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CENTERSPACE - Quarter Report: 2012 January (Form 10-Q)

iretform10q-01312012.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, 2012
 
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
1400 31st Avenue SW, Suite 60
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 R                           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 February 29, 2012, it had 86,169,534 common shares of beneficial interest outstanding.


 
 

 

TABLE OF CONTENTS
 
 
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PART I
ITEM 1. FINANCIAL STATEMENTS - THIRD QUARTER - FISCAL 2012
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
 
   
(in thousands, except share data)
 
 
 
January 31, 2012
   
April 30, 2011
 
ASSETS
           
Real estate investments
           
Property owned
  $ 1,861,321     $ 1,770,798  
Less accumulated depreciation
    (364,190 )     (328,952 )
      1,497,131       1,441,846  
Development in progress
    22,281       9,693  
Unimproved land
    6,390       6,550  
Mortgage loans receivable, net of allowance of $0 and $3, respectively
    0       156  
Total real estate investments
    1,525,802       1,458,245  
Other assets
               
Cash and cash equivalents
    35,502       41,191  
Other investments
    633       625  
Receivable arising from straight-lining of rents, net of allowance of $1,156 and $996, respectively
    21,965       18,933  
Accounts receivable, net of allowance of $185 and $317, respectively
    3,977       5,646  
Real estate deposits
    578       329  
Prepaid and other assets
    4,107       2,351  
Intangible assets, net of accumulated amortization of $46,674 and $42,154, respectively
    49,055       49,832  
Tax, insurance, and other escrow
    11,427       15,268  
Property and equipment, net of accumulated depreciation of $1,499 and $1,231, respectively
    1,464       1,704  
Goodwill
    1,120       1,127  
Deferred charges and leasing costs, net of accumulated amortization of $16,622 and $13,675, respectively
    22,014       20,112  
TOTAL ASSETS
  $ 1,677,644     $ 1,615,363  
                 
LIABILITIES AND EQUITY
               
LIABILITIES
               
Accounts payable and accrued expenses
  $ 43,439     $ 37,879  
Revolving line of credit
    49,000       30,000  
Mortgages payable
    1,038,717       993,803  
Other
    6,326       8,404  
TOTAL LIABILITIES
    1,137,482       1,070,086  
COMMITMENTS AND CONTINGENCIES (NOTE 6)
               
REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES
    0       987  
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, 2012 and April 30, 2011, aggregate liquidation preference of $28,750,000)
    27,317       27,317  
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 85,743,308 shares issued and outstanding at January 31, 2012, and 80,523,265 shares issued and outstanding at April 30, 2011)
    657,304       621,936  
Accumulated distributions in excess of net income
    (269,942 )     (237,563 )
Total Investors Real Estate Trust shareholders’ equity
    414,679       411,690  
Noncontrolling interests – Operating Partnership (19,596,222 units at January 31, 2012 and 20,067,350 units at April 30, 2011)
    114,852       123,627  
Noncontrolling interests – consolidated real estate entities
    10,631       8,973  
Total equity
    540,162       544,290  
TOTAL LIABILITIES AND EQUITY
  $ 1,677,644     $ 1,615,363  
 
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, 2012 and 2011
 
   
(in thousands, except per share data)
 
   
Three Months Ended
January 31
   
Nine Months Ended
January 31
 
   
2012
   
2011
   
2012
   
2011
 
REVENUE
                       
Real estate rentals
  $ 50,318     $ 47,792     $ 148,981     $ 143,333  
Tenant reimbursement
    10,705       12,354       32,301       34,785  
TOTAL REVENUE
    61,023       60,146       181,282       178,118  
EXPENSES
                               
Depreciation/amortization related to real estate investments
    14,359       13,892       42,710       41,573  
Utilities
    4,526       4,775       13,424       13,184  
Maintenance
    6,395       8,358       20,185       22,001  
Real estate taxes
    8,049       7,780       23,528       23,068  
Insurance
    890       646       2,552       1,866  
Property management expenses
    4,989       5,474       15,836       15,525  
Administrative expenses
    1,493       1,716       5,356       5,055  
Advisory and trustee services
    166       134       588       482  
Other expenses
    359       441       1,509       1,357  
Amortization related to non-real estate investments
    903       689       2,395       1,978  
Impairment of real estate investments
    135       0       135       0  
TOTAL EXPENSES
    42,264       43,905       128,218       126,089  
Interest expense
    (16,533 )     (15,868 )     (48,756 )     (48,335 )
Interest income
    25       75       115       194  
Other income
    270       32       546       217  
Income from continuing operations
    2,521       480       4,969       4,105  
Income from discontinued operations
    0       14,108       616       19,936  
NET INCOME
    2,521       14,588       5,585       24,041  
Net income attributable to noncontrolling interests – Operating Partnership
    (351 )     (2,793 )     (723 )     (4,485 )
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities
    (43 )     38       (29 )     82  
Net income attributable to Investors Real Estate Trust
    2,127       11,833       4,833       19,638  
Dividends to preferred shareholders
    (593 )     (593 )     (1,779 )     (1,779 )
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
  $ 1,534     $ 11,240     $ 3,054     $ 17,859  
Earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted
    .02       .00       .03       .03  
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
    .00       .14       .01       .20  
NET INCOME PER COMMON SHARE – BASIC AND DILUTED
  $ .02     $ .14     $ .04     $ .23  
DIVIDENDS PER COMMON SHARE
  $ .1300     $ .1715     $ .4315     $ .5145  

 
 
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, 2012 and 2011
 
   
(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, 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 and share purchase plan
                    1,212       10,130                       10,130  
Shares issued
                    1,999       16,637                       16,637  
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  
                                                         
                                                         
                                                         
Balance April 30, 2011
    1,150     $ 27,317       80,523     $ 621,936     $ (237,563 )   $ 132,600     $ 544,290  
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
                                    4,833       740       5,573  
Distributions – common shares and units
                                    (35,433 )     (8,513 )     (43,946 )
Distributions – preferred shares
                                    (1,779 )             (1,779 )
Distribution reinvestment and share purchase plan
                    3,992       28,831                       28,831  
Shares issued
                    471       3,413                       3,413  
Partnership units issued
                                            2,469       2,469  
Redemption of units for common shares
                    759       3,454               (3,454 )     0  
Other
                    (2 )     (330 )             1,641       1,311  
Balance January 31, 2012
    1,150     $ 27,317       85,743     $ 657,304     $ (269,942 )   $ 125,483     $ 540,162  
 
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, 2012 and 2011
 
   
(in thousands)
 
   
Nine Months Ended
January 31
 
 
 
2012
   
2011
 
CASH FLOWS FROM OPERATING ACTIVITIES
           
Net income
  $ 5,585     $ 24,041  
Adjustments to reconcile net income to net cash provided by operating activities:
               
Depreciation and amortization
    46,328       45,951  
Gain on sale of real estate, land and other investments
    (589 )     (19,365 )
Impairment of real estate investments
    135       0  
Bad debt expense
    771       487  
Changes in other assets and liabilities:
               
Increase in receivable arising from straight-lining of rents
    (3,370 )     (1,441 )
Decrease (increase) in accounts receivable
    946       (4,033 )
Increase in prepaid and other assets
    (1,756 )     (1,663 )
(Increase) decrease in tax, insurance and other escrow
    (901 )     630  
Increase in deferred charges and leasing costs
    (5,480 )     (5,015 )
Increase (decrease) in accounts payable, accrued expenses, and other liabilities
    2,759       (1,208 )
Net cash provided by operating activities
    44,428       38,384  
CASH FLOWS FROM INVESTING ACTIVITIES
               
Proceeds from real estate deposits
    1,640       2,297  
Payments for real estate deposits
    (1,889 )     (2,035 )
Principal proceeds on mortgage loans receivable
    159       1  
(Increase) decrease in other investments
    (8 )     95  
Decrease in lender holdbacks for improvements
    5,056       968  
Increase in lender holdbacks for improvements
    (315 )     (10,764 )
Proceeds from sale of real estate – discontinued operations
    2,088       81,539  
Proceeds from sale of real estate and other investments
    438       0  
Insurance proceeds received
    5,644       329  
Payments for acquisitions and improvements of real estate investments
    (101,791 )     (55,437 )
Net cash (used) provided by investing activities
    (88,978 )     16,993  
CASH FLOWS FROM FINANCING ACTIVITIES
               
Proceeds from mortgages payable
    84,195       97,654  
Principal payments on mortgages payable
    (53,661 )     (160,632 )
Principal payments on revolving line of credit and other debt
    (60 )     (25,650 )
Proceeds from revolving line of credit and other debt
    24,227       36,300  
Proceeds from sale of common shares, net of issue costs
    2,970       16,384  
Proceeds from sale of common shares under distribution reinvestment and share purchase program
    20,778       1,774  
Repurchase of fractional shares and partnership units
    (13 )     (10 )
Payments for acquisition of noncontrolling interests – consolidated real estate entities
    (1,289 )     (425 )
Distributions paid to common shareholders, net of reinvestment of $7,548 and $7,831, respectively
    (27,885 )     (32,300 )
Distributions paid to preferred shareholders
    (1,779 )     (1,779 )
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership, net of reinvestment of $504 and $525, respectively
    (8,009 )     (9,840 )
Distributions paid to noncontrolling interests – consolidated real estate entities
    (586 )     (737 )
Distributions paid to redeemable noncontrolling interests – consolidated real estate entities
    (27 )     0  
Net cash provided (used) by financing activities
    38,861       (79,261 )
NET DECREASE IN CASH AND CASH EQUIVALENTS
    (5,689 )     (23,884 )
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
    41,191       54,791  
CASH AND CASH EQUIVALENTS AT END OF PERIOD
  $ 35,502     $ 30,907  


(continued)


INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)
for the nine months ended January 31, 2012 and 2011
 
   
(in thousands)
 
   
Nine Months Ended
January 31
 
 
 
2012
   
2011
 
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES FOR THE PERIOD
           
Distribution reinvestment plan
  $ 7,548     $ 7,831  
Operating partnership distribution reinvestment plan
    504       525  
Operating partnership units converted to shares
    3,454       6,007  
Real estate investment acquired through the issuance of operating partnership units
    2,469       3,252  
Real estate investment acquired through assumption of indebtedness and accrued costs
    7,190       4,288  
Adjustments to accounts payable included within real estate investments
    (3,244 )     (1,421 )
Noncontrolling partnership interest
    2,227       0  
Fair value adjustments to redeemable noncontrolling interests
    35       (570 )
Involuntary conversion of assets due to flood damage
    2,638       0  
Construction debt reclassified to mortgages payable
    7,190       0  
                 
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
               
Cash paid during the period for:
               
Interest on mortgages
    45,321       48,340  
Interest other
    2,098       892  
    $ 47,419     $ 49,232  
 
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, 2012 and 2011
 
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. 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, Michigan, Missouri, Montana, Nebraska, South Dakota, Wisconsin and Wyoming. As of January 31, 2012, IRET owned 81 multi-family residential properties with 8,921 apartment units and 184 commercial properties, consisting of office, medical, industrial and retail properties, totaling 12.3 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 81.4% and 80.1%, respectively, as of January 31, 2012 and April 30, 2011. 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 (“U.S. GAAP”) are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. 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, 2011, as filed with the SEC on July 14, 2011, as amended by the Current Report on Form 8-K filed with the SEC on December 12, 2011.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2011, the Financial Accounting Standard Board (“FASB”) issued Accounting Standards Update (“ASU”) 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amended Accounting Standards Codification (“ASC”) 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in  U.S. GAAP and International Financial Reporting Standards (“IFRS”), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The amendments are to be applied prospectively for annual periods beginning after December 15, 2011.  The Company is evaluating the effect ASU 2011-04 will have on the Company’s consolidated financial statements, but does not expect  the adoption of ASU 2011-04 will have a material effect on the Company’s operating results or financial position. To date, the Company has not had any transfers in and out of Level 1, Level 2 and Level 3 fair value measurements.
 
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for annual and interim periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position.
 
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. This standard gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit (step I of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than its carrying amount, the two-step impairment test would be required. Otherwise, no further testing is required. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.
 
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, 2012, the Company incurred a loss of approximately $128,000 due to impairment of a retail property located in Kentwood, Michigan. The impairment was based on receipt of a market offer to purchase and the Company’s intention to dispose of the property (a purchase agreement was signed by the Company in the fourth quarter of fiscal year 2012). A related impairment of $7,000 was recorded to write-off goodwill assigned to the Kentwood property. During the nine months ended January 31, 2011, the Company incurred no losses due to impairment.
 


COMPENSATING BALANCES AND OTHER INVESTMENTS; LENDER HOLDBACKS
 
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. At January 31, 2012, the Company’s compensating balances consisted of the following: Dacotah Bank, Minot, North Dakota, 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 $6.1 million; Peoples State Bank of Velva, North Dakota, deposit of $225,000; Equity Bank, Minnetonka, Minnesota, deposit of $300,000; Associated Bank, Green Bay, Wisconsin, deposit of $500,000; Venture Bank, Eagan, Minnesota, deposit of $500,000, and American National Bank, Omaha, Nebraska, deposit of $400,000. The deposits at United Community Bank and Equity Bank and a portion of the deposit at Dacotah Bank are held as certificates of deposit and comprise the $633,000 in Other investments on the Condensed Consolidated Balance Sheets. The certificates of deposit have remaining terms of less than three years and the Company intends to hold them to maturity.
 
The Company has a number of mortgage loans under which the lender retains a portion of the loan proceeds for the payment of constructions costs or tenant improvements, and additionally has two construction loans (for the Company’s Trinity build-to-suit project and Jamestown Theater expansion project) under which the lender held back a portion of the loan proceeds for release against specified construction milestones. The decrease of $5.1 million in lender holdbacks for improvements reflected in the Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2012 is due primarily to the release of loan proceeds to the Company upon completion of these construction milestones and tenant improvement projects.
 
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, 2012 and 2011, respectively, the Company added approximately $3.7 million and $6.5 million of new intangible assets. The Company added no new intangible liabilities in the nine months ended January 31, 2012 and $32,000 of new intangible liabilities in the nine months ended January 31, 2011. The weighted average lives of the intangible assets and intangible liabilities acquired in the nine months ended January 31, 2012 and 2011 are 10.0 years and  9.5 years, respectively. The estimated fair values of intangible assets acquired in the nine months ended January 31, 2012 are provisional and are based on the information that was available as of the filing of the Company’s Form 10-Q. The Company will continue to evaluate the purchase price allocation as better information becomes available. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the respective acquisition dates. Amortization of intangibles related to above or below-market leases is recorded in Real estate rentals in the Condensed Consolidated Statements of Operations. Amortization of other intangibles is recorded in Depreciation/amortization related to real estate investments in the Condensed 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, 2012 and April 30, 2011 were as follows:
 
   
(in thousands)
 
 
 
January 31, 2012
   
April 30, 2011
 
Identified intangible assets (included in intangible assets):
           
Gross carrying amount
  $ 95,729     $ 91,986  
Accumulated amortization
    (46,674 )     (42,154 )
Net carrying amount
  $ 49,055     $ 49,832  
                 
Indentified intangible liabilities (included in other liabilities):
               
Gross carrying amount
  $ 1,104     $ 1,104  
Accumulated amortization
    (954 )     (900 )
Net carrying amount
  $ 150     $ 204  
 

 


 
The effect of amortization of acquired below-market leases and acquired above-market leases on rental income was approximately $(8,000) and $(19,000) for the three months ended January, 31 2012 and 2011, respectively, and $(40,000) and $(36,000) for the nine months ended January 31, 2012 and 2011. 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)
 
2013
  $ 32  
2014
    35  
2015
    18  
2016
    14  
2017
    6  
 
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $1.2 million and $1.7 million for the three months ended January 31, 2012 and 2011, respectively, and $4.4 million and $5.5 million for the nine months ended January 31, 2012 and 2011. 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)
 
2013
  $ 4,921  
2014
    4,515  
2015
    4,158  
2016
    3,940  
2017
    3,471  
 
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 value as of January 31, 2012 and April 30, 2011 was $1.1 million. The annual review at April 30, 2011 indicated no impairment to goodwill. At January 31, 2012, the impairment of a Kentwood, Michigan, retail property indicated that goodwill assigned to the property was also impaired. Accordingly, an approximately $7,000 impairment to goodwill was recognized.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with U.S. GAAP 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 first and third quarters of fiscal year 2012 the Company had no real estate dispositions. During the second quarter of fiscal year 2012, the Company sold a small retail property in Livingston, Montana. During fiscal year 2011, the Company sold four apartment complexes, one industrial property, one retail property and a patio home. The results of operations for these properties are included in discontinued operations in the condensed consolidated statements of operations.
 
TAXABLE REIT SUBSIDIARY
 
During the third quarter of fiscal year 2012, the Company sold its wholly-owned taxable REIT subsidiary, LSREF Golden Ops 14 (WY), LLC (“LSREF Golden Ops”), to the owner of Edgewood Vista Senior Living Inc., the manager of the Company’s portfolio of Edgewood assisted living facilities and of the Company’s Wyoming assisted living facilities. LSREF Golden Ops is the tenant in the Company’s Wyoming assisted living facilities. The Company sold this entity to restructure its assisted living portfolio following its acquisition of a portfolio of seven senior housing projects in Idaho and an assisted living facility in Minot, North Dakota. Following the sale of this entity, the Company’s revenue from its Wyoming assisted living portfolio will be
 



received solely as rent under the lease agreement with LSREF Golden Ops, and property management expenses will be paid by LSREF Golden Ops as the tenant, and accordingly will not be included in the Property management expenses category of the Company’s financial statements.
 
INVOLUNTARY CONVERSION OF ASSETS
 
As we have previously reported, Minot, North Dakota, where our corporate headquarters is located, experienced significant flooding in June 2011, resulting in extensive damage to our Arrowhead Shopping Center and Chateau Apartments property, which consists of two 32-unit buildings.  Additionally, on February 22, 2012, one of the buildings of our Chateau Apartments property, which had been undergoing restoration work following the flood, was completely destroyed by fire. We expect to rebuild the destroyed building but have no firm estimates at this time for costs or expected completion date of such rebuilding. The property is insured and we currently expect our losses to be covered under our insurance policy, subject to a deductible of $200,000. The remaining units in our Chateau Apartments property are expected to be available for leasing in the first quarter of fiscal year 2013. Arrowhead Shopping Center is currently in various stages of re-leasing.  Costs related to clean-up, redevelopment and loss of rents for our Arrowhead Shopping Center and Chateau Apartments from the June 2011 flood are being reimbursed to the Company by our insurance carrier, less the Company’s deductible of $200,000 under the policy.  As of January 31, 2012, the Company had received $5.3 million of insurance proceeds for flood clean-up costs and redevelopment and approximately $246,000 reimbursement for business interruption (loss of rents); additional reimbursement for business interruption in an amount totaling $328,000 is expected to be added back as income to the extent that insurance proceeds are received and gain contingencies are resolved, in accordance with U.S. GAAP.  In regard to its Arrowhead Shopping Center, the  Company currently estimates that a gain on involuntary conversion of approximately $1.7 million will be reported in a future quarter, once all flood-related costs have been reimbursed; however, this number is an estimate only and is subject to revision as reimbursements are received and recognized. The Company is currently unable to estimate whether and to what extent there may be a gain or loss on involuntary conversion due to the recent Chateau Apartments fire.
 
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 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, 2012 and 2011:
 
   
(in thousands, except per share data)
 
   
Three Months Ended
January 31
   
Nine Months Ended
January 31
 
 
 
2012
   
2011
   
2012
   
2011
 
NUMERATOR
                       
Income from continuing operations – Investors Real Estate Trust
  $ 2,127     $ 534     $ 4,337     $ 3,691  
Income from discontinued operations – Investors Real Estate Trust
    0       11,299       496       15,947  
Net income attributable to Investors Real Estate Trust
    2,127       11,833       4,833       19,638  
Dividends to preferred shareholders
    (593 )     (593 )     (1,779 )     (1,779 )
Numerator for basic earnings per share – net income available to common shareholders
    1,534       11,240       3,054       17,859  
Noncontrolling interests – Operating Partnership
    351       2,793       723       4,485  
Numerator for diluted earnings per share
  $ 1,885     $ 14,033     $ 3,777     $ 22,344  
DENOMINATOR
                               
Denominator for basic earnings per share weighted average shares
    84,339       79,398       82,424       78,140  
Effect of convertible operating partnership units
    19,596       19,957       19,752       20,171  
Denominator for diluted earnings per share
    103,935       99,355       102,176       98,311  
Earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted
  $ .02     $ .00     $ .03     $ .03  
Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted
    .00       .14       .01       .20  
NET INCOME PER COMMON SHARE – BASIC & DILUTED
  $ .02     $ .14     $ .04     $ .23  
 

 


 
NOTE 4 • EQUITY
 
The Company has a currently-effective shelf registration statement under which it has registered common and preferred shares of beneficial interest with an aggregate public offering price of up to $150.0 million. On January 20, 2012, the Company entered into a continuous equity offering program under this shelf registration statement with BMO Capital Markets Corp. (“BMO”) as sales agent, pursuant to which the Company may from time to time offer and sell its common shares of beneficial interest having an aggregate gross sales price of up to $100.0 million. Sales of common shares, if any, under the program will depend upon market conditions and other factors to be determined by IRET. During the third quarter of fiscal year 2012, IRET issued approximately 366,000 common shares under this program for total proceeds (before offering expenses but after underwriting discounts and commissions) of $2.7 million. During the third quarter of fiscal year 2011, IRET sold no shares under its previous continuous equity offering program with Robert W. Baird & Co., Incorporated as sales agent. The shelf registration statement under which the Company had reserved shares for issuance under this previous continuous equity offering program expired at the end of its three-year life during the second quarter of fiscal year 2012.
 
During the nine months ended January 31, 2012 and 2011, respectively, approximately 759,000 Units and 831,000 Units were converted to common shares, with a total value of approximately $3.5 million and $6.0 million included in equity. Approximately 52,000 common shares and 15,000 shares were issued under the Company’s 401(k) plan during the nine months ended January 31, 2012 and 2011, respectively, with a total value of approximately $372,000 and $125,000 included in equity. Under the Company’s Distribution Reinvestment and Share Purchase Plan, approximately 4.0 million common shares and 1.2 million common shares were issued during the nine months ended January 31, 2012 and 2011, respectively, with a total value of $28.8 million and $10.1 million included in equity.
 
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 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, 2012 and 2011, 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, 2012
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Real estate revenue
  $ 18,836     $ 18,541     $ 16,609     $ 3,596     $ 3,441     $ 61,023  
Real estate expenses
    8,668       8,695       5,220       1,078       1,188       24,849  
Net operating income
  $ 10,168     $ 9,846     $ 11,389     $ 2,518     $ 2,253       36,174  
Depreciation/amortization
                                            (15,262 )
Administrative, advisory and trustee services
                                            (1,659 )
Other expenses
                                      (359 )
Impairment of real estate investments
                                            (135 )
Interest expense
                                            (16,533 )
Interest and other income
                                            295  
Income from continuing operations
      2,521  
Income from discontinued operations
      0  
Net income
    $ 2,521  




 
(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     $ 3,577     $ 60,146  
Real estate expenses
    8,903       9,507       5,894       1,203       1,526       27,033  
Net operating income
  $ 7,981     $ 9,836     $ 11,099     $ 2,146     $ 2,051       33,113  
Depreciation/amortization
                                            (14,581 )
Administrative, advisory and trustee services
                                      (1,850 )
Other expenses
                                            (441 )
Interest expense
                                            (15,868 )
Interest and other income
                                            107  
Income from continuing operations
                                            480  
Income from discontinued operations
                                            14,108  
Net income
    $ 14,588  

 
(in thousands)
 
Nine Months Ended January 31, 2012
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Real estate revenue
  $ 54,699     $ 55,723     $ 50,299     $ 10,597     $ 9,964     $ 181,282  
Real estate expenses
    25,791       26,451       16,709       3,178       3,396       75,525  
Net operating income
  $ 28,908     $ 29,272     $ 33,590     $ 7,419     $ 6,568       105,757  
Depreciation/amortization
                                            (45,105 )
Administrative, advisory and trustee services
                                            (5,944 )
Other expenses
                                      (1,509 )
Impairment of real estate investments
                                            (135 )
Interest expense
                                            (48,756 )
Interest and other income
                                            661  
Income from continuing operations
      4,969  
Income from discontinued operations
      616  
Net income
    $ 5,585  

 
(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     $ 10,246     $ 178,118  
Real estate expenses
    25,247       27,082       16,563       3,123       3,629       75,644  
Net operating income
  $ 24,349     $ 31,757     $ 32,984     $ 6,767     $ 6,617       102,474  
Depreciation/amortization
                                            (43,551 )
Administrative, advisory and trustee services
                                      (5,537 )
Other expenses
                                            (1,357 )
Interest expense
                                            (48,335 )
Interest and other income
                                            411  
Income from continuing operations
                                            4,105  
Income from discontinued operations
                                            19,936  
Net income
    $ 24,041  
 

 


 
Segment Assets and Accumulated Depreciation
 
Segment assets are summarized as follows as of January 31, 2012, and April 30, 2011, along with reconciliations to the condensed consolidated financial statements:
 
   
(in thousands)
 
As of January 31, 2012
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Segment Assets
                                   
Property owned
  $ 516,135     $ 603,315     $ 493,703     $ 118,767     $ 129,401     $ 1,861,321  
Less accumulated depreciation
    (127,797 )     (117,237 )     (75,244 )     (20,007 )     (23,905 )     (364,190 )
Total property owned
  $ 388,338     $ 486,078     $ 418,459     $ 98,760     $ 105,496       1,497,131  
Cash and cash equivalents
                                            35,502  
Other investments
                                            633  
Receivables and other assets
                                            115,707  
Development in progress
                                            22,281  
Unimproved land
                                            6,390  
Total Assets
                                          $ 1,677,644  

   
(in thousands)
 
As of April 30, 2011
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
Total
 
                                     
Segment assets
                                   
Property owned
  $ 484,815     $ 595,491     $ 447,831     $ 117,602     $ 125,059     $ 1,770,798  
Less accumulated depreciation
    (117,718 )     (104,650 )     (65,367 )     (17,713 )     (23,504 )     (328,952 )
Total property owned
  $ 367,097     $ 490,841     $ 382,464     $ 99,889     $ 101,555       1,441,846  
Cash and cash equivalents
                                            41,191  
Other investments
                                            625  
Receivables and other assets
                                            115,302  
Development in progress
                                            9,693  
Unimproved land
                                            6,550  
Mortgage loans receivable, net of allowance
                                            156  
Total Assets
    $ 1,615,363  

 
NOTE 6 • COMMITMENTS AND CONTINGENCIES
 
Litigation. The Company is not a party to any legal proceedings which are expected to have a material effect on the Company’s liquidity, financial position, cash flows or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material effect on the Company’s liquidity, financial position, cash flows or results of operations.
 
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, 2012, the total property cost of the 36 properties subject to purchase options was approximately $244.3 million, and the total gross rental revenue from these properties was approximately $14.7 million for the nine months ended January 31, 2012.
 
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 110 of IRET’s properties, consisting of approximately 6.1 million square feet of the Company’s combined commercial segments’ properties and 4,017 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 $787.2 million at January 31, 2012. 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.
 
Redemption Value of UPREIT Units.  The limited partnership units (“UPREIT Units”) of the Company’s operating partnership, IRET Properties, are redeemable at the option of the holder for cash, or, at our option, for the Company’s common shares of beneficial interest on a one-for-one basis, after a minimum one-year holding period.  All UPREIT Units receive the same cash distributions as those paid on common shares.  UPREIT Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of an IRET common share for the ten consecutive trading days immediately preceding the date of valuation of the Unit.  As of January 31, 2012 and 2011, the aggregate redemption value of the then-outstanding UPREIT Units of the operating partnership owned by limited partners was approximately $144.7 million and $179.2 million, respectively.
 
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. During the third quarter of fiscal year 2012, IRET acquired, in an equity transaction for $1.3 million, its joint venture partner’s interest in the Company’s only joint venture which allowed 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 entity will continue to be consolidated in IRET’s financial statements. The Company currently has no joint ventures in which its joint venture partner can require the Company to buy the partner’s interest.
 
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, 2012, the Company is committed to fund approximately $10.1 million in tenant improvements, within approximately the next 12 months.
 
Development, Expansion and Renovation Projects. As of January 31, 2012, the Company had several development, expansion and renovation projects underway or recently completed, the costs for which have been capitalized, 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 20-unit multi-family residential property, for an estimated total cost of $2.9 million and a projected completion date in the second quarter of fiscal year 2013. As of January 31, 2012, the Company had incurred approximately $330,000 of these project costs. Work on this project had been temporarily postponed as Company employees and other resources were directed to the supervision of repairs at Company properties damaged by the extensive summer 2011 flooding in Minot, North Dakota, but planning for this conversion project has now resumed.
 
Senior Housing Memory Care and Assisted Living Units, Casper, Wyoming:  During the third quarter of fiscal year 2012, the Company substantially completed construction of an additional approximately 28 assisted living units and 16 memory care units at its existing Meadow Wind senior housing facility in Casper, Wyoming. The Company estimates that construction costs for this expansion project will total approximately $4.7 million. As of January 31, 2012, the Company had incurred approximately $3.8 million of these project costs.
 
Quarry Ridge Apartment Homes, Rochester, Minnesota: In June 2011, the Company commenced construction on an approximately 159-unit apartment project in Rochester, Minnesota, located adjacent to its existing Quarry Ridge Apartment Homes. The Company currently estimates that construction costs (excluding the value of the land) will total approximately $17.3
 



million, and that the project will be completed approximately 14 months from the start of construction. As of January 31, 2012, the Company had incurred approximately $8.1 million of the estimated construction costs.
 
Williston Apartments, Williston, North Dakota:  During the second quarter of fiscal year 2012, the Company formed a joint venture to construct a 144-unit multi-family residential property in Williston, North Dakota.  Construction commenced in August 2011, and the Company currently estimates that the project will be completed by July 2012 at a total cost to the joint venture entity of approximately $19.5 million, including the value of the land. The Company is the majority member of the joint venture, with a 60% interest; the remaining 40% interest is held by the Company’s joint venture partner, a Minnesota limited liability company formed by a developer and a construction company based in St. Cloud, Minnesota. The Company’s cash contribution to the project is approximately $3.3 million; the Company’s joint venture partner contributed project planning and development services and the land for the project, which together were valued at $2.2 million. The remainder of the project cost is being financed with a construction loan from First International Bank & Trust. As of January 31, 2012, the joint venture entity had incurred approximately $8.6 million of the estimated project costs.
 
Senior Housing Memory Care and Assisted Living Units, Laramie, Wyoming:  During the second quarter of fiscal year 2012, the Company entered into a contract for the construction of an additional 29 assisted living units at its existing 48-unit Spring Wind senior housing facility in Laramie, Wyoming, and for the conversion of an existing 16 units at the facility to memory care units, for a total, following project completion, of 61 assisted living units and 16 memory care units.  The Company estimates that the construction costs for this expansion project will total approximately $3.8 million and that the project will be completed in the first quarter of fiscal year 2013.  As of January 31, 2012, the Company had incurred approximately $1.4 million of these project costs.
 
Industrial-Office Build-to-Suit, Minot, North Dakota:  During the second quarter of fiscal year 2012, the Company entered into a 10-year, fully net lease with a provider of production enhancement services to the oil and gas industry, to construct and then lease an approximately 28,000 square foot industrial building to be located in Minot, North Dakota on an approximately 9.6-acre parcel of vacant land. Construction began in October 2011, with completion estimated in the summer of 2012.  Total construction costs are currently estimated at $5.8 million (including the cost of the land), subject to tenant requested changes. As of January 31, 2012, the Company had incurred approximately $1.0 million of these estimated construction costs.
 
Construction interest capitalized for the three month periods ended January 31, 2012 and 2011, respectively, was approximately $116,000 and $26,000 for development projects completed and in progress. Construction interest capitalized for the nine month periods ended January 31, 2012 and 2011, respectively, was approximately $230,000 and $58,000 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. The Company also reports any gains or losses from the sale of a property in discontinued operations. During the first and third quarters of fiscal year 2012 the Company had no real estate dispositions. During the second quarter of fiscal year 2012, the Company sold a small retail property in Livingston, Montana. During fiscal year 2011, the Company sold four apartment complexes, one industrial property, one retail property and a patio home. See Note 8 for additional information on the properties sold during the nine months ended January 31, 2012 and 2011. There were no properties held for sale as of January 31, 2012 or 2011. 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 ended January 31, 2011 and the nine months ended January 31, 2012 and 2011:
 



 
   
Three Months Ended
January 31
   
Nine Months Ended
January 31
 
   
(in thousands)
 
   
2011
   
2012
   
2011
 
REVENUE
                 
Real estate rentals
  $ 304     $ 57     $ 6,066  
Tenant reimbursement
    0       0       36  
TOTAL REVENUE
    304       57       6,102  
EXPENSES
                       
Depreciation/amortization related to real estate investments
    51       8       1,172  
Utilities
    60       0       558  
Maintenance
    74       0       708  
Real estate taxes
    16       0       638  
Insurance
    0       0       110  
Property management expenses
    105       2       853  
Other expenses
    0       0       1  
Amortization related to non-real estate investments
    0       0       4  
TOTAL EXPENSES
    306       10       4,044  
Interest expense
    149       (20 )     (1,492 )
Interest income
    0       0       5  
Income from discontinued operations before gain on sale
    147       27       571  
Gain on sale of discontinued operations
    13,961       589       19,365  
INCOME FROM DISCONTINUED OPERATIONS
  $ 14,108     $ 616     $ 19,936  
 
NOTE 8 • ACQUISITIONS AND DISPOSITIONS
 
PROPERTY ACQUISITIONS
 
During the third quarter of fiscal year 2012, the Company closed on its acquisition of a 36-unit multi-family residential property in Isanti, Minnesota, on approximately 1.7 acres of land, and an adjoining 4.9 acre parcel of vacant land, for a purchase price of approximately $3.5 million, of which $3.0 million was paid in cash and the remainder in limited partnership units of the Operating Partnership valued at $495,000. This property is located next to the Company’s existing 36-unit Evergreen Apartments in Isanti, Minnesota. Also during the third quarter of fiscal year 2012, the Company substantially completed construction of an additional approximately 28 assisted living units and 16 memory care units at its existing Meadow Wind senior housing facility in Casper, Wyoming. The Company estimates that construction costs for this expansion project will total approximately $4.7 million. As of January 31, 2012, the Company had incurred approximately $3.8 million of these project costs.
 
The estimated fair values of land, building and intangible assets acquired are provisional and are based on the information that was available as of the filing of the Company’s Form 10-Q.   The Company  will continue to evaluate the purchase price allocation as better information becomes available. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the acquisition date. The Company expensed approximately $40,000 and $85,000 of transaction costs related to acquisitions in the three months ended January 31, 2012 and 2011, respectively, and approximately $466,000 and $142,000 in the nine months ended January 31, 2012 and 2011, respectively. The Company’s acquisitions and development projects placed in service during the nine months ended January 31, 2012 and 2011 are detailed below:
 


Nine Months Ended January 31, 2012
 
     
(in thousands)
 
Acquisitions and Development Projects Placed in Service
Date Acquired
 
Land
   
Building
   
Intangible Assets
   
Acquisition Cost
 
                           
Multi-Family Residential
                         
147 unit - Regency Park Estates - St. Cloud, MN
8/1/11
  $ 702     $ 10,198     $ 0     $ 10,900  
50 unit - Cottage West Twin Homes - Sioux Falls, SD
10/12/11
    968       3,762       0       4,730  
24 unit - Gables Townhomes - Sioux Falls, SD
10/12/11
    349       1,921       0       2,270  
36 unit - Evergreen II - Isanti, MN
11/1/11
    701       2,774       0       3,475  
        2,720       18,655       0       21,375  
                                   
Commercial Medical
                                 
17,273 sq. ft Spring Creek American Falls - American Falls, ID
9/1/11
    137       3,409       524       4,070  
15,571 sq. ft Spring Creek Soda Springs - Soda Springs, ID
9/1/11
    66       2,122       42       2,230  
15,559 sq. ft Spring Creek Eagle - Eagle, ID
9/1/11
    250       3,191       659       4,100  
31,820 sq. ft Spring Creek Meridian - Meridian, ID
9/1/11
    428       5,499       1,323       7,250  
26,605 sq. ft Spring Creek Overland - Boise, ID
9/1/11
    656       5,001       1,068       6,725  
16,311 sq. ft Spring Creek Boise - Boise, ID
9/1/11
    711       4,236       128       5,075  
26,605 sq. ft Spring Creek Ustick - Meridian, ID
9/1/11
    467       3,833       0       4,300  
Meadow Wind Land - Casper, WY
9/1/11
    50       0       0       50  
24,795 sq. ft Trinity at Plaza 16 - Minot, ND1
9/23/11
    0       5,562       0       5,562  
3,431 sq. ft Edina 6525 Drew Ave S - Edina, MN
10/13/11
    388       117       0       505  
22,193 sq. ft Meadow Winds Addition - Casper, WY2
12/30/11
    0       3,840       0       3,840  
        3,153       36,810       3,744       43,707  
                                   
Commercial Retail
                                 
19,037 sq. ft. Jamestown Buffalo Mall - Jamestown, ND3
6/15/11
    0       822       0       822  
                                   
Unimproved Land
                                 
Industrial-Office Build-to-Suit - Minot, ND
9/7/11
    416       0       0       416  
                                   
Total Property Acquisitions
    $ 6,289     $ 56,287     $ 3,744     $ 66,320  
 
(1)  
Development property placed in service September 23, 2011. Additional costs paid in fiscal year 2011 totaled $3.3 million, for a total project cost at January 31, 2012 of $8.8 million.
(2)  
Expansion project placed in service December 30, 2011.
(3)  
Construction project placed in service June 15, 2011. Additional costs paid in fiscal year 2011 totaled $1.4 million, for a total project cost at January 31, 2012 of $2.3 million.
 


Nine Months Ended January 31, 2011
 
     
(in thousands)
 
Acquisitions and Development Projects Placed in Service
Date Acquired
 
Land
   
Building
   
Intangible Assets
   
Acquisition Cost
 
                           
Commercial Office
                         
58,574 sq. ft. Omaha 10802 Farnam Dr - Omaha, NE
12/16/10
  $ 2,462     $ 4,374     $ 1,459     $ 8,295  
                                   
Commercial Medical
                                 
14,705 sq. ft. Billings 2300 Grant Road - Billings, MT
7/15/10
    649       1,216       657       2,522  
14,640 sq. ft. Missoula 3050 Great Northern - Missoula, MT
7/15/10
    640       1,331       752       2,723  
108,503 sq. ft. Edgewood Vista Minot - Minot, ND
11/10/10
    1,046       11,590       2,545       15,181  
23,965 sq. ft. Edgewood Vista Spearfish Expansion - Spearfish, SD1
1/10/11
    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
6/22/10
    0       1,634       0       1,634  
                                   
Commercial Retail
                                 
47,709 sq. ft. Minot 1400 31st Ave - Minot, ND
12/10/10
    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.
 
PROPERTY DISPOSITIONS
 
The Company had no real estate dispositions in the third quarter of fiscal year 2012. The following table details the Company’s dispositions during the nine months ended January 31, 2012 and 2011:
 
Nine Months Ended January 31, 2012
 
   
(in thousands)
 
Dispositions
 
Sales Price
   
Book Value
and Sales Cost
   
Gain/(Loss)
 
                   
Commercial Retail
                 
41,200 sq ft. Livingstone Pamida - Livingston, MT
  $ 2,175     $ 1,586     $ 589  
                         
Total Property Dispositions
  $ 2,175     $ 1,586     $ 589  
 

 


 
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  
 
NOTE 9 • MORTGAGES PAYABLE AND LINE OF CREDIT
 
The Company’s mortgages payable and revolving line 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 2.71% to 8.25%, and the mortgages have varying maturity dates from the current fiscal year through July 1, 2036.
 
Of the mortgages payable, the balances of fixed rate mortgages totaled $1.0 billion at January 31, 2012 and $992.3 million at April 30, 2011. The balances of variable rate mortgages totaled $10.5 million and $1.5 million as of January 31, 2012 and April 30, 2011, 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, 2012, the weighted average rate of interest on the Company’s mortgage debt was 5.84%, compared to 5.92% on April 30, 2011. The aggregate amount of required future principal payments on mortgages payable as of January 31, 2012, is as follows:
 
Year Ended April 30,
 
(in thousands)
 
2012 (remainder)
  $ 13,417  
2013
    51,724  
2014
    66,024  
2015
    106,207  
2016
    86,182  
Thereafter
    715,163  
Total payments
  $ 1,038,717  
 
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, 2012, lending commitments of $60.0 million.  As of January 31, 2012, the line of credit was secured by mortgages on 23 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. Participants in this credit facility as of January 31, 2012 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; American State Bank & Trust Company and Town & Country Credit Union. 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, 2012, the Company had borrowed $49.0 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, 2012, the Company believes it is 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.
 
Other Investments.  The carrying amount, or cost plus accrued interest, of the certificates of deposit approximates fair value.
 
Other Debt. The fair value of other debt is estimated based on the discounted cash flows of the loan using current market rates.
 
Line of Credit.  The carrying amount approximates fair value because the variable rate debt re-prices frequently.
 
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, 2012 and April 30, 2011, are as follows:
 
   
(in thousands)
 
   
January 31, 2012
   
April 30, 2011
 
   
Carrying Amount
   
Fair Value
   
Carrying Amount
   
Fair Value
 
FINANCIAL ASSETS
                       
Mortgage loans receivable
  $ 0     $ 0     $ 156     $ 156  
Cash and cash equivalents
    35,502       35,502       41,191       41,191  
Other investments
    633       633       625       625  
FINANCIAL LIABILITIES
                               
Other debt
    6,176       6,255       8,200       7,279  
Line of credit
    49,000       49,000       30,000       30,000  
Mortgages payable
    1,038,717       1,086,940       993,803       1,013,713  

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, could 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. The Company acquired this interest from its joint venture partner in the third quarter of fiscal year 2012, and, following this acquisition, currently has no redeemable noncontrolling interests in consolidated real estate entities. As of January 31, 2012 and April 30, 2011, the estimated redemption value of the redeemable noncontrolling interests was $0 and $987,000, respectively. Below is a table reflecting the activity of the redeemable noncontrolling interests.
 
   
(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  




   
(in thousands)
 
Balance at April 30, 2011
  $ 987  
Net income
    12  
Distributions
    (27 )
Mark-to-market adjustments
    35  
Acquisition of joint venture partner’s interest
    (1,007 )
Balance at January 31, 2012
  $ 0  
 
NOTE 12 • SUBSEQUENT EVENTS
 
Common and Preferred Share Distributions.  On March 7, 2012, the Company’s Board of Trustees declared a regular quarterly distribution of 13.00 cents per share and unit on the Company’s common shares of beneficial interest and the limited partnership units of IRET Properties, payable April 2, 2012 to common shareholders and unitholders of record on March 19, 2012.  Also on March 7, 2012, 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 April 2, 2012 to preferred shareholders of record on March 19, 2012.
 
Completed Acquisition.  Subsequent to the end of the third quarter of fiscal year 2012, on February 16, 2012, the Company closed on its acquisition of the Grand Gateway Apartments, a 116-unit multi-family residential property located in St. Cloud, Minnesota, for a purchase price of $7.9 million, of which approximately $3.4 million was paid in cash and the remainder in limited partnership units of the Operating Partnership valued at approximately $4.5 million. A limited partnership of which Stephen Stenehjem, a trustee of the Company, is the general partner, was one of six investors in this property prior to its acquisition by the Company, and the Company’s purchase of the property resulted in the issuance to this limited partnership of UPREIT units of the Operating Partnership valued at approximately $1.0 million. As required under the Company’s Related Party Transactions policy and Declaration of Trust, the transaction was approved by the Company’s Audit Committee and by the independent trustees of the Company, without the participation of Mr. Stenehjem. As a result of this transaction with the Company, the Board of Trustees has determined that Mr. Stenehjem is no longer eligible to be considered an independent trustee under the listing standards of the NASDAQ stock exchange.  Mr. Stenehjem remains on the Company’s Board as a trustee but has resigned as a member of the Company’s Audit Committee.  The Company continues to have a majority of independent trustees on its Board, and three independent trustees on its Audit Committee, and accordingly remains in compliance with these requirements of the listing standards of the NASDAQ stock exchange.
 
Pending Acquisitions.  The Company has signed purchase agreements for the acquisition of the following properties (these pending acquisitions are subject to various closing conditions, and accordingly no assurances can be given that these transactions will be completed): two multi-family residential projects in Grand Forks, North Dakota, with a total of 84 units, for a purchase price totaling approximately $8.3 million, of which approximately $1.1 million would be paid through the issuance of limited partnership units of the Operating Partnership, with the remainder paid in cash; and a 44 building, 308-unit multi-family residential complex in Topeka, Kansas, for a price totaling approximately $17.7 million, of which $5.2 million would be paid in cash, with the remainder consisting of the assumption of existing mortgage debt on the property.
 
Jamestown, North Dakota Joint Venture.  Subsequent to the end of the third quarter of fiscal year 2012, on February 10, 2012, the Company formed a joint venture entity to develop an approximately 45,000 square foot medical office building in Jamestown, North Dakota on approximately 4.98 acres of land to be leased under a prepaid ground lease with an initial term of 79 years. The medical office building would be connected to the recently-built Jamestown Regional Medical Center.  The Company’s joint venture partner in this development project will be an investment group based in Minneapolis, Minnesota. The estimated total project cost for construction of the medical office building is approximately $9.2 million (including the prepaid ground lease), with IRET expected to invest approximately $1.5 million for a 51.0% share in the joint venture. Construction is currently expected to commence in the fourth quarter of fiscal year 2012, and conclude in the third quarter of fiscal year 2013. Construction financing of approximately $6.2 million is being offered by Wells Fargo Bank, NA and this loan is expected to close in the fourth quarter of fiscal year 2012.  IRET will provide management services for this development. This joint venture development project is subject to continued negotiation and various closing conditions, and accordingly no assurances can be given that the project will be completed on the terms summarized above, or at all.

Chateau Apartments Fire.  On February 22, 2012, one of the two buildings of our Chateau Apartments property in Minot, North Dakota, was destroyed by fire. The building had been undergoing restoration following the significant flooding in Minot in June 2011. None of the units in either of the Chateau Apartments buildings were occupied at the time of the fire. We expect to



rebuild the destroyed building but have no firm estimates at this time for the cost or expected completion date of such rebuilding. The property is insured and we currently expect our losses to be covered under our insurance policy, subject to a deductible of $200,000. The remaining units in the other building of our Chateau Apartments property are expected to be available for leasing in the first quarter of fiscal year 2013.

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, 2011, which are included in the Company’s Form 10-K filed with the SEC on July 14, 2011, as amended by the Current Report on Form 8-K filed with the SEC on December 12, 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, 2012, our real estate portfolio consisted of 81 multi-family residential properties containing 8,921 apartment units and having a total real estate investment amount net of accumulated depreciation of $388.3 million, and 184 commercial properties containing approximately 12.3 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 $486.1 million;
 
 
65 commercial medical properties (including senior housing) containing approximately 2.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $418.4 million;
 
 
19 commercial industrial properties containing approximately 2.9 million square feet of leasable space and having a total real estate investment amount net of accumulated depreciation of $98.8 million; and
 
 
32 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 $105.5 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 Colorado, Idaho, Iowa, Kansas, Michigan, Missouri, Montana, Nebraska, South Dakota, 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.
 
Physical occupancy as of January 31, 2012 compared to January 31, 2011 increased in three of our five reportable segments, decreasing in our commercial office and commercial medical segments, on a stabilized basis and an all-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. Our overall level of tenant concessions decreased in the three month period ended January 31, 2012, compared to the three months ended January 31, 2011 and increased in the nine month period ended January 31, 2012, compared to the nine months ended January 31, 2011.
 
We continue to experience lower revenues and decreased occupancy levels in our commercial office segment in comparison with the year-earlier period, which we believe reflects the continuing challenging and uncertain economic conditions in certain of our markets, despite some signs of economic recovery and renewed commercial leasing interest. Our multi-family residential portfolio continues to improve in occupancy and real estate revenue compared to the year-earlier period, although physical occupancy declined in the third quarter of fiscal year 2012 compared to the immediately preceding quarter, due to lower leasing activity in the winter months.
 
During the third quarter of fiscal year 2012, 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 closed on its acquisition of a 36-unit multi-family residential property in Isanti, Minnesota, on approximately 1.7 acres of land, and an adjoining 4.9 acre parcel of vacant land. This property is located next to the Company’s existing 36-unit Evergreen Apartments in Isanti, Minnesota. During the third quarter of fiscal year 2012, the Company sold its wholly-owned taxable REIT subsidiary LSREF Golden Ops 14 (WY), LLC (“LSREF Golden Ops”), to the owner of Edgewood Vista Senior Living Inc., the manager of the Company’s portfolio of Edgewood assisted living facilities and of the Company’s Wyoming assisted living facilities. LSREF Golden Ops is the tenant in the Company’s Wyoming assisted living facilities. The Company sold this entity to restructure its assisted living portfolio following its acquisition of a portfolio of seven senior housing projects in Idaho and an assisted living facility in Minot, North Dakota.
 
As we have previously reported, Minot, North Dakota, where our corporate headquarters is located, experienced significant flooding in June 2011, resulting in extensive damage to our Arrowhead Shopping Center and Chateau Apartments property, which consists of two 32-unit buildings.  Additionally, on February 22, 2012, one of the buildings of our Chateau Apartments property, which had been undergoing restoration work following the flood, was completely destroyed by fire. We expect to rebuild the destroyed building but have no firm estimates at this time for costs or expected completion date of such rebuilding. The property is insured and we currently expect our losses to be covered under our insurance policy, subject to a deductible of $200,000. The remaining units in our Chateau Apartments property are expected to be available for leasing in the first quarter of fiscal year 2013. Arrowhead Shopping Center is currently in various stages of re-leasing.  Costs related to clean-up, redevelopment and loss of rents for our Arrowhead Shopping Center and Chateau Apartments from the June 2011 flood are being reimbursed to the Company by our insurance carrier, less the Company’s deductible of $200,000 under the policy.  As of January 31, 2012, the Company had received $5.3 million of insurance proceeds for flood clean-up costs and redevelopment and approximately $246,000 reimbursement for business interruption (loss of rents); additional reimbursement for business interruption in an amount totaling $328,000 is expected to be added back as income to the extent that insurance proceeds are received and gain contingencies are resolved, in accordance with U.S. GAAP. In regard to its Arrowhead Shopping Center, the Company currently estimates that a gain on involuntary conversion of approximately $1.7 million will be reported in a future quarter, once all flood-related costs have been reimbursed; however, this number is an estimate only and is subject to revision as reimbursements are received and recognized. The Company is currently unable to estimate whether and to what extent there may be a gain or loss on involuntary conversion due to the recent Chateau Apartments fire.
 
On January 20, 2012, the Company entered into a continuous equity offering program with BMO Capital Markets Corp. as sales agent, pursuant to which the Company may from time to time offer and sell its common shares of beneficial interest having an aggregate gross sales price of up to $100.0 million. Sales of common shares, if any, under the program will depend upon market conditions and other factors to be determined by IRET. During the third quarter of fiscal year 2012, the Company issued approximately 366,000 common shares under this program for total proceeds (before offering expenses but after underwriting discounts and commissions) of $2.7 million.
 
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 Form 10-K for the fiscal year ended April 30, 2011, filed with the SEC on July 14, 2011, as amended by the Current Report on
 



Form 8-K filed with the SEC on December 12, 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, 2012.
 
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, 2012 AND 2011
 
REVENUES
 
Revenues for the three months ended January 31, 2012 were $61.0 million compared to $60.1 million in the three months ended January 31, 2011, an increase of $877,000  or 1.5%.  Revenues for the nine months ended January 31, 2012 were $181.3 million compared to $178.1 million in the nine months ended January 31, 2011, an increase of $3.2 million or 1.8%. The increase in revenue for the three and nine months ended January 31, 2012 resulted primarily from properties acquired in Fiscal 2011 and 2012, as shown in the table below.
 
   
(in thousands)
 
 
 
Increase in Total
Revenue
Three Months
ended January 31, 2012
   
Increase in Total
Revenue
Nine Months
ended January 31, 2012
 
Rent in Fiscal 2012 primarily from 8 properties acquired in Fiscal 2011 in excess of that received in Fiscal 2011 from the same 8 properties
  $ 311     $ 2,342  
Rent in Fiscal 2012 primarily from 12 properties acquired in Fiscal 2012
    1,564       2,517  
Decrease in rental income on stabilized properties due to a decrease in tenant reimbursements in commercial segments related to the overall increase in commercial segments’ vacancy
    (1,888 )     (2,445 )
Increase in straight line rent
    498       1,687  
Decrease (increase) in tenant concessions
    392       (937 )
Net increase in total revenue
  $ 877     $ 3,164  

The increase in revenue in the three and nine months ended January 31, 2012 compared to the same quarter in the prior fiscal year is shown by segment in the following table:
 
Three Months Ended January 31, 2012
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
All Segments
 
Non-stabilized real estate revenue
  $ 799     $ 138     $ 888     $ 0     $ 50     $ 1,875  
Stabilized real estate revenue
    1,044       (1,135 )     (1,923 )     281       (155 )     (1,888 )
Straight line rent
    0       (21 )     620       3       (104 )     498  
Concessions
    108       216       32       (37 )     73       392  
Total increase (decrease) in real estate revenue
  $ 1,951     $ (802 )   $ (383 )   $ 247     $ (136 )   $ 877  

Nine Months Ended January 31, 2012
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
All Segments
 
Non-stabilized real estate revenue
  $ 1,520     $ 802     $ 2,119     $ 67     $ 351     $ 4,859  
Stabilized real estate revenue
    3,632       (3,599 )     (2,639 )     576       (415 )     (2,445 )
Straight line rent
    0       134       1,188       325       40       1,687  
Concessions
    (49 )     (454 )     84       (261 )     (257 )     (937 )
Total increase (decrease) in real estate revenue
  $ 5,103     $ (3,117 )   $ 752     $ 707     $ (281 )   $ 3,164  
 
 

 
NET OPERATING INCOME
 
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, 2012 and 2011.  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 (all-property) basis.  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, 2012
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
All Segments
 
                                     
Real estate revenue
  $ 18,836     $ 18,541     $ 16,609     $ 3,596     $ 3,441     $ 61,023  
Real estate expenses
                                               
Utilities
    1,831       1,698       782       71       144       4,526  
Maintenance
    2,386       2,516       1,049       143       301       6,395  
Real estate taxes
    1,760       3,545       1,500       685       559       8,049  
Insurance
    436       211       131       60       52       890  
Property management
    2,255       725       1,758       119       132       4,989  
Total expenses
  $ 8,668     $ 8,695     $ 5,220     $ 1,078     $ 1,188     $ 24,849  
Net operating income
  $ 10,168     $ 9,846     $ 11,389     $ 2,518     $ 2,253     $ 36,174  
                                                 
Stabilized net operating income
  $ 9,772     $ 9,670     $ 10,037     $ 2,409     $ 2,149     $ 34,037  
Non-stabilized net operating income
    396       176       1,352       109       104       2,137  
Total net operating income
  $ 10,168     $ 9,846     $ 11,389     $ 2,518     $ 2,253     $ 36,174  

   
(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     $ 3,577     $ 60,146  
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       150       5,474  
Total expenses
  $ 8,903     $ 9,507     $ 5,894     $ 1,203     $ 1,526     $ 27,033  
Net operating income
  $ 7,981     $ 9,836     $ 11,099     $ 2,146     $ 2,051     $ 33,113  
                                                 
Stabilized net operating income
  $ 7,981     $ 9,719     $ 10,621     $ 2,033     $ 1,973     $ 32,327  
Non-stabilized net operating income
    0       117       478       113       78       786  
Total net operating income
  $ 7,981     $ 9,836     $ 11,099     $ 2,146     $ 2,051     $ 33,113  




   
(in thousands)
 
Nine Months Ended January 31, 2012
 
Multi-Family
Residential
   
Commercial-
Office
   
Commercial-
Medical
   
Commercial-
Industrial
   
Commercial-
Retail
   
All Segments
 
                                     
Real estate revenue
  $ 54,699     $ 55,723     $ 50,299     $ 10,597     $ 9,964     $ 181,282  
Real estate expenses
                                               
Utilities
    4,805       5,850       2,408       19       342       13,424  
Maintenance
    7,840       7,777       3,154       536       878       20,185  
Real estate taxes
    5,104       10,242       4,477       2,063       1,642       23,528  
Insurance
    1,190       654       395       169       144       2,552  
Property management
    6,852       1,928       6,275       391       390       15,836  
Total expenses
  $ 25,791     $ 26,451     $ 16,709     $ 3,178     $ 3,396     $ 75,525  
Net operating income
  $ 28,908     $ 29,272     $ 33,590     $ 7,419     $ 6,568     $ 105,757  
                                                 
Stabilized net operating income
  $ 28,127     $ 28,673     $ 30,834     $ 7,093     $ 6,227     $ 100,954  
Non-stabilized net operating income
    781       599       2,756       326       341       4,803  
Total net operating income
  $ 28,908     $ 29,272     $ 33,590     $ 7,419     $ 6,568     $ 105,757  

   
(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     $ 10,246     $ 178,118  
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       423       15,525  
Total expenses
  $ 25,247     $ 27,082     $ 16,563     $ 3,123     $ 3,629     $ 75,644  
Net operating income
  $ 24,349     $ 31,757     $ 32,984     $ 6,767     $ 6,617     $ 102,474  
                                                 
Stabilized net operating income
  $ 24,349     $ 31,648     $ 32,358     $ 6,514     $ 6,539     $ 101,408  
Non-stabilized net operating income
    0       109       626       253       78       1,066  
Total net operating income
  $ 24,349     $ 31,757     $ 32,984     $ 6,767     $ 6,617     $ 102,474  
 
FACTORS IMPACTING NET OPERATING INCOME
 
Real estate revenue increased slightly in the three month period ended January 31, 2012 compared to the three month period ended January 31, 2011, to $61.0 million compared to $60.1 million; however, real estate revenue increased in only two of our five reportable segments, decreasing in our commercial office, commercial medical and commercial retail segments, with lower tenant reimbursements due to increases in vacancy in our commercial office segment primarily responsible for most of the revenue decrease across these three segments. Real estate revenue increased in three of our five reportable segments in the nine month period ended January 31, 2012 compared to the nine month period ended January 31, 2011, to $181.3 million compared to $178.1 million primarily due to acquisitions in Fiscal 2011 and 2012.  Our overall level of tenant concessions decreased in the three month period ended January 31, 2012 and increased in the nine month period ended January 31, 2012 compared to the year-earlier periods.

 
Physical Occupancy.  As of January 31, 2012, physical occupancy levels on a stabilized basis and on an all property basis increased from the year earlier period in three of our five reportable segments, decreasing in our commercial office and commercial medical segments. We attribute the decrease in commercial office occupancy primarily to continued challenging economic conditions in certain of our markets, 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, 2012, compared to the January 31, 2011, are shown below:
 



 

   
Stabilized Properties
   
All Properties
 
   
January 31,
   
January 31,
 
   
2012
   
2011
   
2012
   
2011
 
Multi-Family Residential
    93.5 %     91.1 %     93.2 %     91.1 %
Commercial Office
    77.6 %     79.8 %     77.9 %     80.1 %
Commercial Medical
    93.8 %     95.8 %     94.5 %     96.1 %
Commercial Industrial
    94.4 %     81.4 %     94.5 %     81.7 %
Commercial Retail
    87.0 %     81.9 %     87.5 %     82.0 %

 
Increased Concessions.  Our overall level of tenant concessions decreased in the three month period ended January 31, 2012 compared to the year-earlier period and increased in the nine month period ended January 31, 2012 compared to the year-earlier period. 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. Additionally, as discussed below, in the three and nine months ended January 31, 2012, we abated rents at our Chateau Apartments and Arrowhead Shopping Center properties for tenants displaced by the flooding in Minot, North Dakota in June 2011, and those abated rents are reflected in the amounts reported in the table below. Rent concessions offered during the three and nine months ended January 31, 2012 will lower, over the lives of the respective leases, our operating revenues by approximately $1.1 million and $4.6 million, as compared to an approximately $1.5 million and $3.6 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, 2011, as shown in the table below:
 

   
(in thousands)
 
   
Three Months Ended January 31,
   
Nine Months Ended January 31,
 
   
2012
   
2011
   
Change
   
2012
   
2011
   
Change
 
Multi-Family Residential
  $ 278     $ 386     $ (108 )   $ 1,234     $ 1,185     $ 49  
Commercial Office
    697       913       (216 )     2,179       1,725       454  
Commercial Medical
    24       56       (32 )     150       234       (84 )
Commercial Industrial
    94       57       37       569       308       261  
Commercial Retail
    49       122       (73 )     448       191       257  
Total
  $ 1,142     $ 1,534     $ (392 )   $ 4,580     $ 3,643     $ 937  

 
 
The amounts in the table above include abated rent at our Chateau Apartments and Arrowhead Shopping Center properties, which were extensively damaged in the flooding that occurred in Minot, North Dakota in June 2011.  Abated rent included in the table above totaled $39,000 and $282,000 for the three and nine months ended January 31, 2012, respectively, at our Chateau Apartments; and $17,000 and $248,000 for the three and nine months ended January 31, 2012, respectively, at our Arrowhead Shopping Center property.
 

 
Utility Expense. Utility expense totaled $4.5 million for the three months ended January 31, 2012, compared to $4.8 million for the three months ended January 31, 2011, a decrease of 5.2%, over the year-earlier period. Utility expenses at properties newly acquired in fiscal years 2012 and 2011 added $88,000 to the utility expense category for the three months ended January 31, 2012. Utility expenses at existing properties decreased by $337,000 resulting in an overall decrease of $249,000 for the three months ended January 31, 2012 compared to the three months ended January 31, 2011. The decrease in utility costs at our stabilized properties for the three months ended January 31, 2012 compared to the year earlier period is due primarily to a decrease in heat and electricity expenses due to the mild winter.  Utility expense totaled $13.4 million for the nine months ended January 31, 2012, compared to $13.2 million for the nine months ended January 31, 2011, an increase of 1.8% over the year-earlier periods. Utility expenses at properties newly acquired in fiscal years 2012 and 2011 added $256,000 to the utility expense category for the nine months ended January 31, 2012. Utility expenses at existing properties decreased by $16,000 resulting in an overall increase of $240,000 for the nine months ended January 31, 2012 compared to the nine months ended January 31, 2011. The decrease in utility costs at our stabilized properties for the nine months ended January 31, 2012 compared to the year earlier period is due primarily to a the timing of payments for an electrical bill-back in our commercial industrial segment offset by the increase in electricity for lights at our commercial office segment.
 
 
 
Utility expenses by reportable segment for the three and nine months ended January 31, 2012 and 2011 are as follows:
 
 
 

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 1,831     $ 1,698     $ 782     $ 71     $ 144     $ 4,526  
2011
  $ 1,851     $ 1,837     $ 812     $ 117     $ 158     $ 4,775  
Change
  $ (20 )   $ (139 )   $ (30 )   $ (46 )   $ (14 )   $ (249 )
% change
    (1.1 %)     (7.6 %)     (3.7 %)     (39.3 %)     (8.9 %)     (5.2 %)
                                                 
Stabilized
  $ (89 )   $ (165 )   $ (28 )   $ (46 )   $ (9 )   $ (337 )
Non-stabilized
  $ 69     $ 26     $ (2 )   $ 0     $ (5 )   $ 88  
Change
  $ (20 )   $ (139 )   $ (30 )   $ (46 )   $ (14 )   $ (249 )

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 4,805     $ 5,850     $ 2,408     $ 19     $ 342     $ 13,424  
2011
  $ 4,586     $ 5,630     $ 2,404     $ 211     $ 353     $ 13,184  
Change
  $ 219     $ 220     $ 4     $ (192 )   $ (11 )   $ 240  
% change
    4.8 %     3.9 %     0.2 %     (91.0 %)     (3.1 %)     1.8 %
                                                 
Stabilized
  $ 57     $ 124     $ 1     $ (192 )   $ (6 )   $ (16 )
Non-stabilized
  $ 162     $ 96     $ 3     $ 0     $ (5 )   $ 256  
Change
  $ 219     $ 220     $ 4     $ (192 )   $ (11 )   $ 240  

 
Decreased Maintenance Expense. Maintenance expenses totaled $6.4 million and $20.2 million for the three and nine months ended January 31, 2012 compared to $8.4 million and $22.0 million for the three and nine months ended January 31, 2011.  Maintenance expenses at properties newly acquired in fiscal year 2012 and 2011 added $141,000 and $341,000, respectively, to the maintenance expenses category for the three and nine months ended January 31, 2012 compared to the corresponding period in fiscal year 2011. Maintenance expenses at existing properties decreased by $2.1 million and $2.2 million, respectively, for the three and nine months ended January 31, 2012 compared to the corresponding period in fiscal year 2011, resulting in a net decrease in maintenance expenses of $2.0 million and $1.8 million, or 23.5% and 8.3% for the three and nine months ended January 31, 2012 compared to the corresponding period in fiscal year 2011.  The decrease in maintenance costs at our stabilized properties for the three and nine months ended January 31, 2012 compared to the three and nine months ended January 31, 2011 is primarily due to a decrease in snow removal costs.
 
 
 
Maintenance expenses by reportable segment for the three and nine months ended January 31, 2012 and 2011 are as follows:
 
 

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 2,386     $ 2,516     $ 1,049     $ 143     $ 301     $ 6,395  
2011
  $ 2,857     $ 3,189     $ 1,347     $ 308     $ 657     $ 8,358  
Change
  $ (471 )   $ (673 )   $ (298 )   $ (165 )   $ (356 )   $ (1,963 )
% change
    (16.5 %)     (21.1 %)     (22.1 %)     (53.6 %)     (54.2 %)     (23.5 %)
                                                 
Stabilized
  $ (568 )   $ (705 )   $ (304 )   $ (165 )   $ (362 )   $ (2,104 )
Non-stabilized
  $ 97     $ 32     $ 6     $ 0     $ 6     $ 141  
Change
  $ (471 )   $ (673 )   $ (298 )   $ (165 )   $ (356 )   $ (1,963 )




   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 7,840     $ 7,777     $ 3,154     $ 536     $ 878     $ 20,185  
2011
  $ 8,139     $ 8,572     $ 3,461     $ 587     $ 1,242     $ 22,001  
Change
  $ (299 )   $ (795 )   $ (307 )   $ (51 )   $ (364 )   $ (1,816 )
% change
    (3.7 %)     (9.3 %)     (8.9 %)     (8.7 %)     (29.3 %)     (8.3 %)
                                                 
Stabilized
  $ (485 )   $ (929 )   $ (314 )   $ (51 )   $ (378 )   $ (2,157 )
Non-stabilized
  $ 186     $ 134     $ 7     $ 0     $ 14     $ 341  
Change
  $ (299 )   $ (795 )   $ (307 )   $ (51 )   $ (364 )   $ (1,816 )

 
 
Increased Real Estate Tax Expense. Real estate taxes on properties newly acquired in fiscal years 2012 and 2011 added $213,000 and $437,000 to real estate tax expense in the three and nine months ended January 31, 2012, compared to the three and nine months ended January 31, 2011. Real estate taxes on stabilized properties increased by $56,000 and $23,000 in the three and nine months ended January 31, 2012, resulting in an increase of $269,000 and $460,000, or 3.5% and 2.0% for the three and nine months ended January 31, 2012, compared to the three and nine months ended January 31, 2011. The increase in real estate taxes for our stabilized properties for the three months ended January 31, 2012 compared to the three months ended January 31, 2011 was due to higher value assessments and increased tax levies in all segments, with the exception of our multi-family residential and commercial office segments where value assessments and tax levies decreased as a result of certain successful tax appeals.  The increase in real estate taxes for our stabilized properties for the nine months ended January 31, 2012 compared to the nine months ended January 31, 2011 was due to higher value assessments and increased tax levies in all segments, with the exception of our commercial office segment where value assessments and tax levies decreased as a result of certain successful tax appeals.
 
 
 
Real estate tax expense by reportable segment for the three and nine months ended January 31, 2012 and 2011 is as follows:
 

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 1,760     $ 3,545     $ 1,500     $ 685     $ 559     $ 8,049  
2011
  $ 1,676     $ 3,571     $ 1,375     $ 626     $ 532     $ 7,780  
Change
  $ 84     $ (26 )   $ 125     $ 59     $ 27     $ 269  
% change
    5.0 %     (0.7 %)     9.1 %     9.4 %     5.1 %     3.5 %
                                                 
Stabilized
  $ (16 )   $ (45 )   $ 46     $ 54     $ 17     $ 56  
Non-stabilized
  $ 100     $ 19     $ 79     $ 5     $ 10     $ 213  
Change
  $ 84     $ (26 )   $ 125     $ 59     $ 27     $ 269  

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 5,104     $ 10,242     $ 4,477     $ 2,063     $ 1,642     $ 23,528  
2011
  $ 4,894     $ 10,453     $ 4,279     $ 1,907     $ 1,535     $ 23,068  
Change
  $ 210     $ (211 )   $ 198     $ 156     $ 107     $ 460  
% change
    4.3 %     (2.0 %)     4.6 %     8.2 %     7.0 %     2.0 %
                                                 
Stabilized
  $ 35     $ (299 )   $ 75     $ 156     $ 56     $ 23  
Non-stabilized
  $ 175     $ 88     $ 123     $ 0     $ 51     $ 437  
Change
  $ 210     $ (211 )   $ 198     $ 156     $ 107     $ 460  

 
Increased Insurance Expense. Insurance expense totaled $890,000 and $2.6 million for the three and nine months ended January 31, 2012 compared to $646,000 and $1.9 million for the three and nine months ended January 31, 2011. Insurance expenses at properties newly acquired in fiscal years 2012 and 2011 added $24,000 and $41,000 to the insurance expense category, while insurance expense at existing properties increased by $220,000 and $645,000 resulting in a net increase in
 


 
 
insurance expenses of $244,000 and $686,000 in the three and nine months ended January 31, 2012, a 37.8% and 36.8% increase over insurance expenses in the three and nine months ended January 31, 2011. The increase in insurance expense at stabilized properties is due primarily to the effect of the deductible under our insurance policy covering damages as a result of the flooding in North Dakota, in addition to other deductible adjustments in the prior year.
 
 
 
Insurance expense by reportable segment for the three and nine months ended January 31, 2012 and 2011 is as follows:
  

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 436     $ 211     $ 131     $ 60     $ 52     $ 890  
2011
  $ 319     $ 144     $ 117     $ 37     $ 29     $ 646  
Change
  $ 117     $ 67     $ 14     $ 23     $ 23     $ 244  
% change
    36.7 %     46.5 %     12.0 %     62.2 %     79.3 %     37.8 %
                                                 
Stabilized
  $ 105     $ 65     $ 9     $ 23     $ 18     $ 220  
Non-stabilized
  $ 12     $ 2     $ 5     $ 0     $ 5     $ 24  
Change
  $ 117     $ 67     $ 14     $ 23     $ 23     $ 244  

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 1,190     $ 654     $ 395     $ 169     $ 144     $ 2,552  
2011
  $ 910     $ 426     $ 339     $ 115     $ 76     $ 1,866  
Change
  $ 280     $ 228     $ 56     $ 54     $ 68     $ 686  
% change
    30.8 %     53.5 %     16.5 %     47.0 %     89.5 %     36.8 %
                                                 
Stabilized
  $ 259     $ 222     $ 52     $ 53     $ 59     $ 645  
Non-stabilized
  $ 21     $ 6     $ 4     $ 1     $ 9     $ 41  
Change
  $ 280     $ 228     $ 56     $ 54     $ 68     $ 686  

 
Property Management Expense. Property management expense totaled $5.0 million for the three months ended January 31, 2012 and compared to $5.5 million for the three months ended January 31, 2011. Property management expenses at properties newly acquired in fiscal years 2012 and 2011 added $130,000 to the property management expenses category in the three months ended January 31, 2012.   Property management expenses at stabilized properties decreased by $615,000 for the three months ended January 31, 2012 compared to the three months ended January 31, 2011, primarily as a result of decreased operating expenses in the Wyoming TRS properties following the sale of our TRS entity in the commercial medical segment, resulting in a decrease of $485,000 or 8.9% in the three months ended January 31, 2012 compared to the year-earlier periods. Property management expense totaled  $15.8 million for the nine months ended January 31, 2012, compared to $15.5 million for the nine months ended January 31, 2011. Property management expenses at properties newly acquired in fiscal years 2012 and 2011 added $227,000 to the property management expenses category in the nine months ended January 31, 2012.   Property management expenses at stabilized properties increased by $84,000 for the nine months ended January 31, 2012 compared to the nine months ended January 31, 2011, primarily as a result of  bad debt provisions in the commercial medical segment.
 


 
 
 
Property management expense by reportable segment for the three and nine months ended January 31, 2012 and 2011 is as follows:
 

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 2,255     $ 725     $ 1,758     $ 119     $ 132     $ 4,989  
2011
  $ 2,200     $ 766     $ 2,243     $ 115     $ 150     $ 5,474  
Change
  $ 55     $ (41 )   $ (485 )   $ 4     $ (18 )   $ (485 )
% change
    2.5 %     (5.4 %)     (21.6 %)     3.5 %     (12.0 %)     (8.9 %)
                                                 
Stabilized
  $ (60 )   $ (43 )   $ (491 )   $ 5     $ (26 )   $ (615 )
Non-stabilized
  $ 115     $ 2     $ 6     $ (1 )   $ 8     $ 130  
Change
  $ 55     $ (41 )   $ (485 )   $ 4     $ (18 )   $ (485 )

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 6,852     $ 1,928     $ 6,275     $ 391     $ 390     $ 15,836  
2011
  $ 6,718     $ 2,001     $ 6,080     $ 303     $ 423     $ 15,525  
Change
  $ 134     $ (73 )   $ 195     $ 88     $ (33 )   $ 311  
% change
    2.0 %     (3.6 %)     3.2 %     29.0 %     (7.8 %)     2.0 %
                                                 
Stabilized
  $ (47 )   $ (84 )   $ 183     $ 88     $ (56 )   $ 84  
Non-stabilized
  $ 181     $ 11     $ 12     $ 0     $ 23     $ 227  
Change
  $ 134     $ (73 )   $ 195     $ 88     $ (33 )   $ 311  


 
FACTORS IMPACTING NET INCOME
 

Net income decreased by approximately $12.1 million and $18.5 million for the three and nine months ended January 31, 2012, compared to the three and nine months ended January 31, 2011. The decrease in net income is due primarily to the decrease in gain on sale of discontinued operations in the three and nine months ended January 31, 2012, compared to the three and nine months ended January 31, 2011, as well as other factors shown by the following analysis:
 
   
Decrease in Net Income
 
   
(in thousands)
 
 
 
Three Months
ended January 31, 2012
   
Nine Months
ended January 31, 2012
 
 
Net income for Fiscal 2011
  $ 14,588     $ 24,041  
Increase in NOI
    3,061       3,283  
Increase in depreciation/amortization due to depreciation of tenant and capital improvements
    (681 )     (1,554 )
Decrease (increase) in administrative, advisory and trustee fees due to additional corporate staff and overhead and increased trustee fees
    191       (407 )
Decrease (increase) in other expenses
    82       (152 )
Increase in impairment of real estate investments
    (135 )     (135 )
Increase in interest expense
    (665 )     (421 )
Increase in interest and other income
    188       250  
Decrease in income from discontinued operations
    (14,108 )     (19,320 )
Net income for Fiscal 2012
  $ 2,521     $ 5,585  

The following factors impacted net income in the three and nine months ended January 31, 2012:
 

 
 
Mortgage Interest Expense.  Our mortgage interest expense increased approximately $146,000, or 1.0%, to approximately $15.4 million during the third quarter of fiscal year 2012, compared to $15.3 million in the third quarter of fiscal year 2011. Mortgage interest expense decreased approximately $866,000, or 1.9%, to approximately $45.5 million during the nine month period ended January 31, 2012, compared to $46.3 million in the nine month period ended January 31, 2011.
 


 
 
 
Mortgage interest expense for properties newly acquired in fiscal years 2012 and 2011 added $572,000 and $1.4 million, respectively  to our total mortgage interest expense in the three and nine months ended January 31, 2012, while mortgage interest expense on existing properties decreased $426,000 and $2.3 million, respectively for the three and nine months ended January 31, 2012. The decrease in mortgage interest expense is due to refinancings in our stabilized properties portfolio. The mortgage interest expense category does not include interest expense on the multi-bank line of credit we entered into in the first quarter of fiscal year 2011, which totaled approximately $775,000 and $1.8 million in the three and nine months ended January 31, 2012.  Mortgage interest expense and interest expense on our line of credit are all components of “Interest expense” on our consolidated statement of operations. Our overall weighted average interest rate on all outstanding mortgage debt (excluding borrowings under our secured line of credit) was 5.81% as of January 31, 2012 and 6.05% as of January 31, 2011.  Our mortgage debt on January 31, 2012 increased approximately $44.9 million, or 4.5% from April 30, 2011.  Mortgage debt does not include our multi-bank line of credit which appears on our consolidated balance sheet in “Revolving line of credit.”
 
 
 
Mortgage interest expense by reportable segment for the three and nine months ended January 31, 2012 and 2011 is as follows:
 

   
(in thousands)
 
Three Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 4,435     $ 5,293     $ 4,134     $ 865     $ 719     $ 15,446  
2011
  $ 4,171     $ 5,281     $ 4,130     $ 948     $ 770     $ 15,300  
Change
  $ 264     $ 12     $ 4     $ (83 )   $ (51 )   $ 146  
% change
    6.3 %     0.2 %     0.1 %     (8.8 %)     (6.6 %)     1.0 %
                                                 
Stabilized
  $ 32     $ (47 )   $ (277 )   $ (83 )   $ (51 )   $ (426 )
Non-stabilized
  $ 232     $ 59     $ 281     $ 0     $ 0     $ 572  
Change
  $ 264     $ 12     $ 4     $ (83 )   $ (51 )   $ 146  

   
(in thousands)
 
Nine Months Ended January 31,
 
Multi-Family
Residential
   
Commercial
Office
   
Commercial
Medical
   
Commercial
Industrial
   
Commercial
Retail
   
Total
 
2012
  $ 12,869     $ 15,690     $ 12,065     $ 2,621     $ 2,217     $ 45,462  
2011
  $ 12,549     $ 16,253     $ 12,345     $ 2,857     $ 2,324     $ 46,328  
Change
  $ 320     $ (563 )   $ (280 )   $ (236 )   $ (107 )   $ (866 )
% change
    2.6 %     (3.5 %)     (2.3 %)     (8.3 %)     (4.6 %)     (1.9 %)
                                                 
Stabilized
  $ (66 )   $ (775 )   $ (1,085 )   $ (236 )   $ (107 )   $ (2,269 )
Non-stabilized
  $ 386     $ 212     $ 805     $ 0     $ 0     $ 1,403  
Change
  $ 320     $ (563 )   $ (280 )   $ (236 )   $ (107 )   $ (866 )

 
 
 
In addition to IRET’s mortgage interest expense, the Company incurs interest expense for a line of credit, amortization of loan costs, security deposits, and special assessments offset by capitalized construction interest. For the three months ended January 31, 2012 and 2011 these amounts were $1.1 million  and $568,000, respectively, for a total interest expense for the three months ended January 31, 2012 and 2011 of $16.5 million and $15.9 million, respectively, an increase of $665,000. For the nine months ended January 31, 2012 and 2011 these amounts were $3.3 million  and $2.0 million, respectively, for a total interest expense for the nine months ended January 31, 2012 and 2011 of $48.8 million and $48.3 million, respectively, an increase of $421,000.

 
Decreased Amortization Expense. The Company allocates 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 $1.2 million and $4.4 million in the three and nine months ended January 31, 2012 compared to $1.7 million and $5.5 million in the three and nine months ended January 31, 2011.
 
CREDIT RISK
 
The following table lists our top ten commercial tenants on January 31, 2012, for all commercial properties owned by us, measured by percentage of total commercial segments’ minimum rents as of January 1, 2012.  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 10% of our total real estate rentals, although affiliated entities of Edgewood Vista together accounted for approximately 12.4% of our total commercial segments’ minimum rents as of January 1, 2012, and they accounted for approximately 7.9% of our total real estate rentals as of January 1, 2012.
 
Lessee
% of Total Commercial
Segments’ Minimum Rents
as of January 1, 2012
Affiliates of Edgewood Vista
12.4%
St. Lukes Hospital of Duluth, Inc.
3.5%
Fairview Health Services
3.4%
Applied Underwriters
2.2%
Affiliates of Siemens USA (NYSE: SI)
1.6%
HealthEast Care System
1.6%
Affiliates of Hewlett Packard (NASDAQ: HPQ)
1.4%
Microsoft (NASDAQ: MSFT)
1.4%
Smurfit - Stone Container (NASDAQ: SSCC)
1.3%
Nebraska Orthopedic Hospital
1.3%
All Others
69.9%
Total Monthly Commercial Rent as of January 1, 2012
100.0%
 
PROPERTY ACQUISITIONS AND DISPOSITIONS
 
During the third quarter of fiscal year 2012, the Company closed on its acquisition of a 36-unit multi-family residential property in Isanti, Minnesota, on approximately 1.7 acres of land, and an adjoining 4.9 acre parcel of vacant land, for a purchase price of approximately $3.5 million, of which $3.0 million was paid in cash and the remainder in limited partnership units of the Operating Partnership valued at $495,000. This property is located next to the Company’s existing 36-unit Evergreen Apartments in Isanti, Minnesota. Also during the third quarter of fiscal year 2012, the Company substantially completed construction of an additional approximately 28 assisted living units and 16 memory care units at its existing Meadow Wind senior housing facility in Casper, Wyoming. The Company estimates that construction costs for this expansion project will total approximately $4.7 million. As of January 31, 2012, the Company had incurred approximately $3.8 million of these project costs. The Company had no real estate dispositions in the third quarter of fiscal year 2012.
 
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, 2012 and 2011.
 
FUNDS FROM OPERATIONS FOR THE THREE AND NINE MONTHS ENDED JANUARY 31, 2012 AND 2011
 
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.” In addition, NAREIT has recently clarified its computation of FFO so as to exclude impairment charges for all periods presented. 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, impairment write-downs, the gains or losses from the sale of operating real estate properties and extraordinary items as defined by U.S. 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 U.S. 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 U.S. GAAP may not reflect underlying economic realities. Additionally, the exclusion, in NAREIT’s definition of FFO, of impairment write-downs and gains and losses from the sales of previously depreciated operating real estate assets, assists IRET management
 



and investors in identifying 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 U.S. 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 U.S. 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 and nine months ended January 31, 2012 increased to $17.2 million compared to $14.6 million, and $48.2 million compared to $47.5 million for the comparable period ended January 31, 2011, an increase of 17.4% and 1.5% respectively.
 
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,
2012
 
2011
 
 
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
  $ 2,127                 $ 11,833              
Less dividends to preferred shareholders
    (593 )                 (593 )            
Net income available to common shareholders
    1,534       84,339     $ 0.02       11,240       79,398     $ 0.14  
Adjustments:
                                               
Noncontrolling interest – Operating Partnership
    351       19,596               2,793       19,957          
Depreciation and amortization(1)
    15,179                       14,577                  
Impairment of real estate investments
    135                       0                  
Gain on depreciable property sales
    0                       (13,961 )                
Funds from operations applicable to common shares
and Units
  $ 17,199       103,935     $ 0.16       14,649       99,355     $ 0.14  

 
(in thousands, except per share amounts)
 
Nine Months Ended January 31,
2012
 
2011
 
 
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
  $ 4,833                 $ 19,638              
Less dividends to preferred shareholders
    (1,779 )                 (1,779 )            
Net income available to common shareholders
    3,054       82,424     $ 0.04       17,859       78,140     $ 0.23  
Adjustments:
                                               
Noncontrolling interest – Operating Partnership
    723       19,752               4,485       20,171          
Depreciation and amortization(4)
    44,892                       44,525                  
Impairment of real estate investments
    135                       0                  
Gain on depreciable property sales
    (589 )                     (19,365 )                
Funds from operations applicable to common shares
and Units
  $ 48,215       102,176     $ 0.47       47,504       98,311     $ 0.48  
 
(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 $15,262 and $14,581, and depreciation/amortization from Discontinued Operations of $0 and $51, less corporate-related depreciation and amortization on office equipment and other assets of $83 and $55, for the three months ended January 31, 2012 and 2011, 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 $45,105 and $43,551, and depreciation/amortization from Discontinued Operations of $8 and $1,172, less corporate-related depreciation and amortization on office equipment and other assets of $221 and $198, for the nine months ended January 31, 2012 and 2011, respectively.
DISTRIBUTIONS
 
The following distributions per common share and unit were paid during the nine months ended January 31 of fiscal years 2012 and 2011:
 
Month
 
Fiscal Year 2012
   
Fiscal Year 2011
 
July
  $ .1715     $ .1715  
October
    .1300       .1715  
January
    .1300       .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 secured and unsecured lines of credit (the Company currently has one multi-bank line of credit with a total commitment capacity of $60.0 million, secured by mortgages on 23 Company properties). 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 real estate market continues to experience significant challenges including reduced tenant demand, occupancies and rental rates. 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
 
While the economy is showing signs of a modest recovery and credit markets have stabilized, underwriting on commercial real estate continues to be more conservative compared to the underwriting standards employed prior to the recessionary period.  We continue to expect to be able to refinance our maturing debt, but we also expect lenders to continue to employ conservative underwriting regarding asset quality, occupancy levels and tenant creditworthiness, and accordingly we are cautious regarding our ability in the remainder of fiscal year 2012 to rely on cash-out refinancing at levels we have achieved in recent years to provide funds for investment opportunities and other corporate purposes.  Additionally, while to date there has been no material negative impact on our ability to borrow in our multi-family segment, we continue to closely monitor proposals such as the Federal Housing Finance Agency’s proposal released February 21, 2012, to modify the roles of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) in financing multi-family residential properties.  As we have previously noted, we consider that one of the consequences of a modification in the agencies’ roles could potentially be a narrowing of their lending focus away from the smaller secondary or tertiary markets which we generally target, to multi-family residential properties in major metropolitan markets. 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 or willingness to lend going forward will most likely result in higher loan costs or more constricted availability of financing for us; accordingly, we continue to closely monitor announcements regarding both firms. As of January 31, 2012, 100%, or $8.1 million of our mortgage debt maturing in the fourth quarter of fiscal year 2012 and first quarter of fiscal year 2013 is debt placed on properties in our four commercial segments. Of this $8.1 million, we have to date loan applications or commitments to refinance approximately $6.0 million. As of January 31, 2012, 100%, or $15.2 million of our mortgage debt maturing in the next twelve months is debt placed on properties in our four commercial segments.
 
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, 2012, lending commitments of $60.0 million.  As of January 31, 2012, the line of credit was secured by mortgages on 23 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. Participants in this credit facility as of January 31, 2012 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; American State Bank & Trust Company and Town & Country Credit Union. 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, 2012, the Company had borrowed $49.0 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, 2012, the Company believes it is 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. At January 31, 2012, the Company’s compensating balances consisted of the following: Dacotah Bank, Minot, North Dakota, 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 $6.1 million; Peoples State Bank of Velva, North Dakota, deposit of $225,000; Equity Bank, Minnetonka, Minnesota, deposit of $300,000; Associated Bank, Green Bay, Wisconsin, deposit of $500,000; Venture Bank, Eagan, Minnesota, deposit of $500,000, and American National Bank, Omaha, Nebraska, deposit of $400,000.
 
The issuance of UPREIT Units for property acquisitions continues to be an expected source of capital for the Company. In the three months ended January 31, 2012, approximately 62,000 Units, valued at issuance at approximately $495,000, were issued in connection with the Company’s acquisition of property.  During the nine months ended January 31, 2012, approximately 288,000 Units, valued at issuance at $2.5 million, were issued in connection with the Company’s acquisition of property. 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 property and the noncontrolling interests in a joint venture.
 
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. The maximum monthly voluntary cash contribution permitted without prior Company approval is currently $10,000. The Company can issue waivers to DRIP participants to provide for investments in excess of the $10,000 maximum monthly investment. During the three months ended January 31, 2012, the Company issued 973,000 shares at an average price of $7.19 per share pursuant to such waivers, for total net proceeds to the Company of $7.0 million. During the nine months ended January 31, 2012, the Company issued 2.2 million shares at an average price of $7.21 per share pursuant to such waivers, for total net proceeds to the Company of $15.8 million. During the three and nine months ended January 31, 2012, respectively, the Company issued a total of approximately 2.3 million common shares and 4.0 million common shares under its DRIP through reinvestments and voluntary cash contributions, with a total value of $16.5 million and $28.8 million.
 
Cash and cash equivalents on January 31, 2012 totaled $35.5 million, compared to $30.9 million on January 31, 2011, an increase of $4.6 million. Net cash provided by operating activities for the nine months ended January 31, 2012 increased by approximately $6.0 million, primarily due to a decrease in accounts receivable and an increase in accounts payable and other liabilities, compared to the nine months ended January 31, 2011.  Net cash used by investing activities was $89.0 million for the nine months ended January 31, 2012 as compared to net cash provided of $17.0 million for the nine months ended January 31, 2011, a change of approximately $106.0 million, primarily due to an increase in payments for acquisitions and improvements of real estate and a decrease in proceeds from discontinued operations. Net cash provided by financing activities was $38.9 million
 



for the nine months ended January 31, 2012, as compared to net cash used by financing activities of $79.3 million in the prior year. The increase in funds provided by financing activity was primarily due to a decrease in principal payments on mortgages in the nine months ended January 31, 2012 as compared to the nine months ended January 31, 2011. 
 
FINANCIAL CONDITION
 
Mortgage Loan Indebtedness. Mortgage loan indebtedness increased by $44.9 million as of January 31, 2012, compared to April 30, 2011, due to new debt on existing and new properties, net of principal payments and loans that were paid off. As of January 31, 2012, approximately 99.0% of the Company’s $1.0 billion 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, 2012, the weighted average rate of interest on the Company’s mortgage debt was 5.84%, compared to 5.92% on April 30, 2011.
 
Property Owned. Property owned increased to $1.9 billion at January 31, 2012 from $1.8 billion at April 30, 2011. During the nine months ended January 31, 2012, the Company acquired 13 additional investment properties and one parcel adjoining an existing property, placed three construction projects in service and disposed of one 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, 2012 were $35.5 million, compared to $41.2 million on April 30, 2011.
 
Other Investments. Other investments, consisting of certificates of deposit held primarily for compensating balances, totaled approximately $633,000 and $625,000 on January 31, 2012 and on April 30, 2011, respectively.
 
Operating Partnership Units. Outstanding units in the Operating Partnership decreased to 19.6 million Units at January 31, 2012 compared to 20.1 million Units outstanding at April 30, 2011. The decrease resulted primarily from the conversion of Units to common shares, net of units issued in exchange for property.
 
Common and Preferred Shares of Beneficial Interest. Common shares of beneficial interest outstanding on January 31, 2012 totaled 85.7 million, compared to 80.5 million outstanding on April 30, 2011. During the nine months ended January 31, 2012, IRET issued approximately 366,000 common shares under its continuous equity offering program for total proceeds (before offering expenses but after underwriting discounts and commissions) of $2.7 million. The Company issued common shares pursuant to its Distribution Reinvestment and Share Purchase Plan, consisting of approximately 4.0 million common shares issued during the nine months ended January 31, 2012, for a total value of $28.8 million. Conversions of approximately 759,000 UPREIT Units to common shares, for a total of approximately $3.5 million in IRET shareholders’ equity, also increased the Company’s common shares of beneficial interest outstanding during the nine months ended January 31, 2012.
 
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 99.0% and 99.8% of our debt, as of January 31, 2012 and April 30, 2011, 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 2012 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, 2012, we had the following amount of future principal and interest payments due on mortgages secured by our real estate:
 



 
(in thousands)
 
 
Future Principal Payments
 
Mortgages
Remaining
Fiscal 2012
 
Fiscal 2013
 
Fiscal 2014
 
Fiscal 2015
 
Fiscal 2016
 
Thereafter
 
Total
 
Fair Value
 
Fixed Rate
  $ 13,364     $ 51,607     $ 65,425     $ 96,457     $ 86,182     $ 715,163     $ 1,028,198     $ 1,076,421  
Average Fixed Interest Rate(1)
    5.77 %     5.76 %     5.72 %     5.60 %     5.53 %                        
Variable Rate
  $ 53     $ 117     $ 599     $ 9,750     $ 0     $ 0     $ 10,519     $ 10,519  
Average Variable Interest Rate(1)
    5.00 %     5.46 %     5.32 %     5.57 %     0                          
                                                    $ 1,038,717     $ 1,086,940  

 
(in thousands)
 
 
Future Interest Payments
 
Mortgages
Remaining
Fiscal 2012
 
Fiscal 2013
 
Fiscal 2014
 
Fiscal 2015
 
Fiscal 2016
 
Thereafter
 
Total
 
Fixed Rate
  $ 15,020     $ 58,489     $ 55,113     $ 50,268     $ 44,326     $ 117,398     $ 340,614  
Variable Rate
    135       571       550       136       0       0       1,392  
                                                    $ 342,006  
 
(1)  
Interest rate given is for the entire year.
 
 
The weighted average interest rate on our fixed rate and variable rate debt as of January 31, 2012, was 5.84%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $10.5 million of variable rate indebtedness would increase our annual interest expense by $105,000.
 
 
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, 2012, 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, 2011.
 
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
 
None
 
Item 3. Defaults Upon Senior Securities.
 
None
 
Item 4. Mine Safety Disclosures
 
 Not Applicable
 
Item 5. Other Information.
 
None
 
Item 6. Exhibits
 
Exhibit No.
Description
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.
101
The following materials from our Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 formatted in eXtensible Business Reporting Language ( “XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) notes to these condensed consolidated financial statements.




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 12, 2012


Exhibit Index
 

Exhibit No.
Description
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.
101
The following materials from our Quarterly Report on Form 10-Q for the quarter ended January 31, 2012 formatted in eXtensible Business Reporting Language ( “XBRL”): (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Operations, (ii) the Condensed Consolidated Statements of Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) notes to these condensed consolidated financial statements.