
FINANCIAL LIABILITIES
                               
Other debt
    8,200       6,974       1,000       1,142  
Mortgages payable
    998,929       1,004,881       1,057,619       1,015,879  



NOTE 11 • REDEEMABLE NONCONTROLLING INTERESTS
 
Redeemable noncontrolling interests on our condensed consolidated balance sheets represent the noncontrolling interest in a joint venture of the Company in which the Company’s unaffiliated partner, at its election, can require the Company to buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. Redeemable noncontrolling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to common shares of beneficial interest on our consolidated balance sheets. As of January 31, 2011 and April 30, 2010, the estimated redemption value of the redeemable noncontrolling interests was $1.2 million and $1.8 million, respectively. Below is a table reflecting the activity of the redeemable noncontrolling interests.
 
   
(in thousands)
 
Balance at April 30, 2009
  $ 1,737  
Net income
    43  
Distributions
    (149 )
Mark-to-market adjustments
    134  
Balance at January 31, 2010
  $ 1,765  

   
(in thousands)
 
Balance at April 30, 2010
  $ 1,812  
Net loss
    (5 )
Distributions
    0  
Mark-to-market adjustments
    (570 )
Balance at January 31, 2011
  $ 1,237  
 
NOTE 12 • SUBSEQUENT EVENTS
 
Common and Preferred Share Distributions. On March 9, 2011, the Company’s Board of Trustees declared a regular quarterly distribution of 17.15 cents per share and unit on the Company’s common shares of beneficial interest and limited partnership units of IRET Properties, payable April 1, 2011 to common shareholders and unitholders of record on March 21, 2011. IRET’s Board of Trustees continues to evaluate the Company’s distribution payout level on a quarter-by-quarter basis in view of the sustained economic downturn; in the event of deterioration in property operating results, or absent the Company’s ability to continue cash-out refinancings of existing properties and/or new borrowings, the Company may need to consider additional cash preservation alternatives, including reducing the level of distributions to common shareholders and unitholders. Also on March 9, 2011, the Company’s Board of Trustees declared a distribution of 51.56 cents per share on the Company’s preferred shares of beneficial interest, payable March 31, 2011 to preferred shareholders of record on March 21, 2011.
 
Pending and Completed Acquisitions and Dispositions. The Company has signed an agreement to acquire a 99,643 square foot retail property located in Robbinsdale, Minnesota for a purchase price of $8.2 million. This pending acquisition is subject to various closing conditions and contingencies, and no assurance can be given that this transaction will be completed. Subsequent to the end of the third quarter of the current fiscal year, the Company closed on its acquisition of a 24-unit multi-family residential property in Bismarck, North Dakota, for a purchase price of $1.9 million, a portion of which was paid in Units valued at approximately $1.5 million, or $9.05 per unit, with the remaining approximately $372,000 paid in cash.  Subsequent to the end of the third quarter of the current fiscal year, the Company also closed on its acquisition of a 44-unit multi-family residential property in Sioux Falls, South Dakota for a purchase price of $2.3 million, a portion of which was paid in Units valued at approximately $299,000, or $9.03 per unit, with the remaining approximately $2.0 million paid in cash.
 
The Company has no currently pending dispositions.
 
ITEM 2. MANAGEMENT’S DISCUSSION
AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 
The following discussion and analysis should be read in conjunction with the unaudited condensed consolidated financial statements included in this report, as well as the Company’s audited financial statements for the fiscal year ended April 30, 2010, which, as updated for discontinued operations, are included in the Company’s Current Report on Form 8-K filed with the SEC on March 14, 2011.
 


Forward Looking Statements. Certain matters included in this discussion are forward looking statements within the meaning of the federal securities laws. Although we believe that the expectations reflected in the following statements are based on reasonable assumptions, we can give no assurance that the expectations expressed will actually be achieved. Many factors may cause actual results to differ materially from our current expectations, including general economic conditions, local real estate conditions, the general level of interest rates and the availability of financing and various other economic risks inherent in the business of owning and operating investment real estate.
 
Overview. IRET is a self-advised equity REIT engaged in owning and operating income-producing real estate properties. Our investments include multi-family residential properties and commercial office, commercial medical, commercial industrial and commercial retail properties located primarily in the upper Midwest states of Minnesota and North Dakota. Our properties are diversified by type and location. As of January 31, 2011, our real estate portfolio consisted of 74 multi-family residential properties containing 8,593 apartment units and having a total real estate investment amount net of accumulated depreciation of $364.2 million, and 176 commercial properties containing approximately 12.2 million square feet of leasable space. Our commercial properties consist of:
 
 
68 commercial office properties containing approximately 5.1 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $494.0 million;
 
 
56 commercial medical properties (including senior housing) containing approximately 2.7 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $384.6 million;
 
 
19 commercial industrial properties containing approximately 3.0 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $99.9 million; and
 
 
33 commercial retail properties containing approximately 1.4 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $101.6 million.
 
Our primary source of income and cash is rents associated with multi-family residential and commercial leases. Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, and adhering to targeted returns in acquiring properties. We intend to continue to achieve our business objective by investing in multi-family residential properties and in commercial office, commercial medical, commercial industrial, and commercial retail properties that are leased to single or multiple tenants, usually for five years or longer, and are located throughout the upper Midwest. We operate mainly within the states of North Dakota and Minnesota, although we also have real estate investments in South Dakota, Montana, Nebraska, Colorado, Idaho, Iowa, Kansas, Michigan, Missouri, Wisconsin and Wyoming.
 
We compete with other owners and developers of multi-family and commercial properties to attract tenants to our properties, and we compete with other real estate investors to acquire properties. Principal areas of competition for tenants are in respect of rents charged and the attractiveness of location and quality of our properties. Competition for investment properties affects our ability to acquire properties we want to add to our portfolio, and the price we pay for acquisitions.
 
IRET has substantially completed its announced goal of transferring the management of the majority of our commercial and multi-family residential properties from third-party property management companies to our own employees. As of January 31, 2011, the Company has under internal management a total of 155 properties in our commercial office, commercial medical, commercial industrial and commercial retail segments, totaling approximately 9.5 million square feet. Approximately 82.4% of the properties in our commercial office segment, 89.3% of the properties in our commercial medical segment, 89.5% of the properties in our commercial industrial segment, 97.0% of the properties in our commercial retail segment, and approximately 93.2% of the properties in the Company’s multi-family residential segment or approximately 7,793 units in 69 properties, were internally managed by Company employees as of January 31, 2011. We will continue to evaluate existing and acquired commercial properties to determine additional suitable candidates for internal management, and to establish appropriate timelines to accomplish the transfers.
 
During the third quarter of fiscal year 2011, as discussed below in the Property Acquisitions and Dispositions section of this Management's Discussion and Analysis of Financial Condition and Results of Operations, the Company acquired three properties: on November 10, 2010, the Company acquired the approximately 108,503 square foot Edgewood Vista assisted living facility in Minot, North Dakota, for approximately $15.2 million, consisting of cash of approximately $9.6 million ($7.4 million of which was paid to the current tenant in the property to acquire the option to purchase the property) and the assumption of existing debt



of approximately $5.6 million; on December 10, 2010, the Company acquired an approximately 47,709 square foot retail/office property in Minot, North Dakota, for a purchase price, paid in cash, of $8.3 million; and on December 16, 2010, the Company acquired an approximately 58,574 square foot office property in Omaha, Nebraska, for a purchase price of approximately $8.3 million, of which approximately $5.3 million was paid in cash, with the remainder paid in limited partnership units of the Company’s Operating Partnership valued at a total of $3.0 million. During the third quarter of fiscal year 2011, the Company substantially completed construction of an approximately 24,000 square foot expansion to its existing Edgewood Vista senior housing facility in Spearfish, South Dakota.  The cost to construct the addition was approximately $2.7 million, of which $2.3 million has been paid as of January 31, 2011.  During the third quarter of fiscal year 2011, the Company sold a small industrial property in Waconia, Minnesota, on November 1, 2010, and three multi-family residential properties in Colorado, the Pinecone and Miramont Apartments in Fort Collins, Colorado, and the Neighborhood Apartments in Colorado Springs, Colorado, on November 15, 2010, for a total sales price of $46.6 million.

Physical occupancy as of January 31, 2011 increased in all of our reportable segments except for commercial office and commercial industrial, on an all-property basis. On a stabilized basis, physical occupancy increased in two of our segments, multi-family residential and commercial retail, and our overall level of tenant concessions increased, compared to physical occupancy as of the year-earlier period, January 31, 2010.
 
We believe the decreased occupancy levels in our commercial office and commercial industrial segments reflect the economic conditions in our markets, as recovery from the national economic recession has been slow.  The recession, and illiquidity and uncertainty in the financial and capital markets during calendar years 2008, 2009, 2010 and continuing into 2011, negatively affected substantially all businesses, including ours.  Although signs of an economic recovery have emerged during the first three quarters of our current fiscal year, and multi-family residential market conditions have improved from the year earlier period, we continue to expect recovery from the recession to be slow during the balance of the current fiscal year. It is not possible for us to predict or quantify the timing and impact of such a recovery, or lack thereof, during the remainder of fiscal year 2011.
 
Critical Accounting Policies. In preparing the condensed consolidated financial statements management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of the Company’s critical accounting policies is included in the Company’s Current Report on Form 8-K for the fiscal year ended April 30, 2010, filed with the SEC on March 14, 2011, in Management’s Discussion and Analysis of Financial Condition and Results of Operations. There have been no significant changes to those policies during the three months ended January 31, 2011.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
For disclosure regarding recent accounting pronouncements and the anticipated impact they will have on our operations, please refer to Note 2 to our condensed consolidated financial statements.
 
RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2011 AND 2010
 
REVENUES
 
Revenues for the three months ended January 31, 2011 were $60.2 million compared to $57.3 million in the three months ended January 31, 2010, an increase of $2.9 million or 5.1%. Revenues for the nine months ended January 31, 2011 were $178.3 million compared to $172.1 million in the nine months ended January 31, 2010, an increase of $6.2 million or 3.6%. The increase in revenue for the three and nine months ended January 31, 2011 resulted primarily from properties acquired in Fiscal 2010.
 



 
   
(in thousands)
 
 
 
Increase in Total
Revenue
Three Months
ended January 31, 2011
   
Increase in Total
Revenue
Nine Months
ended January 31, 2011
 
Rent in Fiscal 2011 primarily from 10 properties acquired in Fiscal 2010 in excess of that received in Fiscal 2010 from the same 10 properties
  $ 1,865     $ 7,728  
Rent in Fiscal 2011 primarily from 7 properties acquired in Fiscal 2011
    833       1,170  
Increase (decrease) in rental income on stabilized properties; increase in third quarter due to an increase in tenant reimbursements in commercial segments net of increased vacancy
    1,037       (841 )
Increase in tenant concessions
    (866 )     (1,875 )
Net increase in total revenue
  $ 2,869     $ 6,182  

NET OPERATING INCOME
 
The following tables report segment financial information. We measure the performance of our segments based on net operating income (“NOI”), which we define as total real estate revenues less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance and property management expenses). We believe that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.
 
The following tables show real estate revenues, real estate expenses and NOI by reportable operating segment for the three and nine months ended January 31, 2011 and 2010.  For a reconciliation of net operating income of reportable segments to net income as reported, see Note 5 of the Notes to the condensed consolidated financial statements in this report.
 
The tables also show NOI by reportable operating segment on a stabilized property and non-stabilized property basis.  Stabilized properties are properties owned and in operation for the entirety of the periods being compared (including properties that were redeveloped or expanded during the periods being compared, with properties purchased or sold during the periods being compared excluded from the stabilized property category), and, in the case of development or re-development properties, which have achieved a target level of occupancy. This comparison allows the Company to evaluate the performance of existing properties and their contribution to net income. Management believes that measuring performance on a stabilized property basis is useful to investors because it enables evaluation of how the Company’s properties are performing year over year. Management uses this measure to assess whether or not it has been successful in increasing net operating income, renewing the leases of existing tenants, controlling operating costs and appropriately handling capital improvements.
 

   
(in thousands)
 
Three Months Ended January 31, 2011
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
All Segments
 
                                     
Real estate revenue
  $ 16,884     $ 19,343     $ 16,993     $ 3,349     $ 3,634     $ 60,203  
Real estate expenses
                                               
Utilities
    1,851       1,837       812       117       158       4,775  
Maintenance
    2,857       3,189       1,347       308       657       8,358  
Real estate taxes
    1,676       3,571       1,375       626       532       7,780  
Insurance
    319       144       117       37       29       646  
Property management
    2,200       766       2,243       115       154       5,478  
Total expenses
  $ 8,903     $ 9,507     $ 5,894     $ 1,203     $ 1,530     $ 27,037  
Net operating income
  $ 7,981     $ 9,836     $ 11,099     $ 2,146     $ 2,104     $ 33,166  
                                                 
Stabilized net operating income
  $ 7,936     $ 9,703     $ 9,918     $ 1,971     $ 2,030     $ 31,558  
Non-stabilized net operating income
    45       133       1,181       175       74       1,608  
Total net operating income
  $ 7,981     $ 9,836     $ 11,099     $ 2,146     $ 2,104     $ 33,166  




   
(in thousands)
 
Three Months Ended January 31, 2010
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
All Segments
 
                                     
Real estate revenue
  $ 16,315     $ 20,303     $ 14,218     $ 3,186     $ 3,312     $ 57,334  
Real estate expenses
                                               
Utilities
    1,749       1,666       778       21       156       4,370  
Maintenance
    2,473       2,998       1,150       235       426       7,282  
Real estate taxes
    1,689       3,461       1,217       606       531       7,504  
Insurance
    413       266       112       75       44       910  
Property management
    2,281       834       1,226       113       165       4,619  
Total expenses
  $ 8,605     $ 9,225     $ 4,483     $ 1,050     $ 1,322     $ 24,685  
Gain on involuntary conversion
    1,660       0       0       0       0       1,660  
Net operating income
  $ 9,370     $ 11,078     $ 9,735     $ 2,136     $ 1,990     $ 34,309  
                                                 
Stabilized net operating income
  $ 9,370     $ 11,053     $ 9,527     $ 2,061     $ 1,989     $ 34,000  
Non-stabilized net operating income
    0       25       208       75       1       309  
Total net operating income
  $ 9,370     $ 11,078     $ 9,735     $ 2,136     $ 1,990     $ 34,309  

 

   
(in thousands)
 
Nine Months Ended January 31, 2011
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
All Segments
 
                                     
Real estate revenue
  $ 49,596     $ 58,839     $ 49,547     $ 9,890     $ 10,411     $ 178,283  
Real estate expenses
                                               
Utilities
    4,586       5,630       2,404       211       353       13,184  
Maintenance
    8,139       8,572       3,461       587       1,242       22,001  
Real estate taxes
    4,894       10,453       4,279       1,907       1,535       23,068  
Insurance
    910       426       339       115       76       1,866  
Property management
    6,718       2,001       6,080       303       433       15,535  
Total expenses
  $ 25,247     $ 27,082     $ 16,563     $ 3,123     $ 3,639     $ 75,654  
Net operating income
  $ 24,349     $ 31,757     $ 32,984     $ 6,767     $ 6,772     $ 102,629  
                                                 
Stabilized net operating income
  $ 24,197     $ 31,602     $ 30,056     $ 6,322     $ 6,698     $ 98,875  
Non-stabilized net operating income
    152       155       2,928       445       74       3,754  
Total net operating income
  $ 24,349     $ 31,757     $ 32,984     $ 6,767     $ 6,772     $ 102,629  

   
(in thousands)
 
Nine Months Ended January 31, 2010
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
All Segments
 
                                     
Real estate revenue
  $ 49,210     $ 61,952     $ 41,157     $ 9,806     $ 9,976     $ 172,101  
Real estate expenses
                                               
Utilities
    4,383       5,476       2,025       141       363       12,388  
Maintenance
    7,330       8,369       3,214       608       943       20,464  
Real estate taxes
    5,027       10,547       3,644       1,925       1,616       22,759  
Insurance
    1,246       789       336       168       153       2,692  
Property management
    6,368       2,570       2,918       319       431       12,606  
Total expenses
  $ 24,354     $ 27,751     $ 12,137     $ 3,161     $ 3,506     $ 70,909  
Gain on involuntary conversion
    1,660       0       0       0       0       1,660  
Net operating income
  $ 26,516     $ 34,201     $ 29,020     $ 6,645     $ 6,470     $ 102,852  
                                                 
Stabilized net operating income
  $ 26,516     $ 34,185     $ 28,869     $ 6,506     $ 6,469     $ 102,545  
Non-stabilized net operating income
    0       16       151       139       1       307  
Total net operating income
  $ 26,516     $ 34,201     $ 29,020     $ 6,645     $ 6,470     $ 102,852  



FACTORS IMPACTING NET OPERATING INCOME
 
Real estate revenue increased in four of our five reportable segments in the three and nine month periods ended January 31, 2011 compared to the three and nine month period ended January 31, 2010, to $60.2 million and $178.3 million, respectively, compared to $57.3 million and $172.1 million, primarily due to acquisitions in the multi-family residential, commercial medical, commercial industrial and commercial retail segments. Our overall level of tenant concessions increased in the three and nine month periods ended January 31, 2011 compared to the year-earlier periods.
 
 
Physical Occupancy.  As of January 31, 2011, physical occupancy levels on an all property basis increased from the year earlier period in three of our reportable segments, decreasing in our commercial office and industrial segment. On a stabilized basis, physical occupancy increased in two of our segments, multi-family residential and commercial retail. We attribute the decrease primarily to difficult leasing conditions resulting from the current economic downturn, as discussed above in the Overview section of this Management’s Discussion and Analysis of Financial Condition and Results of Operations. Multi-family residential market conditions improved from the year earlier period. Physical occupancy rates on a stabilized property and all property basis for January 31, 2011, compared to the January 31, 2010, are shown below:

 
   
Stabilized Properties
   
All Properties
 
   
January 31,
   
January 31,
 
   
2011
   
2010
   
2011
   
2010
 
Multi-Family Residential
    91.2 %     89.6 %     91.1 %     89.6 %
Commercial Office
    79.6 %     84.3 %     80.1 %     83.7 %
Commercial Medical
    95.4 %     95.8 %     96.0 %     95.2 %
Commercial Industrial
    81.1 %     86.1 %     81.7 %     86.3 %
Commercial Retail
    82.4 %     81.9 %     82.5 %     81.9 %

 
Increased Concessions.  Our overall level of tenant concessions increased in the three and nine month periods ended January 31, 2011 compared to the year-earlier periods. To maintain or increase physical occupancy levels at our properties, we may offer tenant incentives, generally in the form of lower or abated rents, which results in decreased revenues and income from operations at our properties. Rent concessions offered during the three and nine months ended January 31, 2011 will lower, over the lives of the respective leases, our operating revenues by approximately $1.5 million and $3.6 million, as compared to an approximately $668,000 and $1.8 million reduction, over the lives of the respective leases, in operating revenues attributable to rent concessions offered in the three and nine months ended January 31, 2010, as shown in the table below:
 

   
(in thousands)
 
   
Three Months Ended January 31,
   
Nine Months Ended January 31,
 
   
2011
   
2010
   
Change
   
2011
   
2010
   
Change
 
Multi-Family Residential
  $ 386     $ 254     $ 132     $ 1,185     $ 888     $ 297  
Commercial Office
    913       316       597       1,725       595       1,130  
Commercial Medical
    56       76       (20 )     234       228       6  
Commercial Industrial
    57       10       47       308       31       277  
Commercial Retail
    122       12       110       191       25       166  
Total
  $ 1,534     $ 668     $ 866     $ 3,643     $ 1,767     $ 1,876  

 
 
Increased Utility Expense. Utility expense totaled $4.8 million and $13.2 million for the three and nine months ended January 31, 2011, compared to $4.4 million and $12.4 million for the three and nine months ended January 31, 2010, an increase of 9.3% and 6.4%, respectively, over the year-earlier periods. Utility expenses at properties newly acquired in fiscal years 2011 and 2010 added $111,000 and $389,000 to the utility expense category for the three and nine months ended January 31, 2011. Utility expenses at existing properties increased by $294,000 and $407,000, respectively, resulting in an increase of $405,000 and $796,000 for the three and nine months ended January 31, 2011. The increase in utility costs at our stabilized properties is due primarily to increased electrical costs in our multi-family residential and commercial office segments.
 



 
Utility expenses by reportable segment for the three and nine months ended January 31, 2011 and 2010 are as follows:
 

 
   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 1,851     $ 1,837     $ 812     $ 117     $ 158     $ 4,775  
2010
  $ 1,749     $ 1,666     $ 778     $ 21     $ 156     $ 4,370  
Change
  $ 102     $ 171     $ 34     $ 96     $ 2     $ 405  
% change
    5.8 %     10.3 %     4.4 %     457.1 %     1.3 %     9.3 %
                                                 
Stabilized
  $ 89     $ 170     $ (57 )   $ 96     $ (4 )   $ 294  
Non-stabilized
  $ 13     $ 1     $ 91     $ 0     $ 6     $ 111  
Change
  $ 102     $ 171     $ 34     $ 96     $ 2     $ 405  

 

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 4,586     $ 5,630     $ 2,404     $ 211     $ 353     $ 13,184  
2010
  $ 4,383     $ 5,476     $ 2,025     $ 141     $ 363     $ 12,388  
Change
  $ 203     $ 154     $ 379     $ 70     $ (10 )   $ 796  
% change
    4.6 %     2.8 %     18.7 %     49.6 %     (2.8 %)     6.4 %
                                                 
Stabilized
  $ 167     $ 153     $ 32     $ 70     $ (15 )   $ 407  
Non-stabilized
  $ 36     $ 1     $ 347     $ 0     $ 5     $ 389  
Change
  $ 203     $ 154     $ 379     $ 70     $ (10 )   $ 796  

 
 
Increased Maintenance Expense. Maintenance expenses totaled $8.4 million and $22.0 million for the three and nine months ended January 31, 2011 compared to $7.3 million and $20.5 million for the three and nine months ended January 31, 2010.  Maintenance expenses at properties newly acquired in fiscal year 2011 and 2010 added $74,000 and $232,000 to the maintenance expenses category for the three and nine months ended January 31, 2011. Maintenance expenses at existing (“stabilized”) properties increased by $1.0 million and $1.3 million, respectively, resulting in an increase in maintenance expenses of $1.1 million, or 14.8% for the three months ended January 31, 2011, and $1.5 million, or 7.5% for the nine months ended January 31, 2011 compared to the corresponding periods in fiscal year 2010.  The increase in maintenance costs at our stabilized properties is due primarily to an increase in general building maintenance costs in our multi-family residential segment, and all segments incurred increased snow removal costs.
 

 
Maintenance expenses by reportable segment for the three and nine months ended January 31, 2011 and 2010 are as follows:
 
 
   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 2,857     $ 3,189     $ 1,347     $ 308     $ 657     $ 8,358  
2010
  $ 2,473     $ 2,998     $ 1,150     $ 235     $ 426     $ 7,282  
Change
  $ 384     $ 191     $ 197     $ 73     $ 231     $ 1,076  
% change
    15.5 %     6.4 %     17.1 %     31.1 %     54.2 %     14.8 %
                                                 
Stabilized
  $ 360     $ 164     $ 177     $ 70     $ 231     $ 1,002  
Non-stabilized
  $ 24     $ 27     $ 20     $ 3     $ 0     $ 74  
Change
  $ 384     $ 191     $ 197     $ 73     $ 231     $ 1,076  

 



 

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 8,139     $ 8,572     $ 3,461     $ 587     $ 1,242     $ 22,001  
2010
  $ 7,330     $ 8,369     $ 3,214     $ 608     $ 943     $ 20,464  
Change
  $ 809     $ 203     $ 247     $ (21 )   $ 299     $ 1,537  
% change
    11.0 %     2.4 %     7.7 %     (3.5 %)     31.7 %     7.5 %
                                                 
Stabilized
  $ 742     $ 191     $ 98     $ (25 )   $ 299     $ 1,305  
Non-stabilized
  $ 67     $ 12     $ 149     $ 4     $ 0     $ 232  
Change
  $ 809     $ 203     $ 247     $ (21 )   $ 299     $ 1,537  

 
 
Increased Real Estate Tax Expense. Real estate taxes on properties newly acquired in fiscal years 2011 and 2010 added $54,000 and $245,000, respectively, to real estate tax expense in the three and nine months ended January 31, 2011, compared to the three and nine months ended January 31, 2010. Real estate taxes on stabilized properties increased by $222,000 and $64,000, respectively, in the three and nine months ended January 31, 2011, resulting in an increase of $276,000 and $309,000 or 3.7% and 1.4% for the three and nine months ended January 31, 2011, compared to the three and nine months ended January 31, 2010. The increase in real estate taxes for our stabilized properties is a net effect of the commercial medical segment experiencing higher value assessments and increased tax levies offset by successful appeals in the four other segments.
 
 
Real estate tax expense by reportable segment for the three and nine months ended January 31, 2011 and 2010 is as follows:
 
 
   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 1,676     $ 3,571     $ 1,375     $ 626     $ 532     $ 7,780  
2010
  $ 1,689     $ 3,461     $ 1,217     $ 606     $ 531     $ 7,504  
Change
  $ (13 )   $ 110     $ 158     $ 20     $ 1     $ 276  
% change
    (0.8 %)     3.2 %     13.0 %     3.3 %     0.2 %     3.7 %
                                                 
Stabilized
  $ (26 )   $ 87     $ 151     $ 21     $ (11 )   $ 222  
Non-stabilized
  $ 13     $ 23     $ 7     $ (1 )   $ 12     $ 54  
Change
  $ (13 )   $ 110     $ 158     $ 20     $ 1     $ 276  

 

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 4,894     $ 10,453     $ 4,279     $ 1,907     $ 1,535     $ 23,068  
2010
  $ 5,027     $ 10,547     $ 3,644     $ 1,925     $ 1,616     $ 22,759  
Change
  $ (133 )   $ (94 )   $ 635     $ (18 )   $ (81 )   $ 309  
% change
    (2.6 %)     (0.9 %)     17.4 %     (0.9 %)     (0.5 %)     1.4 %
                                                 
Stabilized
  $ (176 )   $ (168 )   $ 548     $ (47 )   $ (93 )   $ 64  
Non-stabilized
  $ 43     $ 74     $ 87     $ 29     $ 12     $ 245  
Change
  $ (133 )   $ (94 )   $ 635     $ (18 )   $ (81 )   $ 309  

 
 
Decreased Insurance Expense. Insurance expense totaled $646,000 and $1.9 million for the three and nine months ended January 31, 2011 compared to $910,000 and $2.7 million for the three and nine months ended January 31, 2010. Insurance expenses at properties newly acquired in fiscal years 2011 and 2010 added $59,000 and $186,000 to the insurance expense category, while insurance expense at existing properties decreased by $323,000 and $1.0 million, respectively, resulting in a net decrease in insurance expenses of $264,000 and $826,000 in the three and nine months ended January 31, 2011, a 29.0% and 30.7% decrease over insurance expenses in the three and nine months ended January 31, 2010. The decrease in insurance expense at stabilized properties is due to reduced insurance rates because of better claims experience.
 


 
 
 
Insurance expense by reportable segment for the three and nine months ended January 31, 2011 and 2010 is as follows:
 

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 319     $ 144     $ 117     $ 37     $ 29     $ 646  
2010
  $ 413     $ 266     $ 112     $ 75     $ 44     $ 910  
Change
  $ (94 )   $ (122 )   $ 5     $ (38 )   $ (15 )   $ (264 )
% change
    (22.8 %)     (45.9 %)     4.5 %     (50.7 %)     (34.1 %)     (29.0 %)
                                                 
Stabilized
  $ (97 )   $ (123 )   $ (50 )   $ (38 )   $ (15 )   $ (323 )
Non-stabilized
  $ 3     $ 1     $ 55     $ 0     $ 0     $ 59  
Change
  $ (94 )   $ (122 )   $ 5     $ (38 )   $ (15 )   $ (264 )

 

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 910     $ 426     $ 339     $ 115     $ 76     $ 1,866  
2010
  $ 1,246     $ 789     $ 336     $ 168     $ 153     $ 2,692  
Change
  $ (336 )   $ (363 )   $ 3     $ (53 )   $ (77 )   $ (826 )
% change
    (27.0 %)     (46.0 %)     0.9 %     (31.5 %)     (50.3 %)     (30.7 %)
                                                 
Stabilized
  $ (344 )   $ (367 )   $ (171 )   $ (53 )   $ (77 )   $ (1,012 )
Non-stabilized
  $ 8     $ 4     $ 174     $ 0     $ 0     $ 186  
Change
  $ (336 )   $ (363 )   $ 3     $ (53 )   $ (77 )   $ (826 )

 
 
Increased Property Management Expense. Property management expense totaled $5.5 million and $15.5 million for the three and nine months ended January 31, 2011 and compared to $4.6 million and $12.6 million for the three and nine months ended January 31, 2010. Property management expenses at properties newly acquired in fiscal years 2011 and 2010 added $1.1 million and $4.3 million to the property management expenses category in the three and nine months ended January 31, 2011, primarily from the five commercial medical properties located in Wyoming acquired in fiscal year 2010. Property management expenses at stabilized properties decreased by $217,000 and $1.3 million for the three and nine months ended January 31, 2011 compared to the three and nine months ended January 31, 2010, primarily as a result of reduced bad debt write-off in the commercial medical segment and reduced management fees in the commercial office segment, resulting in a net increase of $859,000 and $2.9 million or 18.6% and 23.2% in the three and nine months ended January 31, 2011 compared to the year-earlier periods.
 
 
Property management expense by reportable segment for the three and nine months ended January 31, 2011 and 2010 is as follows:
 
 
   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 2,200     $ 766     $ 2,243     $ 115     $ 154     $ 5,478  
2010
  $ 2,281     $ 834     $ 1,226     $ 113     $ 165     $ 4,619  
Change
  $ (81 )   $ (68 )   $ 1,017     $ 2     $ (11 )   $ 859  
% change
    (3.6 %)     (8.2 %)     83.0 %     1.8 %     (6.7 %)     18.6 %
                                                 
Stabilized
  $ (99 )   $ (73 )   $ (31 )   $ (1 )   $ (13 )   $ (217 )
Non-stabilized
  $ 18     $ 5     $ 1,048     $ 3     $ 2     $ 1,076  
Change
  $ (81 )   $ (68 )   $ 1,017     $ 2     $ (11 )   $ 859  

 



 

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 6,718     $ 2,001     $ 6,080     $ 303     $ 433     $ 15,535  
2010
  $ 6,368     $ 2,570     $ 2,918     $ 319     $ 431     $ 12,606  
Change
  $ 350     $ (569 )   $ 3,162     $ (16 )   $ 2     $ 2,929  
% change
    5.5 %     (22.1 %)     108.4 %     (5.0 %)     0.5 %     23.2 %
                                                 
Stabilized
  $ 289     $ (581 )   $ (1,026 )   $ (22 )   $ (1 )   $ (1,341 )
Non-stabilized
  $ 61     $ 12     $ 4,188     $ 6     $ 3     $ 4,270  
Change
  $ 350     $ (569 )   $ 3,162     $ (16 )   $ 2     $ 2,929  

 

FACTORS IMPACTING NET INCOME
 

Net income increased by approximately $14.2 million and $20.9 million for the three and nine months ended January 31, 2011, compared to the three and nine months ended January 31, 2010. The increase in net income is due primarily to a gain on sale of discontinued operations and to a lesser extent an increase in revenues from properties acquired in Fiscal 2011 and 2010 in the three and nine months ended January 31, 2011, compared to the three and nine months ended January 31, 2010, as well as other factors shown by the following analysis:
 
   
Increase in Net Income
 
   
(in thousands)
 
 
 
Three Months
ended January 31, 2011
   
Nine Months
ended January 31, 2011
 
 
Net income for Fiscal 2010
  $ 364     $ 3,133  
Decrease in NOI
    (1,143 )     (223 )
Increase in depreciation/amortization due to depreciation of tenant and capital improvements
    (94 )     (617 )
Increase in administrative, advisory and trustee fees due to additional corporate staff and overhead and increased trustee fees
    (60 )     (762 )
Decrease in other expenses
    95       111  
Decrease in impairment of real estate investment
    0       708  
Decrease in interest expense
    646       911  
Decrease in interest and other income
    (143 )     (92 )
Increase in income from discontinued operations
    14,923       20,872  
Net income for Fiscal 2011
  $ 14,588     $ 24,041  

The following factors impacted net income in the three and nine months ended January 2011:
 
 
Gain from Discontinued Operations.  As noted above, net income increased in the three and nine months ended January 31, 2011 compared to the year-earlier periods primarily due to a gain on sale of discontinued operations.  During the second and third quarters of fiscal year 2011, the Company sold a small industrial property in Minnesota, three multi-family residential properties in Colorado, a small retail property in Wisconsin, a small residential property in North Dakota and a large multi-family property in Texas.  The gain on sale resulting from these dispositions increased net income in three and nine months ended January 31, 2011 by approximately $14.0 million and $19.4 million, respectively.
 
 
Decreased Mortgage Interest Expense.  Our mortgage interest expense decreased approximately $784,000, or 4.9%, to approximately $15.3 million during the third quarter of fiscal year 2011, compared to $16.1 million in the third quarter of fiscal year 2010. Mortgage interest expense decreased approximately $1.4 million or 2.9%, to approximately $46.4 million during the nine month period ended January 31, 2011, compared to $47.8 million during the nine month period ended January 31, 2010. The decrease in mortgage interest expense is due to refinancings in our stabilized properties portfolio. Our overall weighted average interest rate on all outstanding mortgage debt was 6.05% as of January 31, 2011 and 6.21% as of January 31, 2010.  Our mortgage debt on January 31, 2011 decreased approximately $58.7 million, or 5.5% from April 30, 2010.
 



 
Mortgage interest expense by reportable segment for the three and nine months ended January 31, 2011 and 2010 is as follows:
 

 
   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 4,171     $ 5,281     $ 4,130     $ 948     $ 791     $ 15,321  
2010
  $ 4,195     $ 5,737     $ 4,327     $ 1,008     $ 838     $ 16,105  
Change
  $ (24 )   $ (456 )   $ (197 )   $ (60 )   $ (47 )   $ (784 )
% change
    (0.6 %)     (7.9 %)     (4.6 %)     (6.0 %)     (5.6 %)     (4.9 %)
                                                 
Stabilized
  $ (70 )   $ (474 )   $ (269 )   $ (58 )   $ (47 )   $ (918 )
Non-stabilized
  $ 46     $ 18     $ 72     $ (2 )   $ 0     $ 134  
Change
  $ (24 )   $ (456 )   $ (197 )   $ (60 )   $ (47 )   $ (784 )

 

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2011
  $ 12,549     $ 16,253     $ 12,345     $ 2,857     $ 2,384     $ 46,388  
2010
  $ 12,364     $ 17,343     $ 12,517     $ 2,924     $ 2,615     $ 47,763  
Change
  $ 185     $ (1,090 )   $ (172 )   $ (67 )   $ (231 )   $ (1,375 )
% change
    1.5 %     (6.3 %)     (1.4 %)     (2.3 %)     (8.8 %)     (2.9 %)
                                                 
Stabilized
  $ 46     $ (1,108 )   $ (334 )   $ (132 )   $ (231 )   $ (1,759 )
Non-stabilized
  $ 139     $ 18     $ 162     $ 65     $ 0     $ 384  
Change
  $ 185     $ (1,090 )   $ (172 )   $ (67 )   $ (231 )   $ (1,375 )

 
 
 
In addition to IRET’s mortgage interest expense, the Company incurs interest expense for lines of credit, amortization of loan costs, security deposits, and special assessments offset by capitalized construction interest. For the three months ended January 31, 2011 and 2010 these amounts were $567,000 and $429,000, respectively, a total interest expense for the three months ended January 31, 2011 and 2010 of $15.9 million and $16.5 million, respectively, a decrease of $646,000. For the nine months ended January 31, 2011 and 2010 these amounts were $2.0 million and $1.5 million, respectively, for a total interest expense for the nine months ended January 31, 2011 and 2010 of $48.4 million and $49.3 million, respectively, a decrease of $911,000.
 
 
 
Increased Amortization Expense. The Company allocated a portion of the purchase price paid for properties to in-place lease intangible assets.  The amortization period of these intangible assets is the term of the respective lease. Amortization expense related to in-place leases totaled $1.7 million and $5.5 million in the three and nine months ended January 31, 2011, respectively compared to $2.1 million and $6.6 million in the three and nine months ended January 31, 2010.
 
CREDIT RISK
 
The following table lists our top ten commercial tenants on January 31, 2011, for all commercial properties owned by us, measured by percentage of total commercial segments’ minimum rents as of January 31, 2011.  Our results of operations are dependent on, among other factors, the economic health of our tenants. We attempt to mitigate tenant credit risk by working to secure creditworthy tenants that meet our underwriting criteria and monitoring our portfolio to identify potential problem tenants. We believe that our credit risk is also mitigated by the fact that no individual tenant accounts for more than approximately 10% of our total real estate rentals, although affiliated entities of Edgewood Vista together accounted for approximately 10.7% of our total commercial segments’ minimum rents as of January 31, 2011.
 



 
Lessee
% of Total Commercial
Segments’ Minimum Rents
as of January 31, 2011
Affiliates of Edgewood Vista
10.7%
St. Lukes Hospital of Duluth, Inc.
3.4%
Fairview Health Services
2.6%
Applied Underwriters
2.2%
Affiliates of Siemens USA
2.1%
HealthEast Care System
1.6%
Microsoft (NASDAQ: MSFT)
1.4%
Smurfit - Stone Container (NASDAQ: SSCC)
1.4%
Nebraska Orthopedic Hospital
1.3%
Arcadis Corporate Services, Inc.
1.2%
All Others
72.1%
Total Monthly Commercial Rent as of January 31, 2011
100.0%
 
PROPERTY ACQUISITIONS AND DISPOSITIONS
 
During the third quarter of fiscal year 2011, the Company acquired three properties: on November 10, 2010, the Company acquired the approximately 108,503 square foot Edgewood Vista assisted living facility in Minot, North Dakota, for approximately $15.2 million, consisting of cash of approximately $9.6 million ($7.4 million of which was paid to the current tenant in the property to acquire the option to purchase the property) and the assumption of existing debt of approximately $5.6 million; on December 10, 2010, the Company acquired an approximately 47,709 square foot retail/office property in Minot, North Dakota, for a purchase price, paid in cash, of $8.3 million; and on December 16, 2010, the Company acquired an approximately 58,574 square foot office property in Omaha, Nebraska, for a purchase price of approximately $8.3 million, of which approximately $5.3 million was paid in cash, with the remainder paid in limited partnership units of the Company’s Operating Partnership valued at a total of $3.0 million. During the third quarter of fiscal year 2011, the Company substantially completed construction of an approximately 24,000 square foot expansion to its existing Edgewood Vista senior housing facility in Spearfish, South Dakota. The cost to construct the addition was approximately $2.7 million, of which $2.3 million has been paid as of January 31, 2011.
 
During the third quarter of fiscal year 2011, the Company sold a small industrial property in Waconia, Minnesota, on November 1, 2010, and three multi-family residential properties in Colorado, the Pinecone and Miramont Apartments in Fort Collins, Colorado and the Neighborhood Apartments in Colorado Springs, Colorado, on November 15, 2010, for a total sales price of $46.6 million.
 
The Company had no acquisitions or development projects placed in service during the second quarter of fiscal year 2011. During the second quarter of fiscal year 2011, IRET sold a small retail property in Ladysmith, Wisconsin, on September 2, 2010; a patio home property in Fargo, North Dakota on September 30, 2010; and the Company’s 504-unit Dakota Hill at Valley Ranch Apartments in Irving, Texas on October 26, 2010, for a total sales price of $36.8 million.
 
During the first quarter of fiscal year 2011, IRET acquired, on July 15, 2010, two medical office buildings located in, respectively, Billings, Montana and Missoula, Montana, for a total purchase price of approximately $5.2 million, consisting of cash of approximately $957,000 and the assumption of existing debt with an interest rate of 7.06% and a maturity date of December 31, 2016 in the amount of approximately $4.3 million. The two medical office buildings were each constructed in 2001, and contain approximately 14,705 square feet and 14,640 square feet of leasable space, respectively. During the first quarter of fiscal year 2011, the Company completed construction of a single-tenant office/warehouse facility in Fargo, North Dakota. The cost to construct the facility was approximately $3.9 million, including the cost of the land plus imputed construction interest. There were no dispositions in the first quarter of fiscal year 2011.
 
See Note 8 of Notes to Condensed Consolidated Financial Statements above for a table detailing the Company’s acquisitions and dispositions during the nine month periods ended January 31, 2011 and January 31, 2010.
 


FUNDS FROM OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2011 AND 2010
 
IRET considers Funds from Operations (“FFO”) a useful measure of performance for an equity REIT. IRET uses the definition of FFO adopted by the National Association of Real Estate Investment Trusts, Inc. (“NAREIT”). NAREIT defines FFO to mean “net income (computed in accordance with generally accepted accounting principles), excluding gains (or losses) from sales of property, plus depreciation and amortization, and after adjustments for unconsolidated partnerships and joint ventures. Adjustments for unconsolidated partnerships and joint ventures will be calculated to reflect funds from operations on the same basis.” Because of limitations of the FFO definition adopted by NAREIT, IRET has made certain interpretations in applying the definition. IRET believes all such interpretations not specifically provided for in the NAREIT definition are consistent with the definition.
 
IRET management considers that FFO, by excluding depreciation costs, the gains or losses from the sale of operating real estate properties and extraordinary items as defined by GAAP, is useful to investors in providing an additional perspective on IRET’s operating results. Historical cost accounting for real estate assets in accordance with GAAP assumes, through depreciation, that the value of real estate assets decreases predictably over time. However, real estate asset values have historically risen or fallen with market conditions. NAREIT’s definition of FFO, by excluding depreciation costs, reflects the fact that real estate, as an asset class, generally appreciates over time and that depreciation charges required by GAAP may not reflect underlying economic realities. Additionally, the exclusion, in NAREIT’s definition of FFO, of gains and losses from the sales of previously depreciated operating real estate assets, allows IRET management and investors better to identify the operating results of the long-term assets that form the core of IRET’s investments, and assists in comparing those operating results between periods. FFO is used by IRET management and investors to identify trends in occupancy rates, rental rates and operating costs.
 
While FFO is widely used by REITs as a primary performance metric, not all real estate companies use the same definition of FFO or calculate FFO in the same way. Accordingly, FFO presented here is not necessarily comparable to FFO presented by other real estate companies. FFO should not be considered as an alternative to net income as determined in accordance with GAAP as a measure of IRET’s performance, but rather should be considered as an additional, supplemental measure, and should be viewed in conjunction with net income as presented in the consolidated financial statements included in this report. FFO does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of sufficient cash flow to fund all of IRET’s needs or its ability to service indebtedness or make distributions.
 
FFO applicable to common shares and Units for the three months ended January 31, 2011 decreased slightly to $14.6 million compared to $14.7 million for the comparable period ended January 31, 2010, a decrease of 0.2%. FFO applicable to common shares and Units for the nine months ended January 31, 2011 increased to $47.5 million compared to $45.7 million for the comparable period ended January 31, 2010, an increase of 3.8%.
 
RECONCILIATION OF NET INCOME ATTRIBUTABLE TO
INVESTORS REAL ESTATE TRUST TO FUNDS FROM OPERATIONS
 
 
(in thousands, except per share amounts)
 
Three Months Ended January 31,
2011
 
2010
 
 
Amount
   
Weighted
Avg Shares
and Units(2)
 
Per
Share and
Unit(3)
 
Amount
   
Weighted
Avg Shares
and Units(2)
 
Per
Share
And
Unit(3)
 
 
 
 
Net income attributable to Investors Real Estate Trust
  $ 11,833                 $ 452              
Less dividends to preferred shareholders
    (593 )                 (593 )            
Net income (loss) available to common shareholders
    11,240       79,398     $ 0.14       (141 )     73,607     $ 0.00  
Adjustments:
                                               
Noncontrolling interest – Operating Partnership
    2,793       19,957               (39 )     20,909          
Depreciation and amortization(1)
    14,577                       14,865                  
Gain on depreciable property sales
    (13,961 )                     0                  
Funds from operations applicable to common shares
and Units
  $ 14,649       99,355     $ 0.14       14,685       94,516     $ 0.16  




 
(in thousands, except per share amounts)
 
Nine Months Ended January 31,
2011
 
2010
 
 
Amount
   
Weighted
Avg Shares
and Units(2)
 
Per
Share and
Unit(3)
 
Amount
   
Weighted
Avg Shares
and Units(2)
 
Per
Share
And
Unit(3)
 
 
 
 
Net income attributable to Investors Real Estate Trust
  $ 19,638                 $ 2,754              
Less dividends to preferred shareholders
    (1,779 )                 (1,779 )            
Net income available to common shareholders
    17,859       78,140     $ 0.23       975       67,375     $ 0.02  
Adjustments:
                                               
Noncontrolling interest – Operating Partnership
    4,485       20,171               381       20,909          
Depreciation and amortization(4)
    44,525                       44,390                  
Gain on depreciable property sales
    (19,365 )                     0                  
Funds from operations applicable to common shares
and Units
  $ 47,504       98,311     $ 0.48     $ 45,746       88,284     $ 0.52  

(1)
Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments and amortization related to non-real estate investments from the Condensed Consolidated Statements of Operations, totaling $14,591 and $14,497, and depreciation/amortization from Discontinued Operations of $41 and $581, less corporate-related depreciation and amortization on office equipment and other assets of $55 and $213, for the three months ended January 31, 2011 and 2010, respectively.
(2)
UPREIT Units of the Operating Partnership are exchangeable for common shares of beneficial interest on a one-for-one basis.
(3)
Net income attributable to Investors Real Estate Trust is calculated on a per share basis. FFO is calculated on a per share and unit basis.
(4)
Real estate depreciation and amortization consists of the sum of depreciation/amortization related to real estate investments and amortization related to non-real estate investments from the Condensed Consolidated Statements of Operations, totaling $43,581 and $42,964, and depreciation/amortization from Discontinued Operations of $1,146 and $1,738, less corporate-related depreciation and amortization on office equipment and other assets of $202 and $312, for the nine months ended January 31, 2011 and 2010, respectively.
 
DISTRIBUTIONS
 
The following distributions per common share and unit were paid during the nine months ended January 31 of fiscal years 2011 and 2010:
 
Month
 
Fiscal Year 2011
   
Fiscal Year 2010
 
July
  $ .1715     $ .1705  
October
  $ .1715     $ .1710  
January
  $ .1715     $ .1715  

 
LIQUIDITY AND CAPITAL RESOURCES
 
OVERVIEW
 
The Company’s principal liquidity demands are maintaining distributions to the holders of the Company’s common and preferred shares of beneficial interest and UPREIT Units, capital improvements and repairs and maintenance to the Company’s properties, acquisition of additional properties, property development, tenant improvements and debt service and repayments.
 
The Company has historically met its short-term liquidity requirements through net cash flows provided by its operating activities, and, from time to time, through draws on its unsecured lines of credit. Management considers the Company’s ability to generate cash from property operating activities, cash-out refinancing of existing properties and, from time to time, draws on its line of credit to be adequate to meet all operating requirements and to make distributions to its shareholders in accordance with the REIT provisions of the Internal Revenue Code. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to our real estate portfolio are also generally expected to be funded from existing cash on hand, cash flow generated from property operations, cash-out refinancing of existing properties, and/or new borrowings. However, the commercial and residential real estate markets continue to experience significant challenges including reduced occupancies and rental rates as well as restrictions on the availability of financing. In the event of deterioration in property operating results, or absent the Company’s ability to successfully continue cash-out refinancing of existing properties and/or new borrowings, the Company may need to consider additional cash preservation alternatives, including scaling back development activities, capital improvements and renovations and reducing the level of distributions to shareholders.
 


To the extent the Company does not satisfy its long-term liquidity requirements, which consist primarily of maturities under the Company’s long-term debt, construction and development activities and potential acquisition opportunities, through net cash flows provided by operating activities and its credit facilities, the Company intends to satisfy such requirements through a combination of funding sources which the Company believes will be available to it, including the issuance of UPREIT Units, additional common or preferred equity, proceeds from the sale of properties, and additional long-term secured or short-term unsecured indebtedness.
 
SOURCES AND USES OF CASH
 
Ongoing stresses in the United States economy continue to result in uncertainty regarding the terms on which financing for the commercial real estate sector will be available going forward. In IRET’s recent experience, credit tightening has eased somewhat, but we remain cautious regarding the future prospects for the availability of financing to the commercial real estate sector. While to date there has been no material negative impact on our ability to borrow in our multi-family segment, the events involving both the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae), resulting in the U.S. government’s decision to place them into indefinite conservatorship, and recent proposals from the Obama administration to begin reducing the government’s support of the national mortgage market, do present an environment of heightened risk for us. IRET obtains a majority of its multi-family debt from primarily Freddie Mac. Our current plan is to refinance a majority of our maturing multi-family debt with these two entities, so any change in their ability to lend going forward will most likely result in higher loan costs for us; accordingly, we continue to closely monitor announcements regarding both firms. As of January 31, 2011, approximately 22.3%, or $11.3 million of our mortgage debt maturing in the remainder of fiscal year 2011 and the first quarter of fiscal year 2012 is debt placed on multi-family residential assets, and approximately 77.7%, or $39.4 million, is debt placed on properties in our four commercial segments. Of this $50.7 million, we have to date loan applications or commitments to refinance approximately $37.4 million. As of January 31, 2011, approximately 25.9%, or $21.0 million of our mortgage debt maturing in the next twelve months is debt placed on multi-family residential assets, and approximately 74.1%, or $60.1 million, is debt placed on properties in our four commercial segments.
 
As of January 31, 2011, the Company had one secured line of credit with First International Bank and Trust, Watford City, North Dakota, as lead bank. This line of credit had, as of January 31, 2011, lending commitments of $50.0 million, with the capacity to grow to $60.0 million. Participants in the line of credit include several banks whose previous separate credit lines to the Company were terminated during the second quarter of fiscal year 2011 following their consolidation into the First International Bank-led facility. Participants in this secured credit facility as of January 31, 2011 included, in addition to First International Bank, the following financial institutions:  The Bank of North Dakota; First Western Bank and Trust; Dacotah Bank; United Community Bank of North Dakota: American State Bank & Trust Company and Town & Country Credit Union. As of January 31, 2011, the Company had advanced $10.0 million under the line of credit. The line of credit has a minimum outstanding principal balance requirement of $10.0 million. The facility includes customary loan covenants including restrictions regarding minimum debt-service ratios to be maintained in the aggregate and individually on properties in the collateral pool, and the Company is also required to maintain minimum depository account(s) totaling $6.0 million with First International, of which $1.5 million is to be held in a non-interest bearing account. As of January 31, 2011, the Company was in compliance with the facility covenants.
 
The Company maintains compensating balances, not restricted as to withdrawal, with several financial institutions in connection with financing received from those institutions and/or to ensure future credit availability, as follows: Dacotah Bank, Minot, North Dakota, a deposit of $350,000; United Community Bank, Minot, North Dakota, deposit of $275,000; Commerce Bank, A Minnesota Banking Corporation, deposit of $250,000; First International Bank, Watford City, North Dakota, deposit of $6.0 million, and Peoples State Bank of Velva, North Dakota, deposit of $150,000.
 
The issuance of UPREIT Units for property acquisitions continues to be an expected source of capital for the Company. In the three and nine months ended January 31, 2011, approximately 357,000 Units, valued at issuance at $3.3 million, were issued in connection with the Company’s acquisition of one property and the noncontrolling interests in a joint venture. In the three months ended January 31, 2010, there were no Units issued in connection with property acquisitions.  In the nine months ended January 31, 2010, approximately 292,000 Units, valued at issuance at $2.9 million, were issued in connection with the Company’s acquisition of two properties.
 
The Company has a Distribution Reinvestment and Share Purchase Plan (“DRIP”). The DRIP provides common shareholders and UPREIT Unitholders of the Company an opportunity to invest their cash distributions in common shares of the Company, and purchase additional shares through voluntary cash contributions, at a discount (currently 5%) from the market price. During the third quarter of fiscal year 2011, the Company issued approximately 446,000 common shares under its DRIP, with a total value of
 



$3.9 million. During the nine months ended January 31, 2011, the Company issued approximately 1.2 million common shares under its DRIP, with a total value of $10.1 million.
 
Cash and cash equivalents on January 31, 2011 totaled $30.9 million, compared to $47.8 million on January 31, 2010, a decrease of $16.9 million. Net cash provided by operating activities for the nine months ended January 31, 2011 decreased by approximately $4.5 million, primarily due to increases in accounts receivable and deferred charges and leasing costs and a decrease in accounts payable, accrued expenses, and other liabilities compared to the nine months ended January 31, 2010.  Net cash provided by investing activities was $17.0 million for the nine months ended January 31, 2011 as compared to net cash used of $109.5 million for the nine months ended January 31, 2010,  an increase of approximately $126.5 million, primarily due to an increase in proceeds from the sale of real estate, a decrease in payments for acquisitions and improvements of real estate, and a decrease in restricted cash. Net cash used by financing activities was $79.3 million for the nine months ended January 31, 2011, as compared to proceeds from financing activities of $81.1 million in the prior year. The decrease in funds provided from financing activity was primarily due to the Company paying down mortgages payable with proceeds from sales of real estate in the nine months ended January 31, 2011 and a decrease in proceeds from the sale of common shares compared to the nine months ended January 31, 2010. 
 
FINANCIAL CONDITION
 
Mortgage Loan Indebtedness. Mortgage loan indebtedness decreased by $58.7 million as of January 31, 2011, compared to April 30, 2010, due to principal payments and loans that were paid off. As of January 31, 2011, approximately 99.8%, of the Company’s $998.9 million of mortgage debt is at fixed rates of interest, with staggered maturities. This limits the Company’s exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on the Company’s results of operations and cash flows. As of January 31, 2011, the weighted average rate of interest on the Company’s mortgage debt was 6.05%, compared to 6.17% on April 30, 2010.
 
Property Owned. Property owned was $1.8 billion at January 31, 2011 and April 30, 2010. During the nine months ended January 31, 2011, the Company acquired five additional investment properties, placed one development property and one expansion project in service and disposed of six investment properties and a patio home property, as described above in the “Property Acquisitions and Dispositions” subsection of this Management’s Discussion and Analysis of Financial Condition and Results of Operations.
 
Cash and Cash Equivalents. Cash and cash equivalents on hand on January 31, 2011 were $30.9 million, compared to $54.8 million on April 30, 2010.
 
Marketable Securities. The Company’s investment in marketable securities classified as available-for-sale was approximately $325,000 and $420,000 on January 31, 2011 and on April 30, 2010, respectively. Marketable securities are held available for sale and, from time to time, the Company invests excess funds in such securities or uses the funds so invested for operational purposes.
 
Operating Partnership Units. Outstanding units in the Operating Partnership decreased to 20.0 million Units at January 31, 2011 compared to 20.5 million Units outstanding at April 30, 2010. The decrease resulted primarily from the conversion of Units to common shares.
 
Common and Preferred Shares of Beneficial Interest. Common shares of beneficial interest outstanding on January 31, 2011 totaled 79.8 million, compared to 75.8 million outstanding on April 30, 2010. During the first quarter of fiscal year 2011, the Company sold 1.8 million common shares under its continuous offering program with Robert W. Baird & Co., Incorporated (“Baird”) as sales agent, for net proceeds of approximately $15.0 million, before offering expenses but after underwriting discounts. The Company sold no shares under this program during the second and third quarters of fiscal year 2011. The Company issued common shares pursuant to our Distribution Reinvestment and Share Purchase Plan, consisting of approximately 1.2 million common shares issued during the nine months ended January 31, 2011, for a total value of $10.1 million. Conversions of approximately 831,000 UPREIT Units to common shares, for a total of approximately $6.0 million in IRET shareholders’ equity also increased the Company’s common shares of beneficial interest outstanding during the nine months ended January 31, 2011.



ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
 
Our exposure to market risk is limited primarily to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations.
 
Variable interest rates. Because approximately 99.8% and 97.3% of our debt, as of January 31, 2011 and April 30, 2010, respectively, is at fixed interest rates, we have little exposure to interest rate fluctuation risk on our existing debt, and accordingly interest rate fluctuations during the third quarter of fiscal year 2011 did not have a material effect on the Company. However, even though our goal is to maintain a fairly low exposure to interest rate risk, we are still vulnerable to significant fluctuations in interest rates on any future repricing or refinancing of our fixed or variable rate debt, and on future debt.  We primarily use long-term (more than nine years) and medium term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest rate swaps or any other type of hedging activity to manage our interest rate risk.  As of January 31, 2011, we had the following amount of future principal and interest payments due on mortgages secured by our real estate:
 
   
Future Principal Payments (in thousands)
 
Mortgages
 
Remaining
Fiscal 2011
   
Fiscal 2012
   
Fiscal 2013
   
Fiscal 2014
   
Fiscal 2015
   
Thereafter
   
Total
   
Fair Value
 
Fixed Rate
  $ 14,983     $ 108,692     $ 48,866     $ 59,837     $ 83,217     $ 681,737     $ 997,332     $ 1,003,284  
Average Fixed Interest Rate
    5.80 %     5.68 %     5.87 %     5.83 %     5.73 %                        
Variable Rate
  $ 70     $ 281     $ 180     $ 667     $ 72     $ 327     $ 1,597     $ 1,597  
Average Variable Interest Rate
    4.79 %     4.42 %     4.61 %     3.04 %     5.59 %                        
                                                    $ 998,929     $ 1,004,881  

 
 
Future Interest Payments (in thousands)
 
Mortgages
Remaining
Fiscal 2011
 
Fiscal 2012
 
Fiscal 2013
 
Fiscal 2014
 
Fiscal 2015
 
Thereafter
 
Total
 
Fixed Rate
  $ 14,893     $ 55,769     $ 51,314     $ 48,072     $ 43,861     $ 130,078     $ 343,987  
Variable Rate
    18       68       58       32       22       41       239  
                                                    $ 344,226  
 
The weighted average interest rate on our fixed rate and variable rate debt as of January 31, 2011, was 6.05%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $1.6 million of variable rate indebtedness would increase our annual interest expense by $16,000.
 
 
ITEM 4. CONTROLS AND PROCEDURES
 
IRET’s management, with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of January 31, 2011, such disclosure controls and procedures were effective to ensure that information required to be disclosed by IRET in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Commission’s rules and forms, and is accumulated and communicated to management, including the Company’s principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.
 
Internal Control Over Financial Reporting: There have not been any changes in the Company’s internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Securities and Exchange Act of 1934, as amended) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
 


PART II — OTHER INFORMATION
 
Item 1. Legal Proceedings
 
In the course of our operations, we become involved in litigation. At this time, we know of no pending or threatened proceedings that would have a material impact upon us.
 
Item 1A. Risk Factors
 
Important factors that could cause our actual results to be materially different from expectations expressed in forward-looking statements include the risk factors previously disclosed in our Annual Report on Form 10-K for the fiscal year ended April 30, 2010.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
Item 3. Defaults Upon Senior Securities.
 
None
 
Item 4. Reserved.
 
Item 5. Other Information.
 
During the third quarter of fiscal year 2011, the Compensation Committee of the Board of Trustees of the Company approved an increase of 2.0%, effective as of December 27, 2010, in the annual base salaries of certain of the Company’s executive officers.  A table setting forth the annual base salary levels of the Company’s executive officers for calendar years 2011 and 2010 is filed as Exhibit 10 to this Quarterly Report on Form 10-Q, and is incorporated herein by reference.
Item 6. Exhibits
 
Exhibit No.
Description
10
Material Contracts
12
Calculation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Share Distributions
31.1
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.




Signatures
 
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
 
INVESTORS REAL ESTATE TRUST
(Registrant)
 
/s/ Timothy P. Mihalick
Timothy P. Mihalick
President and Chief Executive Officer
 
/s/ Diane K. Bryantt
Diane K. Bryantt
Senior Vice President and Chief Financial Officer
 
Date: March 14, 2011


 
Exhibit Index
 

Exhibit No.
Description
10
Material Contracts
12
Calculation of Ratio of Earnings to Fixed Charges and Earnings to Combined Fixed Charges and Preferred Share Distributions
31.1
Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2
Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32
Certifications of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.