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CENTERSPACE - Quarter Report: 2017 January (Form 10-Q)

Table of Contents

 

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 the quarterly period ended January 31, 2017

 

or

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to ____________

 

Commission File Number 001-35624

 

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)

 

 

 

1400 31st Avenue SW, Suite 60

Post Office Box 1988

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 ☑

No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

 

 

 

 

Yes ☑

No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. 

 

 

 

 

Large accelerated filer ☑

Accelerated filer ☐

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 ☑

 

The number of common shares of beneficial interest outstanding as of March 6, 2017, was 121,917,954.

 

 


 

Table of Contents

TABLE OF CONTENTS

 

 

 

Page

Part I. Financial Information 

 

 

Condensed Consolidated Balance Sheets (unaudited) January 31, 2017 and April 30, 2016

Condensed Consolidated Statements of Operations (unaudited) For the Three and Nine Months ended January 31, 2017 and 2016

Condensed Consolidated Statements of Equity (unaudited) For the Nine Months ended January 31, 2017 and 2016

Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months ended January 31, 2017 and 2016

Notes to Condensed Consolidated Financial Statements (unaudited) 

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 

30 

Item 3. Quantitative and Qualitative Disclosures About Market Risk 

50 

Item 4. Controls and Procedures 

51 

 

 

Part II. Other Information 

 

Item 1. Legal Proceedings 

52 

Item 1A. Risk Factors 

52 

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

52 

Item 3. Defaults Upon Senior Securities 

52 

Item 4. Mine Safety Disclosures 

53 

Item 5. Other Information 

53 

Item 6. Exhibits 

53 

Signatures 

55 

 

 

2


 

Table of Contents

PART I

ITEM 1. FINANCIAL STATEMENTS - THIRD QUARTER - FISCAL 2017

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

 

 

 

 

 

 

 

 

(in thousands, except share data)

 

 

    

January 31, 2017

    

April 30, 2016

 

ASSETS

 

 

 

 

 

 

 

Real estate investments

 

 

 

 

 

 

 

Property owned

 

$

1,685,823

 

$

1,681,471

 

Less accumulated depreciation

 

 

(334,875)

 

 

(312,889)

 

 

 

 

1,350,948

 

 

1,368,582

 

Development in progress

 

 

11,531

 

 

51,681

 

Unimproved land

 

 

19,076

 

 

20,939

 

Total real estate investments

 

 

1,381,555

 

 

1,441,202

 

Assets held for sale and assets of discontinued operations

 

 

140,226

 

 

220,537

 

Cash and cash equivalents

 

 

56,999

 

 

66,698

 

Other investments

 

 

 —

 

 

50

 

Receivable arising from straight-lining of rents, net of allowance of $308 and $333, respectively

 

 

7,839

 

 

7,179

 

Accounts receivable, net of allowance of $220 and $97, respectively

 

 

3,878

 

 

1,524

 

Prepaid and other assets

 

 

4,060

 

 

2,937

 

Intangible assets, net of accumulated amortization of $5,372 and $6,230, respectively

 

 

731

 

 

1,858

 

Tax, insurance, and other escrow

 

 

5,724

 

 

5,450

 

Property and equipment, net of accumulated depreciation of $1,120 and $1,058, respectively

 

 

915

 

 

1,011

 

Goodwill

 

 

1,645

 

 

1,680

 

Deferred charges and leasing costs, net of accumulated amortization of $3,819 and $3,719, respectively

 

 

5,517

 

 

4,896

 

TOTAL ASSETS

 

$

1,609,089

 

$

1,755,022

 

LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

 

 

 

 

 

 

 

LIABILITIES

 

 

 

 

 

 

 

Liabilities held for sale and liabilities of discontinued operations

 

$

54,291

 

$

77,488

 

Accounts payable and accrued expenses

 

 

41,351

 

 

39,727

 

Revolving line of credit

 

 

157,000

 

 

17,500

 

Mortgages payable, net of unamortized loan costs of $5,525 and $4,931, respectively

 

 

688,424

 

 

812,393

 

Construction debt and other

 

 

39,524

 

 

82,130

 

TOTAL LIABILITIES

 

 

980,590

 

 

1,029,238

 

COMMITMENTS AND CONTINGENCIES (NOTE 6)

 

 

 

 

 

 

 

REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES

 

 

7,300

 

 

7,522

 

EQUITY

 

 

 

 

 

 

 

Investors Real Estate Trust shareholders’ equity

 

 

 

 

 

 

 

Series A Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 0 shares issued and outstanding at January 31, 2017 and  1,150,000 issued and outstanding at April 30, 2016, aggregate liquidation preference of $28,750,000)

 

 

 —

 

 

27,317

 

Series B Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 4,600,000 shares issued and outstanding at January 31, 2017 and April 30, 2016, aggregate liquidation preference of $115,000,000)

 

 

111,357

 

 

111,357

 

Common Shares of Beneficial Interest (Unlimited authorization, no par value, 121,889,299 shares issued and outstanding at January 31, 2017, and 121,091,249 shares issued and outstanding at April 30, 2016)

 

 

921,735

 

 

922,084

 

Accumulated distributions in excess of net income

 

 

(486,015)

 

 

(442,000)

 

Total Investors Real Estate Trust shareholders’ equity

 

 

547,077

 

 

618,758

 

Noncontrolling interests – Operating Partnership (16,034,209 units at January 31, 2017 and 16,285,239 units at April 30, 2016)

 

 

72,007

 

 

78,484

 

Noncontrolling interests – consolidated real estate entities

 

 

2,115

 

 

21,020

 

Total equity

 

 

621,199

 

 

718,262

 

TOTAL LIABILITIES, REDEEMABLE NONCONTROLLING INTERESTS AND EQUITY

 

$

1,609,089

 

$

1,755,022

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

3


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)

for the three and nine months ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31, 

 

January 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate rentals

 

$

46,278

 

$

44,015

 

$

137,122

 

$

126,633

 

Tenant reimbursement

 

 

4,896

 

 

4,391

 

 

14,272

 

 

13,164

 

TOTAL REVENUE

 

 

51,174

 

 

48,406

 

 

151,394

 

 

139,797

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses, excluding real estate taxes

 

 

17,034

 

 

15,412

 

 

48,905

 

 

43,952

 

Real estate taxes

 

 

5,759

 

 

4,909

 

 

17,095

 

 

14,624

 

Depreciation and amortization

 

 

13,475

 

 

12,693

 

 

41,273

 

 

36,315

 

Impairment of real estate investments

 

 

 —

 

 

162

 

 

54,153

 

 

3,320

 

General and administrative expenses

 

 

3,130

 

 

2,929

 

 

8,438

 

 

8,316

 

Acquisition and investment related costs

 

 

5

 

 

35

 

 

52

 

 

433

 

Other expenses

 

 

1,037

 

 

51

 

 

2,705

 

 

1,281

 

TOTAL EXPENSES

 

 

40,440

 

 

36,191

 

 

172,621

 

 

108,241

 

Operating income (loss)

 

 

10,734

 

 

12,215

 

 

(21,227)

 

 

31,556

 

Interest expense

 

 

(10,680)

 

 

(9,151)

 

 

(31,670)

 

 

(25,706)

 

Loss on extinguishment of debt

 

 

(1,907)

 

 

 —

 

 

(1,907)

 

 

(106)

 

Interest income

 

 

816

 

 

566

 

 

1,988

 

 

1,687

 

Other income

 

 

158

 

 

135

 

 

668

 

 

286

 

(Loss) income before gain on sale of real estate and other investments, and income from discontinued operations

 

 

(879)

 

 

3,765

 

 

(52,148)

 

 

7,717

 

Gain on sale of real estate and other investments

 

 

2,437

 

 

1,446

 

 

11,292

 

 

1,271

 

Income (loss) from continuing operations

 

 

1,558

 

 

5,211

 

 

(40,856)

 

 

8,988

 

Income from discontinued operations

 

 

23,631

 

 

38,232

 

 

37,741

 

 

55,859

 

NET INCOME (LOSS)

 

 

25,189

 

 

43,443

 

 

(3,115)

 

 

64,847

 

Net income attributable to noncontrolling interests – Operating Partnership

 

 

(2,525)

 

 

(4,227)

 

 

(403)

 

 

(5,940)

 

Net loss attributable to noncontrolling interests – consolidated real estate entities

 

 

446

 

 

581

 

 

16,585

 

 

2,096

 

Net income attributable to Investors Real Estate Trust

 

 

23,110

 

 

39,797

 

 

13,067

 

 

61,003

 

Dividends to preferred shareholders

 

 

(2,503)

 

 

(2,879)

 

 

(8,260)

 

 

(8,636)

 

Redemption of preferred shares

 

 

(1,435)

 

 

 —

 

 

(1,435)

 

 

 —

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

19,172

 

$

36,918

 

$

3,372

 

$

52,367

 

(Loss) earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted

 

$

(0.01)

 

$

0.02

 

$

(0.24)

 

$

0.02

 

Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted

 

 

0.17

 

 

0.28

 

 

0.27

 

 

0.40

 

NET INCOME PER COMMON SHARE – BASIC & DILUTED

 

$

0.16

 

$

0.30

 

$

0.03

 

$

0.42

 

DIVIDENDS PER COMMON SHARE

 

$

0.13

 

$

0.13

 

$

0.39

 

$

0.39

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

4


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)

for the nine months ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

 

    

 

 

    

NUMBER

    

 

 

    

ACCUMULATED

    

 

 

    

 

 

 

 

 

NUMBER OF

 

 

 

 

OF

 

 

 

 

DISTRIBUTIONS

 

NONREDEEMABLE

 

 

 

 

 

 

PREFERRED

 

PREFERRED

 

COMMON

 

COMMON

 

IN EXCESS OF

 

NONCONTROLLING

 

TOTAL

 

 

 

SHARES

 

SHARES

 

SHARES

 

SHARES

 

NET INCOME

 

INTERESTS

 

EQUITY

 

Balance April 30, 2015

 

5,750

 

$

138,674

 

124,455

 

$

951,868

 

$

(438,432)

 

$

88,844

 

$

740,954

 

Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

61,003

 

 

4,087

 

 

65,090

 

Distributions - common shares and units

 

 

 

 

 

 

 

 

 

 

 

 

(48,323)

 

 

(5,431)

 

 

(53,754)

 

Distributions – Series A preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(1,779)

 

 

 

 

 

(1,779)

 

Distributions – Series B preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(6,857)

 

 

 

 

 

(6,857)

 

Distribution reinvestment and share purchase plan

 

 

 

 

 

 

821

 

 

5,619

 

 

 

 

 

 

 

 

5,619

 

Shares issued and share-based compensation

 

 

 

 

 

 

220

 

 

1,191

 

 

 

 

 

 

 

 

1,191

 

Partnership units issued

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

400

 

 

400

 

Redemption of units for common shares

 

 

 

 

 

 

181

 

 

980

 

 

 

 

 

(980)

 

 

 —

 

Shares repurchased

 

 

 

 

 

 

(4,643)

 

 

(35,000)

 

 

 

 

 

 

 

 

(35,000)

 

Distributions paid to non-controlling interests

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,935)

 

 

(6,935)

 

Balance January 31, 2016

 

5,750

 

$

138,674

 

121,034

 

$

924,658

 

$

(434,388)

 

$

79,985

 

$

708,929

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance April 30, 2016

 

5,750

 

$

138,674

 

121,091

 

$

922,084

 

$

(442,000)

 

$

99,504

 

$

718,262

 

Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests

 

 

 

 

 

 

 

 

 

 

 

 

13,067

 

 

(15,880)

 

 

(2,813)

 

Distributions - common shares and units

 

 

 

 

 

 

 

 

 

 

 

 

(47,387)

 

 

(6,332)

 

 

(53,719)

 

Distributions – Series A preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(1,403)

 

 

 

 

 

(1,403)

 

Distributions – Series B preferred shares

 

 

 

 

 

 

 

 

 

 

 

 

(6,857)

 

 

 

 

 

(6,857)

 

Shares issued and share-based compensation

 

 

 

 

 

 

553

 

 

1,756

 

 

 

 

 

 

 

 

1,756

 

Redemption of units for common shares

 

 

 

 

 

 

251

 

 

548

 

 

 

 

 

(548)

 

 

 —

 

Preferred shares repurchased

 

(1,150)

 

 

(27,317)

 

 

 

 

 

 

 

(1,435)

 

 

 

 

 

(28,752)

 

Contributions from nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

7,188

 

 

7,188

 

Distributions to nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(159)

 

 

(159)

 

Acquisition of nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

(2,677)

 

 

 

 

 

(2,261)

 

 

(4,938)

 

Conversion to equity of notes receivable from nonredeemable noncontrolling interests – consolidated real estate entities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(7,366)

 

 

(7,366)

 

Other

 

 

 

 

 

 

(6)

 

 

24

 

 

 

 

 

(24)

 

 

 —

 

Balance January 31, 2017

 

4,600

 

$

111,357

 

121,889

 

$

921,735

 

$

(486,015)

 

$

74,122

 

$

621,199

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

 

 

5


 

Table of Contents

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

for the nine months ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Nine Months Ended

 

 

 

January 31, 

 

 

    

2017

    

2016

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

Net (loss) income

 

$

(3,115)

 

$

64,847

 

Adjustments to reconcile net (loss) income to net cash provided by operating activities:

 

 

 

 

 

 

 

Depreciation and amortization

 

 

42,379

 

 

43,811

 

Depreciation and amortization from discontinued operations

 

 

81

 

 

5,425

 

Gain on sale of real estate, land, other investments and discontinued operations

 

 

(37,330)

 

 

(25,512)

 

Loss (gain) on extinguishment of debt and discontinued operations

 

 

870

 

 

(35,552)

 

Share-based compensation expense

 

 

1,428

 

 

1,391

 

Impairment of real estate investments

 

 

54,153

 

 

3,760

 

Bad debt expense

 

 

234

 

 

392

 

Changes in other assets and liabilities:

 

 

 

 

 

 

 

Receivable arising from straight-lining of rents

 

 

(373)

 

 

(104)

 

Accounts receivable

 

 

(1,153)

 

 

301

 

Prepaid and other assets

 

 

(1,209)

 

 

(265)

 

Tax, insurance and other escrow

 

 

(789)

 

 

(193)

 

Deferred charges and leasing costs

 

 

(2,141)

 

 

(999)

 

Accounts payable, accrued expenses and other liabilities

 

 

2,664

 

 

(10,363)

 

Net cash provided by operating activities

 

 

55,699

 

 

46,939

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from real estate deposits

 

 

1,370

 

 

3,725

 

Payments for real estate deposits

 

 

(1,370)

 

 

(2,486)

 

Decrease in other investments

 

 

50

 

 

279

 

Decrease in lender holdbacks for improvements

 

 

1,688

 

 

3,906

 

Increase in lender holdbacks for improvements

 

 

(646)

 

 

(862)

 

Proceeds from sale of discontinued operations

 

 

112,932

 

 

366,125

 

Proceeds from sale of real estate and other investments

 

 

17,710

 

 

8,580

 

Insurance proceeds received

 

 

275

 

 

1,035

 

Payments for acquisitions of real estate assets

 

 

 —

 

 

(71,381)

 

Payments for development and re-development of real estate assets

 

 

(16,082)

 

 

(106,306)

 

Payments for improvements of real estate assets

 

 

(34,536)

 

 

(20,692)

 

Payments for improvements of real estate assets from discontinued operations

 

 

 —

 

 

(5,182)

 

Net cash provided by investing activities

 

 

81,391

 

 

176,741

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

Proceeds from mortgages payable

 

 

84,150

 

 

95,602

 

Principal payments on mortgages payable

 

 

(242,912)

 

 

(218,264)

 

Proceeds from revolving lines of credit

 

 

234,000

 

 

43,000

 

Principal payments on revolving lines of credit

 

 

(94,500)

 

 

(110,554)

 

Proceeds from construction debt

 

 

17,041

 

 

62,268

 

Principal payments on construction debt

 

 

(49,080)

 

 

 —

 

Proceeds from sale of common shares under distribution reinvestment and share purchase program

 

 

 —

 

 

1,493

 

Additions to notes receivable from noncontrolling partner –  consolidated real estate entities

 

 

(9,211)

 

 

 —

 

Proceeds from noncontrolling partner – consolidated real estate entities

 

 

9,749

 

 

1,120

 

Payments for acquisition of noncontrolling interests – consolidated real estate entities

 

 

(4,938)

 

 

 —

 

Repurchase of common shares

 

 

 —

 

 

(35,000)

 

Repurchase of preferred shares

 

 

(28,752)

 

 

 —

 

Distributions paid to common shareholders

 

 

(47,387)

 

 

(44,326)

 

Distributions paid to preferred shareholders

 

 

(8,458)

 

 

(8,636)

 

Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership

 

 

(6,332)

 

 

(5,301)

 

Distributions paid to noncontrolling interests – consolidated real estate entities

 

 

(159)

 

 

(6,935)

 

Net cash used by financing activities

 

 

(146,789)

 

 

(225,533)

 

NET DECREASE IN CASH AND CASH EQUIVALENTS

 

 

(9,699)

 

 

(1,853)

 

CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR

 

 

66,698

 

 

48,970

 

CASH AND CASH EQUIVALENTS AT END OF YEAR

 

$

56,999

 

$

47,117

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited, continued)

for the nine months ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Nine Months Ended

 

 

 

January 31, 

 

 

    

2017

    

2016

 

SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES

 

 

 

 

 

 

 

Distribution reinvestment plan – shares issued

 

$

 —

 

$

3,997

 

Operating partnership distribution reinvestment plan – shares issued

 

 

 —

 

 

130

 

Operating partnership units converted to shares

 

 

548

 

 

980

 

Real estate assets acquired through the issuance of operating partnership units

 

 

 —

 

 

400

 

Increase  to accounts payable included within real estate investments

 

 

(543)

 

 

(4,991)

 

Conversion to equity of notes receivable from noncontrolling interests – consolidated real estate entities

 

 

9,846

 

 

 —

 

Construction debt reclassified to mortgages payable

 

 

10,549

 

 

41,649

 

Decrease in real estate assets in connection with transfer of real estate assets in settlement of debt

 

 

 —

 

 

87,213

 

Decrease in debt in connection with transfer of real estate assets in settlement of debt

 

 

 —

 

 

122,610

 

 

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

 

 

 

 

 

 

 

Cash paid for interest, net of amounts capitalized of $412 and $4,396, respectively

 

$

26,504

 

$

28,990

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (unaudited)

for the nine months ended January 31, 2017 and 2016

NOTE 1 • ORGANIZATION 

Investors Real Estate Trust, collectively with our consolidated subsidiaries (“IRET”, “we” or “us”) is a self-advised real estate investment trust (REIT) focused on the acquisition, development, redevelopment and management of multifamily communities located primarily in select growth markets throughout the Midwest. We have elected to be taxed as a REIT under Sections 856-860 of the Internal Revenue Code of 1986, as amended. As a REIT, we are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income, except for taxes on undistributed REIT taxable income and taxes on the income generated by our taxable REIT subsidiary (“TRS”). Our TRS is subject to corporate federal and state income tax on its taxable income at regular statutory rates. We have considered estimated future taxable income and have determined that there were no material income tax provisions or material net deferred income tax items for our TRS for the nine months ended January 31, 2017 and 2016.

Our properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Idaho, Iowa, Kansas, Montana, Nebraska, South Dakota, Wisconsin and Wyoming. As of January 31, 2017, we held for investment 86 multifamily properties with 12,813 apartment units and 2.7 million net rentable square feet in 30 healthcare and 14 other properties. We held for sale 14 multifamily properties, 22 healthcare properties, 1 retail property and 1 parcel of land as of January 31, 2017. We conduct a majority of our business activities through our 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, we or us 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 our accounts and the accounts of all our subsidiaries in which we maintain a controlling interest, including the Operating Partnership. All intercompany balances and transactions are eliminated in consolidation. Our fiscal year ends April 30th.

Our interest in the Operating Partnership was 88.4% of the limited partnership units of the Operating Partnership (“Units”) as of January 31, 2017 and 88.1% as of April 30, 2016. Under the terms of the Operating Partnership’s Agreement of Limited Partnership, limited partners have the right to require the Operating Partnership to redeem their Units for cash any time following the first anniversary of the date they acquired such Units (“Exchange Right”). When a limited partner exercises the Exchange Right, we have the right, in our sole discretion, to acquire such Units by either making a cash payment or exchanging the Units for our common shares of beneficial interest (“Common Shares”), on a one-for-one basis. The Exchange Right is subject to certain conditions and limitations, including the limited partner may not exercise the Exchange Right more than two times during a calendar year and the limited partner may not exercise for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for less than 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, a greater number of redemptions during a calendar year or other limitations to their Exchange Right.

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 our other operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership and income and expenses.

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UNAUDITED INTERIM FINANCIAL STATEMENTS

Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) 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 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 our 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 accompanying notes thereto should be read in conjunction with the consolidated financial statements and accompanying notes included in our Annual Report on Form 10-K for the fiscal year ended April 30, 2016, as filed with the SEC on June 29, 2016.

RECENT ACCOUNTING PRONOUNCEMENTS

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers. The standard will eliminate the transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 does not apply to lease contracts accounted for under ASC 840, Leases. The ASU is effective for fiscal years beginning after December 15, 2017. We do not expect adoption of this update to have a material impact on our operating results or financial position.

 

In February 2015, the FASB issued ASU 2015-02, Amendments to the Consolidation Analysis. ASU 2015-02 affects reporting entities that are required to evaluate whether they should consolidate certain legal entities. Specifically, the amendments: (i) modify the evaluation of whether limited partnerships and similar legal entities are variable interest entities or voting interest entities, (ii) eliminate the presumption that a general partner should consolidate a limited partnership, (iii) affect the consolidated analysis of reporting entities that are involved with variable interest entities, and (iv) provide a scope exception for certain entities. The ASU is effective for fiscal years beginning after December 15, 2015. We adopted the guidance in ASU 2015-02 as of May 1, 2016, as more fully described in the Variable Interest Entity section below.

 

In April 2015, the FASB issued ASU 2015-03, Simplifying the Presentation of Debt Issuance Costs. ASU 2015-03 requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of the debt liability to which they relate, consistent with debt discounts, as opposed to being presented as assets. The ASU is effective for fiscal years beginning after December 15, 2015. We adopted the guidance in ASU 2015-03 as of May 1, 2016.

 

In April 2015, the FASB issued ASU 2015-05, Customer’s Accounting for Fees Paid in a Cloud Computing Arrangement. Under ASU 2015-05, if a cloud computing arrangement includes a software license, then the customer should account for the software license element of the arrangement consistent with the acquisition of other software licenses. If a cloud computing arrangement does not include a software license, the customer should account for the arrangement as a service contract. The ASU is effective for fiscal years beginning after December 15, 2015. Our adoption of the guidance in ASU 2015-05 did not have a material impact on our operating results or financial position.

 

In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 amends certain aspects of recognition, measurement, presentation and disclosure of financial instruments, including the requirement to measure certain equity investments at fair value with changes in fair value recognized in net income. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We do not expect adoption of this update to have a material impact on our operating results or financial position.

 

 

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In February 2016, the FASB issued ASU 2016-02, Leases. ASU 2016-02 amends existing accounting standards for lease accounting, including by requiring lessees to recognize most leases on the balance sheet and making certain changes to lessor accounting. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2018. We are currently evaluating the impact the new standard may have on our consolidated financial statements.

 

In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting. ASU 2016-09 amends several aspects of the accounting for share-based payment transactions, including the income tax consequences, accrual of compensation cost, classification of awards as either equity or liabilities, and classification on the statement of cash flows. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2016. We are currently evaluating the impact the new standard may have on our consolidated financial statements.

In August 2016, the FASB issued ASU 2016-15, Classification of Certain Cash Receipts and Cash Payments. ASU 2016-15 addresses eight specific cash flow issues with the objective of reducing diversity in practice. The cash flow issues include debt prepayment or debt extinguishment costs and proceeds from the settlement of insurance claims. The ASU is effective for interim and annual reporting periods in fiscal years beginning after December 15, 2017. We are currently evaluating the impact the new standard may have on our consolidated financial statements.

In January 2017, the FASB issued ASU 2017-01, Clarifying the Definition of a Business. ASU 2017-01 clarifies the definition of a business and provides further guidance for evaluating whether a transaction will be accounted for as an acquisition of an asset or a business. ASU 2017-01 is effective for interim and annual periods beginning after December 15, 2017, and early adoption is permitted. Under the ASU, we believe most of our future acquisitions of operating properties will qualify as asset acquisitions and most future transaction costs associated with these acquisitions will be capitalized.

IMPAIRMENT OF LONG-LIVED ASSETS

We periodically evaluate our long-lived assets, including investments in real estate, for impairment indicators. The impairment evaluation is performed on assets by property such that assets for a property form an asset group. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset group and legal and environmental concerns. If indicators exist, we compare the expected future undiscounted cash flows for the long-lived asset group against the carrying amount of that asset group. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset group, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset group. 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, 2017, we recognized impairments of $40.9 million, $5.8 million, $4.7 million, and $2.8 million, respectively, on three multifamily properties and one parcel of unimproved land in Williston, North Dakota, due to deterioration of this energy-impacted market, which resulted in poor leasing activity and declining rental rates during the three months ended July 31, 2016, which should generally be a strong leasing period. These properties were written-down to estimated fair value based on an independent appraisal in the case of one property and management cash flow estimates and market data in the case of the remaining assets. The properties impaired for $40.9 million, $4.7 million, and $2.8 million are owned by joint venture entities in which, at the time of impairment, we had an approximately 71.5%, 60% and 70% interest, respectively, but which are consolidated in our financial statements.

During the nine months ended January 31, 2016, we incurred a loss of approximately $3.8 million due to impairment of one office property, two parcels of land and eight multifamily properties. We recognized impairments of approximately $440,000 on an office property in Eden Prairie, Minnesota; $1.3 million on a parcel of land in Grand Chute, Wisconsin; $1.9 million on eight multifamily properties in St. Cloud, Minnesota; and $162,000 on a parcel of land in River Falls,

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Wisconsin. These properties were written-down to estimated fair value during the first, second and third quarters of fiscal year 2016 based on receipt of individual market offers to purchase and our intent to dispose of the properties or, in the case of the Grand Chute, Wisconsin, the sale listing price and our intent to dispose of the property. The impairment loss of the Eden Prairie, Minnesota property for the first quarter of fiscal year 2016 is reported in discontinued operations. See Note 7 for additional information. 

HELD FOR SALE

We classify properties as held for sale when they meet the U.S. GAAP criteria, which include: (a) management commits to and initiates a plan to sell the asset (disposal group), (b) the sale is probable and expected to be completed within one year under terms that are usual and customary for sales of such assets (disposal groups), and (c) actions required to complete the plan indicate that it is unlikely that significant changes to the plan will be made or that the plan will be withdrawn. Real estate held for sale is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale. Liabilities classified as held for sale consist of liabilities to be included in the transaction and liabilities directly associated with assets that will be transferred in the transaction. Twenty-two healthcare properties, fourteen multifamily properties, one commercial property, and one parcel of land were classified as held for sale at January 31, 2017. Thirty-five healthcare properties, one multifamily property, one industrial property and three parcels of unimproved land were classified as held for sale at April 30, 2016.

COMPENSATING BALANCES AND OTHER INVESTMENTS; HOLDBACKS

We maintain 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, 2017, our compensating balances totaled $2.1 million and consisted of the following:

 

 

 

 

 

Financial Institution

    

 

 

 

Bremer Bank, Saint Paul, MN

 

 

1,285,000

 

Dacotah Bank, Minot, ND

 

 

250,000

 

Peoples State Bank, Velva, ND

 

 

225,000

 

American National Bank, Omaha, NE

 

 

200,000

 

Commerce Bank a Minnesota Banking Corporation

 

 

100,000

 

Total

 

$

2,060,000

 

 

We have a number of mortgage loans under which the lender retains a portion of the loan proceeds or requires a deposit for the payment of construction costs or tenant improvements. The decrease of $1.7 million in lender holdbacks for improvements reflected in the Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2017 is due primarily to the release of loan proceeds to us upon completion of construction and tenant improvement projects, while the increase of approximately $646,000 represents additional amounts retained by lenders for new projects.

IDENTIFIED INTANGIBLE ASSETS AND LIABILITIES AND GOODWILL

Upon acquisition of real estate, we record 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. We amortize 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). There were no new intangible assets or new intangible liabilities added in the nine months ended January 31, 2017. In the nine months ended January 31, 2016, we added $1.3 million in new intangible assets and approximately $101,000 of new intangible liabilities. The weighted average lives of the intangible assets acquired in the nine months ended January 31, 2017 and 2016 are 0 and .8 years, respectively. 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

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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.

Our identified intangible assets and intangible liabilities at January 31, 2017 and April 30, 2016 were as follows:

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

January 31, 2017

    

April 30, 2016

 

Identified intangible assets (included in intangible assets):

 

 

 

 

 

 

 

Gross carrying amount

 

$

6,103

 

$

8,088

 

Accumulated amortization

 

 

(5,372)

 

 

(6,230)

 

Net carrying amount

 

$

731

 

$

1,858

 

 

 

 

 

 

 

 

 

Identified intangible liabilities (included in other liabilities):

 

 

 

 

 

 

 

Gross carrying amount

 

$

157

 

$

159

 

Accumulated amortization

 

 

(71)

 

 

(55)

 

Net carrying amount

 

$

86

 

$

104

 

 

The amortization of acquired below-market leases and acquired above-market leases increased rental income by approximately $1,000 for the three months ended January 31, 2017 and reduced rental income by approximately $3,000 for the three months ended January 31, 2016, and approximately $8,000 and $14,000 for the nine months ended January 31, 2017 and 2016, respectively. 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)

 

2018

 

$

(11)

 

2019

 

 

(20)

 

2020

 

 

(16)

 

2021

 

 

(13)

 

2022

 

 

(6)

 

 

Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was approximately $106,000 and $533,000 for the three months ended January 31, 2017 and 2016, respectively, and $1.1 million for the nine months ended January 31, 2017 and 2016, respectively. 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)

 

2018

 

$

269

 

2019

 

 

170

 

2020

 

 

104

 

2021

 

 

78

 

2022

 

 

25

 

 

The excess of the cost of an acquired property over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill. Our 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. The book value of goodwill as of January 31, 2017 and April 30, 2016 was $1.6 million and $1.7 million, respectively. The annual review at April 30, 2016 indicated no impairment to goodwill and there was no indication of impairment at January 31, 2017.  During the nine months ended January 31, 2017, we disposed of two commercial properties to which goodwill had been assigned, and as a result, approximately $26,000 of goodwill was derecognized. Approximately $26,000 and $17,000 of goodwill is included in assets held for sale at January 31, 2017 and April 30, 2016, respectively. During the nine months ended January 31, 2016, we disposed of eight commercial properties to which goodwill had been assigned, and as a result, approximately $196,000 of goodwill was derecognized.

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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.  On the Condensed Consolidated Statements of Operations, we combined utilities, maintenance, insurance, property management expenses and other property expenses onto a single line called property operating expenses, excluding real estate taxes. We also combined depreciation/amortization related to real estate investments and amortization related to non-real estate investments onto a single line called depreciation and amortization. Additionally on the Condensed Consolidated Statements of Operations, we reclassed acquisition and project costs from other expenses to acquisition and investment related costs. On the Condensed Consolidated Statements of Cash Flows, we moved additions to notes receivable from the cash flow from investing activities section to the cash flows from financing activities section, where it was originally reported in the second quarter of 2017.

We report, in discontinued operations, the results of operations and the related gains or losses of properties that have either been disposed of or classified as held for sale and for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results. As the result of discontinued operations, retroactive reclassifications that change prior period numbers have been made. See Note 7 for additional information. During the fourth quarter of fiscal year 2016, we classified as discontinued operations 34 senior housing properties, of which 8 were sold during the second quarter of fiscal year 2017, 5 were sold in the third quarter of fiscal year 2017, and 21 remained held for sale at January 31, 2017.

PROCEEDS FROM FINANCING LIABILITY

During fiscal year 2014, we sold a non-core assisted living property in exchange for $7.9 million in cash and a $29.0 million contract for deed. The buyer leased the property back to us, and also granted us an option to repurchase the property at a specified price at or prior to July 31, 2018. We accounted for the transaction as a financing liability due to our continuing involvement with the property and recorded the $7.9 million in sales proceeds within other liabilities on the Condensed Consolidated Balance Sheets.  The balance of the liability as of January 31, 2017 was $7.9 million.

VARIABLE INTEREST ENTITY

As discussed in the Recent Accounting Pronouncements section, effective May 1, 2016, we adopted the guidance in ASU 2015-02.  As a result, the Operating Partnership and each of our less than wholly-owned real estate partnerships have been deemed to have the characteristics of a variable interest entity (“VIE”).  However, we were not required to consolidate any previously unconsolidated entities or deconsolidate any previously consolidated entities as a result of the change in classification. Accordingly, there has been no change to the recognized amounts in our condensed consolidated balance sheets and statements of operations or amounts reported in our condensed consolidated statements of cash flows. We determined that an additional six consolidated partnerships, including the Operating Partnership, are VIEs under the new standard because the limited partners are not able to exercise substantive kick-out or participating rights. We are the VIEs primary beneficiary and the partnerships are required to be consolidated on our balance sheet because we have a controlling financial interest in the VIEs, and have both the power to direct the activities of the VIEs that most significantly impact the VIE’s economic performance as well as the obligation to absorb losses or the right to receive benefits from the VIEs that could potentially be significant to the VIEs. Because the Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.

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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. We have no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. Upon the exercise of Exchange Rights, and in our sole discretion, we may issue shares in exchange for Units on a one-for-one basis after a minimum holding period of one year. 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, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share data)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31, 

 

January 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

NUMERATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

Income (loss) from continuing operations – Investors Real Estate Trust

 

$

2,229

 

$

5,495

 

$

(20,259)

 

$

10,836

 

Income from discontinued operations – Investors Real Estate Trust

 

 

20,881

 

 

34,302

 

 

33,326

 

 

50,167

 

Net income (loss) attributable to Investors Real Estate Trust

 

 

23,110

 

 

39,797

 

 

13,067

 

 

61,003

 

Dividends to preferred shareholders

 

 

(2,503)

 

 

(2,879)

 

 

(8,260)

 

 

(8,636)

 

Redemption of preferred shares

 

 

(1,435)

 

 

 —

 

 

(1,435)

 

 

 —

 

Numerator for basic earnings per share – net income available to common shareholders

 

 

19,172

 

 

36,918

 

 

3,372

 

 

52,367

 

Noncontrolling interests – Operating Partnership

 

 

2,525

 

 

4,227

 

 

403

 

 

5,940

 

Numerator for diluted earnings per share

 

$

21,697

 

$

41,145

 

$

3,775

 

$

58,307

 

DENOMINATOR

 

 

 

 

 

 

 

 

 

 

 

 

 

Denominator for basic earnings per share weighted average shares

 

 

121,255

 

 

121,864

 

 

121,175

 

 

123,793

 

Effect of convertible operating partnership units

 

 

16,120

 

 

13,877

 

 

16,229

 

 

13,913

 

Denominator for diluted earnings per share

 

 

137,375

 

 

135,741

 

 

137,404

 

 

137,706

 

(Loss) earnings per common share from continuing operations – Investors Real Estate Trust – basic and diluted

 

$

(0.01)

 

$

0.02

 

$

(0.24)

 

$

0.02

 

Earnings per common share from discontinued operations – Investors Real Estate Trust – basic and diluted

 

 

0.17

 

 

0.28

 

 

0.27

 

 

0.40

 

NET INCOME PER COMMON SHARE – BASIC & DILUTED

 

$

0.16

 

$

0.30

 

$

0.03

 

$

0.42

 

 

 

 

NOTE 4 • EQUITY 

Equity Awards. No shares were issued under an incentive award plan during the third quarter of fiscal years 2017 and 2016. During the second quarter of fiscal year 2017, we issued approximately 121,000 Common Shares, with a total grant-date value of approximately $502,000, under our 2015 Incentive Award Plan, for executive officer share based compensation for future performance. During the first quarter of fiscal year 2017, we issued approximately 378,000 Common Shares, with a total grant-date value of approximately $1.4 million, under our 2015 Incentive Award Plan, for executive officer and trustee share based compensation for future performance. We also issued approximately 59,000 Common Shares, with a total grant-date value of approximately $352,000, under our 2008 Incentive Award Plan, for trustee share based compensation for fiscal year 2016 performance. During the first quarter of fiscal year 2016, we issued approximately 220,000 Common Shares, net of withholding, with a total grant-date value of approximately $1.6 million, under our 2008 Incentive Award Plan, for executive officer and trustee share based compensation for fiscal year 2015 performance. No shares were issued under an incentive award plan during the second quarter of fiscal year 2016.

DRIP. We have implemented a Distribution Reinvestment and Share Purchase Plan (“DRIP”), which provides our common shareholders and the unitholders of the Operating Partnership an opportunity to invest their cash distributions in Common Shares and to purchase additional Common Shares through voluntary cash contributions. A DRIP participant cannot purchase additional Common Shares in excess of $10,000 per month, unless waived by us. We did not issue any waivers during the nine months ended January 31, 2017 and 2016.

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As permitted under the DRIP, starting on October 1, 2015, we changed the source from which Common Shares will be purchased under the DRIP to open market transactions, which are not eligible for purchase price discounts. During the three months ended January 31, 2017 and 2016, no shares were issued under the DRIP.  During the nine months ended January 31, 2017, no shares were issued under the DRIP.  During the nine months ended January 31, 2016, approximately 821,000 Common Shares with a total value included in equity of $5.6 million, and an average price per share after applicable discounts of $6.85 were issued under the DRIP.

Exchange Rights. Pursuant to the exercise of Exchange Rights, during the three months ended January 31, 2017 and 2016, respectively, approximately 194,000 and 27,000 Common Shares were issued in exchange for Units, with a total value of approximately $414,000 and $125,000 included in equity.  During the nine months ended January 31, 2017 and 2016, approximately 252,000 and 180,000 Common Shares were issued in exchange for Units, with a total value of approximately $548,000 and $981,000 included in equity.

 

Redemption of Preferred A. On September 1, 2016, our Board of Trustees authorized the redemption of some or all of the 8.25% Series A Cumulative Redeemable Preferred Shares (“Preferred A Shares”) from time to time, but no later than by December 31, 2016. On November 1, 2016, we delivered notice to holders of the Preferred A Shares that we intended to redeem all 1,150,000 Preferred A Shares at a redemption price equal to $25.00 per share plus any accrued but unpaid distributions per share up to and including the redemption date of December 2, 2016. On December 2, 2016, we completed the redemption of the Preferred A Shares for an aggregate redemption price of $29.2 million, and such shares are no longer deemed outstanding as of such date and were delisted from trading on the New York Stock Exchange.

 

Share Repurchase Program. On December 7, 2016, our Board of Trustees authorized a share repurchase program to repurchase up to $50 million of our Common Shares and/or Series B preferred shares over a one year period. 

Under this program, we may repurchase the shares in open-market purchases including pursuant to Rule 10b5-1 plans, as determined by management and in accordance with the requirements of the Securities and Exchange Commission. The extent to which we repurchase our shares, and the timing of such repurchases, will depend upon a variety of factors, including market conditions, regulatory requirements and other corporate considerations, as determined by the executive management team. The program may be suspended or discontinued at any time.

 

NOTE 5 • SEGMENT REPORTING 

We report our results in two reportable segments, which are aggregations of similar properties: multifamily and healthcare, excluding our senior housing properties, which are classified as held for sale and discontinued operations at January 31, 2017.   

We measure the performance of our segments based on net operating income (“NOI”), which we define as total real estate revenues less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance, property management expenses and other property expenses). During the first quarter of fiscal year 2017, we removed offsite costs associated with property management and casualty-related amounts from our assessment of segment performance as a result of our announced strategic shift to focus solely on our multifamily segment. These expenses were removed from the operating results reviewed by our chief operating decision maker to allow for the assessment of direct property costs in NOI, excluding allocated costs. We believe that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with US GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.

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The revenues and NOI for these reportable segments are summarized as follows for the three and nine month periods ended January 31, 2017 and 2016, 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, 2017

    

Multifamily

    

Healthcare

All Other

    

Amounts Not
Allocated To
Segments
(1)

    

Total

 

Real estate revenue

 

$

36,269

 

$

12,099

$

2,806

 

$

 —

 

$

51,174

 

Real estate expenses

 

 

16,336

 

 

4,216

 

838

 

 

1,403

 

 

22,793

 

Net operating income (loss)

 

$

19,933

 

$

7,883

$

1,968

 

$

(1,403)

 

$

28,381

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,475)

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,130)

 

Acquisition and investment related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(5)

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,037)

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(10,680)

 

Loss on debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,907)

 

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

974

 

Loss before gain on sale of real estate and other investments and income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

(879)

 

Gain on sale of real estate and other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

2,437

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

1,558

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

23,631

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

25,189

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Nine Months Ended January 31, 2017

    

Multifamily

    

Healthcare

All Other

    

Amounts Not
Allocated To
Segments
(1)

    

Total

 

Real estate revenue

 

$

107,559

 

$

35,301

$

8,534

 

 

 —

 

$

151,394

 

Real estate expenses

 

 

46,781

 

 

12,560

 

2,294

 

 

4,365

 

 

66,000

 

Net operating income (loss)

 

$

60,778

 

$

22,741

$

6,240

 

 

(4,365)

 

 

85,394

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

(41,273)

 

Impairment of real estate investments

 

 

 

 

 

 

 

 

 

 

 

 

 

(54,153)

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,438)

 

Acquisition and investment related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(52)

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,705)

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(31,670)

 

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

2,656

 

Loss before gain on sale of real estate and other investments and income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

(52,148)

 

Gain on sale of real estate and other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

11,292

 

Loss from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

(40,856)

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

37,741

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

$

(3,115)

 

(1)

Consists of offsite costs associated with property management and casualty-related amounts, which are excluded in our assessment of segment performance.

 

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(in thousands)

 

Three Months Ended January 31, 2016

    

Multifamily

    

Healthcare

All Other

    

Amounts Not
Allocated To
Segments
(1)

    

 

Total

 

Real estate revenue

 

$

33,425

 

$

11,859

$

3,122

 

$

 —

 

$

48,406

 

Real estate expenses

 

 

14,564

 

 

3,971

 

634

 

 

1,152

 

 

20,321

 

Net operating income (loss)

 

$

18,861

 

$

7,888

$

2,488

 

$

(1,152)

 

 

28,085

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

(12,693)

 

Impairment of real estate investments

 

 

 

 

 

 

 

 

 

 

 

 

 

(162)

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(2,929)

 

Acquisition and investment related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(35)

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(51)

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,151)

 

Loss on debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

 

 

0

 

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

701

 

Income before gain on sale of real estate and other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

3,765

 

Gain on sale of real estate and other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

1,446

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

5,211

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

38,232

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

43,443

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Nine Months Ended January 31, 2016

    

Multifamily

    

Healthcare

All Other

    

Amounts Not
Allocated To
Segments
(1)

    

 

Total

 

Real estate revenue

 

$

97,034

 

$

33,989

$

8,774

 

$

 —

 

$

139,797

 

Real estate expenses

 

 

42,194

 

 

11,287

 

1,863

 

 

3,232

 

 

58,576

 

Net operating income (loss)

 

$

54,840

 

$

22,702

$

6,911

 

$

(3,232)

 

 

81,221

 

Depreciation and amortization

 

 

 

 

 

 

 

 

 

 

 

 

 

(36,315)

 

Impairment of real estate investments

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,320)

 

General and administrative expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,316)

 

Acquisition and investment related costs

 

 

 

 

 

 

 

 

 

 

 

 

 

(433)

 

Other expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,281)

 

Interest expense

 

 

 

 

 

 

 

 

 

 

 

 

 

(25,706)

 

Loss on debt extinguishment

 

 

 

 

 

 

 

 

 

 

 

 

 

(106)

 

Interest and other income

 

 

 

 

 

 

 

 

 

 

 

 

 

1,973

 

Income before gain on sale of real estate and other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

7,717

 

Gain on sale of real estate and other investments

 

 

 

 

 

 

 

 

 

 

 

 

 

1,271

 

Income from continuing operations

 

 

 

 

 

 

 

 

 

 

 

 

 

8,988

 

Income from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

 

 

55,859

 

Net income

 

 

 

 

 

 

 

 

 

 

 

 

$

64,847

 

(1)

Consists of offsite costs associated with property management and casualty-related amounts, which are excluded in our assessment of segment performance.

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Segment Assets and Accumulated Depreciation

 

Segment assets are summarized as follows as of January 31, 2017, and April 30, 2016, along with reconciliations to the condensed consolidated financial statements:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

As of January 31, 2017

    

Multifamily

    

Healthcare

    

All Other

    

Total

 

Segment assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Property owned

 

$

1,245,033

 

$

343,814

 

$

96,976

 

$

1,685,823

 

Less accumulated depreciation

 

 

(222,568)

 

 

(91,287)

 

 

(21,020)

 

 

(334,875)

 

Total property owned

 

$

1,022,465

 

$

252,527

 

$

75,956

 

$

1,350,948

 

Assets held for sale and assets from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

140,226

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

56,999

 

Receivables and other assets

 

 

 

 

 

 

 

 

 

 

 

30,309

 

Development in progress

 

 

 

 

 

 

 

 

 

 

 

11,531

 

Unimproved land

 

 

 

 

 

 

 

 

 

 

 

19,076

 

Total Assets

 

 

 

 

 

 

 

 

 

 

$

1,609,089

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

As of April 30, 2016

    

Multifamily

    

Healthcare

    

All Other

    

Total

 

Segment assets

 

 

 

 

 

 

 

 

 

 

 

 

 

Property owned

 

$

1,243,909

 

$

337,920

 

$

99,642

 

$

1,681,471

 

Less accumulated depreciation

 

 

(209,156)

 

 

(83,558)

 

 

(20,175)

 

 

(312,889)

 

Total property owned

 

$

1,034,753

 

$

254,362

 

$

79,467

 

$

1,368,582

 

Assets held for sale and assets from discontinued operations

 

 

 

 

 

 

 

 

 

 

 

220,537

 

Cash and cash equivalents

 

 

 

 

 

 

 

 

 

 

 

66,698

 

Other investments

 

 

 

 

 

 

 

 

 

 

 

50

 

Receivables and other assets

 

 

 

 

 

 

 

 

 

 

 

26,535

 

Development in progress

 

 

 

 

 

 

 

 

 

 

 

51,681

 

Unimproved land

 

 

 

 

 

 

 

 

 

 

 

20,939

 

Total Assets

 

 

 

 

 

 

 

 

 

 

$

1,755,022

 

 

 

 

NOTE 6 • COMMITMENTS AND CONTINGENCIES

Litigation.  We are not a party to any legal proceedings which are expected to have a material effect on our liquidity, financial position, cash flows or results of operations. We are subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of our 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 our liquidity, financial position, cash flows or results of operations.

Insurance.  We carry insurance coverage on our properties in amounts and types that we believe are customarily obtained by owners of similar properties and are sufficient to achieve our risk management objectives.

Purchase Options.  We have granted options to purchase certain of our properties to tenants 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 our initial cost for the property. As of January 31, 2017, the total investment cost, plus improvements, for the six properties subject to purchase options was $69.7 million, and the total gross rental revenue from these properties was $5.5 million for the nine months ended January 31, 2017.

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 we currently have no knowledge of any material violation of

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environmental laws, ordinances or regulations at any of our properties, there can be no assurance that areas of contamination will not be identified at any of our properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to us.

Restrictions on Taxable Dispositions.  Approximately 47 of our properties, consisting of approximately 762,000 square feet of our combined commercial properties and 4,457 apartment units, are subject to restrictions on our ability to resell in taxable transactions. These restrictions are contained in agreements we entered into with some of the sellers or contributors of the properties, and are effective for varying periods. The real estate investment amount of these properties (net of accumulated depreciation) was $423.3 million at January 31, 2017. We do not believe that these restrictions materially affect the conduct of our business or decisions whether to dispose of these properties during the restriction periods because we generally hold properties for investment purposes, rather than for sale. Historically, where we have deemed it to be in the Company’s and the shareholders’ best interests to dispose of restricted properties, we have done so through tax-deferred transactions under Section 1031 of the Internal Revenue Code.

Exchange Value of Units.  Whenever limited partners of the Operating Partnership exercise their Exchange Rights, we have the right, but not the obligation, to acquire such Units in exchange for either cash or our Common Shares on a one-for-one basis. If Units are exchanged for cash, the amount of cash per Unit is equal to the average of the daily market price of a Common Share for the ten consecutive trading days immediately preceding the date of valuation of the Unit.  As of January 31, 2017 and 2016, the aggregate exchange value of the then-outstanding Units of the Operating Partnership owned by limited partners was approximately $108.5 million and $89.4 million, respectively. All Units receive the same cash distributions as those paid on our Common Shares. 

Joint Venture Buy/Sell Options.  Several of our 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 we buy our partners’ interests. However, from time to time, we have entered into joint venture agreements which contain options compelling us to acquire the interest of the other parties. We currently have one such joint venture, IRET-Minot Apartments, in which our joint venture partner can, for the four-year period from February 6, 2016 through February 5, 2020, compel us to acquire the partner’s interest for a price to be determined in accordance with the provisions of the joint venture agreement.  The joint venture partner’s interest is reflected as a redeemable noncontrolling interest on the Condensed Consolidated Balance Sheets. See Note 11 for additional information.

Tenant Improvements. In entering into leases with commercial tenants, we may commit 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 we are 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, 2017, we are committed to fund $5.6 million in tenant improvements within approximately the next 12 months.

Development Project.  As of January 31, 2017, we had a development project underway during the quarter, the costs for which have been capitalized, as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

    

(in fiscal years)

 

 

    

 

    

Rentable

    

 

 

    

 

 

    

Anticipated

 

 

 

 

 

Square Feet

 

Anticipated

 

Costs as of

 

Construction

 

Project Name and Location

 

Planned Segment

 

or Number of Units

 

Total Cost

 

January 31, 2017(1)

 

Completion

 

Monticello Crossings - Monticello, MN

 

Multifamily

 

202 units

 

$

32,134

 

$

29,345

 

4Q 2017

 

Other

 

n/a

 

n/a

 

 

n/a

 

 

3,161

 

n/a

 

 

 

 

 

 

 

 

 

 

$

32,506

 

 

 

(1)

Amount for Monticello Crossings includes costs related to portions of the development project that were placed into service during the quarters ended October 31, 2016 and January 31, 2017.

This development project is subject to various contingencies, and no assurances can be given that it will be completed within the time frames or on the terms currently expected.

Construction interest capitalized for the three month periods ended January 31, 2017 and 2016, respectively, was approximately $114,000 and $1.0 million for development projects completed and in progress. Construction interest

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capitalized for the nine month periods ended January 31, 2017 and 2016, respectively, was approximately $412,000 and $4.4 million for development projects completed and in progress.

Pending Disposition. We currently have signed sales agreements for the disposition of the following properties. These pending dispositions are subject to various closing conditions and contingencies, and no assurances can be given that the transactions will be completed on the terms currently proposed, or at all:

·

3 senior housing properties, 1 multifamily property and 1 parcel of unimproved land in Minnesota for a total sale price of $50.4 million.

 

NOTE 7 • DISCONTINUED OPERATIONS

We report in discontinued operations the results of operations and any gain or loss on sale of a property or group of properties that has either been disposed of or is classified as held for sale and for which the disposition represents a strategic shift that has or will have a major effect on our operations and financial results. During fiscal year 2016, we determined that our strategic plan to exit the office and retail segments met the criteria for discontinued operations. Accordingly, 48 office properties, 17 retail properties and 1 healthcare property were classified as held for sale and subsequently sold during fiscal year 2016. Additionally, we determined that our strategic decision to exit senior housing, which was a subset of our healthcare segment, met the criteria for discontinued operations and we consequently classified 34 senior housing properties as held for sale and discontinued operations at April 30, 2016. Thirteen of those senior housing properties were sold during the second and third quarters of fiscal year 2017 and the remaining 21 senior housing properties continued to be classified as held for sale and discontinued operations at January 31, 2017.

The following information shows the effect on net income and the gains or losses from the sales of properties classified as discontinued operations for the three and nine months ended January 31, 2017 and 2016:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Three Months Ended

 

Nine Months Ended

 

 

 

January 31, 

 

January 31, 

 

 

    

2017

    

2016

    

2017

    

2016

 

REVENUE

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate rentals

 

$

5,323

 

$

9,968

 

$

15,325

 

$

38,111

 

Tenant reimbursement

 

 

 —

 

 

819

 

 

226

 

 

8,570

 

TRS senior housing revenue

 

 

813

 

 

1,003

 

 

2,602

 

 

3,006

 

TOTAL REVENUE

 

 

6,136

 

 

11,790

 

 

18,153

 

 

49,687

 

EXPENSES

 

 

 

 

 

 

 

 

 

 

 

 

 

Property operating expenses, excluding real estate taxes

 

 

 —

 

 

1,555

 

 

 —

 

 

10,323

 

Real estate taxes

 

 

 —

 

 

876

 

 

 —

 

 

5,665

 

Depreciation and amortization

 

 

 —

 

 

2,331

 

 

16

 

 

11,918

 

Impairment of real estate investments

 

 

 —

 

 

 —

 

 

 —

 

 

440

 

TRS senior housing expenses

 

 

840

 

 

912

 

 

2,393

 

 

2,493

 

TOTAL EXPENSES

 

 

840

 

 

5,674

 

 

2,409

 

 

30,839

 

Operating income

 

 

5,296

 

 

6,116

 

 

15,744

 

 

18,848

 

Interest expense(1)

 

 

(1,200)

 

 

(4,825)

 

 

(3,969)

 

 

(16,993)

 

Gain/loss on extinguishment of debt(1)

 

 

 —

 

 

36,456

 

 

(72)

 

 

29,336

 

Other income

 

 

 —

 

 

154

 

 

 —

 

 

427

 

Income from discontinued operations before gain on sale

 

 

4,096

 

 

37,901

 

 

11,703

 

 

31,618

 

Gain on sale of discontinued operations

 

 

19,535

 

 

331

 

 

26,038

 

 

24,241

 

INCOME FROM DISCONTINUED OPERATIONS

 

$

23,631

 

$

38,232

 

$

37,741

 

$

55,859

 

(1)

Interest expense for the three and nine months ended January 31, 2016 includes $1.6 million and $4.7 million, respectively of default interest related to a $122.6 million non-recourse loan by one of our subsidiaries. In the third quarter of fiscal year 2016, ownership of the nine properties serving as collateral on the loan was transferred to the mortgage lender and the debt obligation and accrued interest was removed from our balance sheet.

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The following information reconciles the carrying amounts of major classes of assets and liabilities of the discontinued operations to assets and liabilities held for sale that are presented separately on the Condensed Consolidated Balance Sheets:

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

January 31, 2017

    

April 30, 2016

 

Carrying amounts of major classes of assets included as part of discontinued operations

 

 

 

 

 

 

 

Property owned and intangible assets, net of accumulated depreciation and amortization

 

$

111,335

 

$

189,900

 

Receivable arising from straight-lining of rents

 

 

5,278

 

 

9,805

 

Accounts receivable

 

 

476

 

 

1,707

 

Prepaid and other assets

 

 

68

 

 

43

 

Tax, insurance and other escrow

 

 

711

 

 

670

 

Property and equipment

 

 

475

 

 

479

 

Goodwill

 

 

18

 

 

18

 

Total major classes of assets of the discontinued operations

 

 

118,361

 

 

202,622

 

Other assets included in the disposal group classified as held for sale

 

 

21,865

 

 

17,915

 

Total assets of the disposal group classified as held for sale on the balance sheet

 

$

140,226

 

$

220,537

 

 

 

 

 

 

 

 

 

Carrying amounts of major classes of liabilities included as part of discontinued operations

 

 

 

 

 

 

 

Accounts payable and accrued expenses

 

$

356

 

$

810

 

Mortgages payable

 

 

39,839

 

 

67,940

 

Other

 

 

7,900

 

 

7,900

 

Total major classes of liabilities of the discontinued operations

 

 

48,095

 

 

76,650

 

Other liabilities included in the disposal group classified as held for sale

 

 

6,196

 

 

838

 

Total liabilities of the disposal group classified as held for sale on the balance sheet

 

$

54,291

 

$

77,488

 

 

 

NOTE 8 • ACQUISITIONS, DEVELOPMENTS PLACED IN SERVICE AND DISPOSITIONS

PROPERTY ACQUISITIONS

We added no new real estate properties to our portfolio through property acquisitions during the three and nine months ended January 31, 2017, and the three months ended January 31, 2016. We expensed approximately $162,000 of transaction costs related to the acquisitions in the nine months ended January 31, 2016. Our acquisitions during the nine months ended January 31, 2016 are detailed below.

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Nine Months Ended January 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

Total

 

 

Form of Consideration

 

 

Investment Allocation

 

 

    

Date

    

Acquisition

 

 

 

    

    

 

 

 

 

 

 

    

 

 

    

Intangible

 

Acquisitions

    

Acquired

    

Cost

  

  

Cash

    

Units(1)

  

  

Land

    

Building

    

Assets

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

74 unit - Gardens - Grand Forks, ND

 

2015-09-10

 

$

9,250

 

 

$

8,850

 

$

400

 

 

$

518

 

$

8,672

 

$

60

 

276 unit - GrandeVille at Cascade Lake - Rochester, MN

 

2015-10-29

 

 

56,000

 

 

 

56,000

 

 

 —

 

 

 

5,003

 

 

50,363

 

 

634

 

 

 

 

 

 

65,250

 

 

 

64,850

 

 

400

 

 

 

5,521

 

 

59,035

 

 

694

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

27,819 sq ft Lakeside Medical Plaza - Omaha, NE

 

2015-08-20

 

 

6,500

 

 

 

6,500

 

 

 —

 

 

 

903

 

 

5,109

 

 

488

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Property Acquisitions

 

 

 

$

71,750

 

 

$

71,350

 

$

400

 

 

$

6,424

 

$

64,144

 

$

1,182

 

(1)

Value of Units of the Operating Partnership at the acquisition date.

Acquisitions in the nine months ended January 31, 2017 and 2016 are immaterial to our real estate portfolio both individually and in the aggregate, and consequently no proforma information is presented. The results of operations from acquired properties are included in the Condensed Consolidated Statements of Operations as of their acquisition date. The revenue and net income of our acquisitions in the nine months ended January 31, 2017 and 2016, respectively, (excluding development projects placed in service) are detailed below.

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

Nine Months Ended January 31,

    

2017

    

2016

 

Total revenue

 

$

 —

 

$

1,969

 

Net loss

 

$

 —

 

$

(62)

 

 

 DEVELOPMENT PROJECTS PLACED IN SERVICE

The Operating Partnership placed $72.4 million and $136.8 million of development projects in service during the nine months ended January 31, 2017 and 2016, respectively, as detailed below.

Nine Months Ended January 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

Date Placed

    

 

 

    

 

 

    

Development

 

Development Projects Placed in Service(1)

 

in Service

 

Land

 

Building

 

Cost

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

241 unit - 71 France - Edina, MN(2)

 

2016-05-01

 

$

4,721

 

$

67,642

 

$

72,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Development Projects Placed in Service

 

 

 

$

4,721

 

$

67,642

 

$

72,363

 

(1)

Development projects that are placed in service in phases are excluded from this table until the entire project has been placed in service. See Note 6 for additional information on the Monticello Crossings project, which was partially placed in service during the nine months ended January 31, 2017.

(2)

Costs paid in prior fiscal years totaled $70.9 million. Additional costs incurred in fiscal year 2017 totaled $1.5 million, for a total project cost at January 31, 2017 of $72.4 million. The project is owned by a joint venture entity in which we currently have an approximately 52.6% interest. The joint venture is consolidated in our financial statements.

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Nine Months Ended January 31, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

Date Placed

    

 

 

    

 

 

    

Development

 

Development Projects Placed in Service 

 

in Service

 

Land

 

Building

 

Cost

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

72 unit - Chateau II - Minot, ND (1)

 

2015-06-01

 

$

240

 

$

14,401

 

$

14,641

 

288 unit - Renaissance Heights - Williston, ND(2)

 

2015-07-27

 

 

3,080

 

 

59,371

 

 

62,451

 

 

 

 

 

 

3,320

 

 

73,772

 

 

77,092

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

57,624 sq ft Edina 6565 France SMC III - Edina, MN(3)

 

2015-06-01

 

 

 —

 

 

32,725

 

 

32,725

 

70,756 sq ft PrairieCare Medical - Brooklyn Park, MN(4)

 

2015-09-08

 

 

2,610

 

 

21,748

 

 

24,358

 

 

 

 

 

 

2,610

 

 

54,473

 

 

57,083

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

7,963 sq ft Minot Southgate Retail - Minot, ND(5)

 

2015-10-01

 

 

889

 

 

1,734

 

 

2,623

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Development Projects Placed in Service

 

 

 

$

6,819

 

$

129,979

 

$

136,798

 

(1)

Costs paid in prior fiscal years totaled $12.3 million. Additional costs paid in fiscal year 2016 totaled $2.3 million, for a total project cost at January 31, 2016 of $14.6 million.

(2)

Costs paid in prior fiscal years totaled $57.7 million. Additional costs paid in fiscal year 2016 totaled $4.8 million, for a total project cost at January 31, 2016 of $62.5 million. The project is owned by a joint venture entity in which we currently have an approximately 86.6% interest. The joint venture is consolidated in our financial statements. An impairment charge of $36.7 million was recorded for this property in the first quarter of fiscal year 2017. See Note 2 for additional information.

(3)

Costs paid in prior fiscal years totaled $20.8 million. Additional costs paid in fiscal year 2016 totaled $11.9 million, for a total project cost at January 31, 2016 of $32.7 million.

(4)

Costs paid in prior fiscal years totaled $17.3 million. Additional costs paid in fiscal year 2016 totaled $7.1 million, for a total project cost at January 31, 2016 of $24.4 million.

(5)

Costs paid in prior fiscal years totaled $2.1 million. Additional costs paid in fiscal year 2016 totaled approximately $500,000, for a total project cost at January 31, 2016 of $2.6 million.

 

PROPERTY DISPOSITIONS

During the third quarter of fiscal year 2017, we sold one retail property and five healthcare properties for a total sales price of $73.9 million. During the third quarter of fiscal year 2016, we sold 3 retail properties for a total sales price of $3.5 million and transferred ownership of nine office properties pursuant to a deed in lieu transaction. The following table details our dispositions during the nine months ended January 31, 2017 and 2016:

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Nine Months Ended January 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

Date

    

 

 

    

Book Value

    

 

 

 

Dispositions

 

Disposed

 

Sales Price

 

and Sales Cost

 

Gain/(Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

189,244 sq ft Idaho Spring Creek Senior Housing Portfolio(1)

 

2016-10-31

 

$

43,900

 

$

37,397

 

$

6,503

 

426,652 sq ft 5 Edgewood Vista Senior Housing Properties(2)

 

2017-01-18

 

 

69,928

 

 

50,393

 

 

19,535

 

 

 

 

 

 

113,828

 

 

87,790

 

 

26,038

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

195,075 sq ft Stone Container - Fargo, ND

 

2016-07-25

 

 

13,400

 

 

4,418

 

 

8,982

 

28,528 sq ft Grand Forks Carmike - Grand Forks, ND

 

2016-12-29

 

 

4,000

 

 

1,563

 

 

2,437

 

 

 

 

 

 

17,400

 

 

5,981

 

 

11,419

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unimproved Land

 

 

 

 

 

 

 

 

 

 

 

 

Georgetown Square Unimproved Land - Grand Chute, WI

 

2016-05-06

 

 

250

 

 

274

 

 

(24)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Property Dispositions

 

 

 

$

131,478

 

$

94,045

 

$

37,433

 

(1)

The properties included in this portfolio disposition are: Spring Creek American Falls, Spring Creek Boise, Spring Creek Eagle, Spring Creek Fruitland, Spring Creek Fruitland Unimproved, Spring Creek Meridian, Spring Creek Overland, Spring Creek Soda Springs and Spring Creek Ustick.

(2)

The properties included in this portfolio disposition are: Edgewood Vista Bismarck, Edgewood Vista Brainerd, Edgewood Vista East Grand Forks, Edgewood Vista Fargo and Edgewood Vista Spearfish.

Nine Months Ended January 31, 2016 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

Date

    

 

    

Book Value

    

 

 

 

Dispositions

 

Disposed

 

Sales Price

 

and Sales Cost

 

Gain/(Loss)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other

 

 

 

 

 

 

 

 

 

 

 

 

117,144 sq ft Thresher Square – Minneapolis, MN

 

2015-05-18

 

$

7,000

 

$

7,175

 

$

(175)

 

2,549,222 sq ft Office Sale Portfolio(1)

 

2015-08-03

 

 

250,000

 

 

231,537

 

 

18,463

 

420,216 sq ft Mendota Office Center Portfolio – Mendota Heights, MN(2)

 

2015-08-12

 

 

40,000

 

 

41,574

 

 

(1,574)

 

1,027,208 sq ft Retail Sale Portfolio(3)

 

2015-09-30

 

 

78,960

 

 

71,913

 

 

7,047

 

48,700 sq ft Eden Prairie 6101 Blue Circle Drive – Eden Prairie, MN

 

2015-10-19

 

 

2,900

 

 

2,928

 

 

(28)

 

8,526 sq ft Burnsville I Strip Center – Burnsville, MN

 

2015-12-23

 

 

1,300

 

 

913

 

 

387

 

4,800 sq ft Pine City C-Store – Pine City, MN

 

2016-01-08

 

 

300

 

 

355

 

 

(55)

 

11,003 sq ft Minot Plaza – Minot, ND

 

2016-01-19

 

 

1,854

 

 

393

 

 

1,461

 

937,518 sq ft 9-Building Office Portfolio(4)(5)

 

2016-01-29

 

 

122,610

(5)  

 

86,154

(5)  

 

36,456

(5)

 

 

 

 

 

 

 

 

 

 

 

 

 

Total Property Dispositions

 

 

 

$

504,924

 

$

442,942

 

$

61,982

 

(1)

The properties included in this portfolio disposition are: 610 Business Center, 7800 West Brown Deer Road, Ameritrade, Barry Pointe Office Park, Benton Business Park, Brenwood, Brook Valley I, Crosstown Centre, Golden Hills Office Center, Granite Corporate Center, Great Plains, Highlands Ranch I, Highlands Ranch II, Interlachen Corporate Center, Intertech Building, Minnesota National Bank, Northpark Corporate Center, Omaha 10802 Farnam Dr, Plaza VII, Plymouth 5095 Nathan Lane, Prairie Oak Business Center, Rapid City 900Concourse Drive, Spring Valley IV, Spring Valley V, Spring Valley X, Spring Valley XI, Superior Office Building, TCA Building, Three Paramount Plaza, UHC Office, US Bank Financial Center, Wells Fargo Center, West River Business Park and Westgate.

(2)

The properties included in this portfolio disposition are: Mendota Office Center I, Mendota Office Center II, Mendota Office Center III, Mendota Office Center IV and American Corporate Center.

(3)

The properties included in this portfolio disposition are: Mendota Office Center I, Mendota Office Center II, Mendota Office Center III,

Mendota Office Center IV and American Corporate Center.

(4)

The properties included in this portfolio disposition are: Champlin South Pond, Chan West Village, Duluth 4615 Grand, Duluth Denfeld

Retail, Forest Lake Auto, Forest Lake Westlake Center, Grand Forks Medpark Mall, Jamestown Buffalo Mall, Jamestown Business Center,

Lakeville Strip Center, Monticello C Store & vacant land, Omaha Barnes & Noble, Pine City Evergreen Square, Rochester Maplewood

Square and St. Cloud Westgate.

(5)

On January 29, 2016, we transferred ownership of nine properties to the mortgage lender on a $122.6 million non-recourse loan and the debt obligation and accrued interest from our balance sheet. The properties had an estimated fair value of $89.3 million on the transfer date. Upon completion of this transfer, we recognized a gain on extinguishment of debt of $36.5 million, representing the difference between the loan and accrued interest payable extinguished over the carrying value of the properties, cash, accounts payable and accounts receivable transferred as of the transfer date and related closing costs.

 

 

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NOTE 9 • MORTGAGES PAYABLE AND LINE OF CREDIT

Most of the properties we own serve as collateral for separate mortgage loans on single properties or groups of properties. The majority of these mortgages payable are non-recourse to us, 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 3.02% to 7.94%, and the mortgages have varying maturity dates from the current fiscal year through July 1, 2036. As of January 31, 2017, our management believes there are no material defaults or material compliance issues in regard to any mortgages payable.

Of the mortgages payable, including mortgages on properties held for sale, the balances of fixed rate mortgages totaled $658.2 million at January 31, 2017 and $689.3 million at April 30, 2016. The balances of variable rate mortgages totaled $81.3 million and $196.8 million as of January 31, 2017 and April 30, 2016, respectively. We do not utilize derivative financial instruments to mitigate our exposure to changes in market interest rates. Most of the fixed rate mortgages have substantial pre-payment penalties. As of January 31, 2017, the weighted average rate of interest on our mortgage debt was 4.74%, compared to 4.54% on April 30, 2016. The aggregate amount of required future principal payments on mortgages payable as of January 31, 2017, is as follows:

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

Mortgages

 

Mortgages

 

 

 

 

on Properties

 

on Properties

 

 

 

 

Held for

 

Held for

 

Year Ended April 30,

 

 

Investment

 

Sale

 

2017 (remainder)

 

$

11,847

$

30,477

 

2018

 

 

47,510

 

819

 

2019

 

 

79,107

 

2,326

 

2020

 

 

95,092

 

668

 

2021

 

 

137,880

 

711

 

Thereafter

 

 

322,513

 

10,588

 

Total payments

 

$

693,949

$

45,589

 

In addition to the individual mortgage loans comprising our $739.5 million of mortgage indebtedness, we also had a revolving, multi-bank line of credit with First International Bank and Trust, Watford City, North Dakota, as lead bank, which had, during the third quarter of fiscal year 2017, lending commitments of $100.0 million (“FIB Line of Credit”) and our Operating Partnership had a revolving, multi-bank line of credit with the Bank of Montreal as administrative agent, which had, as of January 31, 2017, lending commitments of $250.0 million (“BMO Line of Credit”). These lines of credit are not included in our mortgage indebtedness total.

On January 31, 2017, we repaid the FIB Line of Credit in full in the amount of $17.5 million, along with any other fees, and terminated the FIB Line of Credit. During the third quarter of fiscal year 2017, the FIB Line of Credit was secured by mortgages on 17 properties, had an interest rate of 5.00% and a minimum outstanding principal balance requirement of $17.5 million. Under the terms of the FIB Line of Credit, properties could be added and removed from the collateral pool with the agreement of the lenders. Participants in the FIB Line of Credit included, in addition to First International Bank, the following financial institutions: The Bank of North Dakota, First Western Bank and Trust, Dacotah Bank, Highland Bank, American State Bank & Trust Company, Town & Country Credit Union, WoodTrust Bank, United Community Bank and United Bankers’ Bank. The FIB Line of Credit included covenants and restrictions requiring us to achieve on a fiscal and calendar quarter basis a debt service coverage ratio on borrowing base collateral of 1.25x in the aggregate and 1.00x on individual assets in the collateral pool. We were also required to maintain minimum depository account(s) totaling $6.0 million with First International Bank, of which $1.5 million was to be held in a non-interest bearing account. On January 31, 2017, we repaid the FIB Line of Credit in full in the amount of $17.5 million, along with any other fees, and terminated the FIB Line of Credit.

On January 31, 2017, our Operating Partnership entered into a credit agreement for the unsecured, variable interest rate BMO Line of Credit. The BMO Line of Credit contains a $250 million accordion option, which exercise is subject to the satisfaction of certain conditions. However, the maximum borrowing capacity of the BMO Line of Credit will be based on the value of an unencumbered asset pool (“UAP”). The UAP may not consist of less than 15 properties that meet

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certain eligibility criteria, and eligible properties may be added and removed from the UAP subject to the satisfaction of certain conditions. The BMO Line of Credit is guaranteed, jointly and severally, by us, the general partner of our Operating Partnership and each subsidiary that owns a UAP property. It will accrue interest at a rate based either on a margin percentage over the Lender’s Base Rate, ranging from 0.6% to 1.25%, or on a margin percentage over LIBOR, ranging from 1.6% to 2.25%, based on our total leverage ratio. The BMO Line of Credit has a termination date of January 31, 2021, which may be extended for an additional one year period subject to the satisfaction of certain conditions.  The line also requires the payment of customary fees and contains covenants, representations, warranties and events of default customary for credit facilities of this type, including a covenant on a fiscal quarterly-end basis that the consolidated leverage ratio will not be greater than 0.60 to 1.00. Participants, as of January 31, 2017, included the following financial institutions: BMO Harris Bank N.A., KeyBank, National Association, PNC Bank, National Association, Royal Bank of Canada, U.S. Bank National Association, Associated Bank, National Association, Bank of North Dakota and Raymond James Bank, N.A.; with KeyBank, National Association and PNC Bank, National Association as syndication agents and BMO Capital Markets Corp., Keybanc Capital Markets Inc. and PNC Capital Markets, LLC as joint lead arrangers and joint book runners. As of January 31, 2017, the line had a credit limit based on the UAP of $174.0 million, of which $157.0 million was drawn on the line, consisting of $40.0 million at an interest rate of 4.50% and $117.0 million at an interest rate of 2.53%. The funds were used primarily to repay the FIB Line of Credit and any outstanding fees, and to repay existing debt encumbering the 26 properties that were included in the UAP as of the same date. As of January 31, 2017, we believe we and our Operating Partnership were in compliance with the covenants contained in the BMO Line of Credit.

NOTE 10 • FAIR VALUE MEASUREMENTS

ASC 820, Fair Value Measurement and Disclosures defines and establishes a framework for measuring fair value.  The objective of fair value is to determine the price that would be received upon the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (the exit price). ASC 820 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three levels, as follows: 

Level 1:  Quoted prices in active markets for identical assets

Level 2:  Significant other observable inputs

Level 3:  Significant unobservable inputs

Fair value estimates may be different than the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.

Fair Value Measurements on a Recurring Basis

We had no assets or liabilities recorded at fair value on a recurring basis at January 31, 2017 and April 30, 2016.

Fair Value Measurements on a Nonrecurring Basis

There were no non-financial assets and liabilities measured at fair value on a nonrecurring basis at January 31, 2017. Non-financial assets measured at fair value on a nonrecurring basis at April 30, 2016 consisted of real estate held for sale that was written-down to estimated fair value during fiscal year 2016. See Note 2 for additional information on

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impairment losses recognized during fiscal years 2017 and 2016. The aggregate fair value of these assets by their levels in the fair value hierarchy is as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

    

Total

    

Level 1

    

Level 2

    

Level 3

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

April 30, 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate held for sale

 

$

6,650

 

$

 —

 

$

 —

 

$

6,650

 

As of April 30, 2016, we estimated fair value on two properties held for sale based upon receipt of individual market offers and our intent to dispose of the properties. 

Financial Assets and Liabilities Not Measured at Fair Value

The following methods and assumptions were used to estimate the fair value of each class of financial assets and liabilities. The fair values of our financial instruments approximate their carrying amount in the consolidated financial statements except for debt.

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. 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 relevant treasury interest rates plus credit spreads (Level 2).

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 relevant treasury interest rates plus credit spreads (Level 2).

The estimated fair values of our financial instruments as of January 31, 2017 and April 30, 2016, are as follows:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

January 31, 2017

 

April 30, 2016

 

 

 

Carrying Amount

 

Fair Value

 

Carrying Amount

 

Fair Value

 

FINANCIAL ASSETS

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

56,999

 

$

56,999

 

$

66,698

 

$

66,698

 

FINANCIAL LIABILITIES

 

 

 

 

 

 

 

 

 

 

 

 

 

Other debt

 

 

39,438

 

 

39,438

 

 

82,026

 

 

82,026

 

Lines of credit

 

 

157,000

 

 

157,000

 

 

17,500

 

 

17,500

 

Mortgages payable

 

 

693,949

 

 

695,495

 

 

817,324

 

 

866,649

 

Mortgages payable related to assets held for sale

 

 

53,489

 

 

53,321

 

 

68,824

 

 

78,690

 

 

NOTE 11 • REDEEMABLE NONCONTROLLING INTERESTS

Redeemable noncontrolling interests on the Condensed Consolidated Balance Sheets represent the noncontrolling interest in joint ventures in which our unaffiliated partner, at its election, could require us 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 on the Condensed Consolidated Balance Sheets. We currently have one joint venture, IRET-Minot Apartments, LLC, in which our joint venture partner can, for the four-year period from February 6, 2016 through February 5, 2020, compel us to acquire the partner’s interest for a price to be determined in accordance with the provisions of the joint venture agreement. IRET-

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Minot Apartments, LLC owns the Commons and Landing at Southgate property in Minot, ND. Below is a table reflecting the activity of the redeemable noncontrolling interests.

 

 

 

 

 

 

    

(in thousands)

 

Balance at April 30, 2016

 

$

7,522

 

Contributions

 

 

500

 

Conversion of notes payable to IRET equity

 

 

(420)

 

Net income

 

 

(302)

 

Balance at January 31, 2017

 

$

7,300

 

 

 

 

NOTE 12 • SHARE BASED COMPENSATION

Share based awards are provided to officers, non-officer employees and trustees under our 2015 Incentive Plan approved by shareholders on September 15, 2015, which allows for awards in the form of cash and unrestricted and restricted Common Shares, up to an aggregate of 4,250,000 shares, over the ten year period in which the plan will be in effect. Through January 31, 2017, awards under the 2015 Incentive Plan consisted of cash and restricted and unrestricted Common Shares.

Prior to the approval of our 2015 Incentive Plan, share based awards were provided to officers, non-officer employees and trustees under the our 2008 Incentive Award Plan, which was approved by shareholders on September 16, 2008, which allowed for awards in the form of cash and unrestricted and restricted Common Shares, up to an aggregate of 2,000,000 shares, over the period in which the plan will be in effect. Through January 31, 2017, awards under the 2008 Incentive Award Plan consisted of cash and restricted and unrestricted Common Shares.

Long-Term Incentive Plan

Under the 2008 Incentive Award Plan, our officers and non-officer employees could earn share awards under the Long-Term Incentive Program (“LTIP”) adopted pursuant to the plan, which was a backward-looking program that measured performance over a one-year performance period beginning on the first day of each fiscal year. Such awards were payable to the extent deemed earned in shares, 50% of which vested on the last day of the performance period and 50% of which vested on the first anniversary of the end of the performance period. Such awards utilized the sole performance metric of the three-year average of the annual absolute total shareholder return (“TSR”).

Under the 2015 Incentive Plan, our officers and non-officer employees may earn share awards under a revised long-term incentive program, a forward-looking program that measures long-term performance over the stated performance period. Such awards are payable to the extent deemed earned in shares. The terms of the long-term incentive awards granted under the revised program may vary from year to year.

Fiscal Year 2017 LTIP Awards

Awards granted on June 22, 2016 consist of time-based restricted share awards and performance restricted share awards for 45,651 and 273,901 shares, respectively, that are classified as equity awards. The time-based restricted share awards vest as to one-third of the shares on each June 22, 2017, May 1, 2018 and May 1, 2019.  We recognize compensation expense associated with the time-based restricted share awards ratably over the requisite service periods.

The performance restricted share awards are earned based on our TSR as compared to the MSCI US REIT Index over a forward looking three-year period. The maximum number of shares that are eligible to be earned are the shares that were granted. Earned awards (if any) will fully vest as of the last day of the measurement period. These awards have market conditions in addition to service conditions that must be met for the awards to vest. We recognize compensation expense ratably based on the grant date fair value, as determined using the Monte Carlo valuation model, and regardless of whether the market conditions are achieved and the performance restricted share awards ultimately vest. Therefore, previously recorded compensation expense is not adjusted in the event that the market conditions are not achieved. We based the expected volatility on the historical volatility of our daily closing share price. We based the risk-free interest rate on the interest rates on U.S. treasury bonds with a maturity equal to the remaining performance period of the award. We based the expected term on the performance period of the performance restricted share award. The assumptions used

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to value the performance restricted share awards were an expected volatility of 23.8%, a risk-free interest rate of 0.86% and an expected life of 2.85 years. The share price at the grant date, June 22, 2016, was $6.24. 

Awards granted on August 8, 2016 consist of time-based restricted share awards and performance restricted share awards for 43,549 and 77,243 shares, respectively, that are classified as equity awards. Of the time-based awards, 12,874 vest as to one-third of the shares on each August 8, 2017, May 1, 2018 and May 1, 2019.  The remaining 30,675 time-based awards vest as to one-third of the shares on each August 8, 2017, August 8, 2018 and August 8, 2019.

 

The assumptions used to value the performance restricted awards granted on August 8, 2016 were an expected volatility of 24.0%, a risk-free interest rate of 0.83% and an expected life of 2.72 years. We based the expected volatility on the historical volatility of our daily closing price. The share price at the grant date, August 8, 2016, was $6.57.

 

Trustee Awards

We award share-based compensation to our non-management trustees on an annual basis. Awards for 59,000 shares granted on June 22, 2016 consisted of time-based restricted share awards that vest on May 1, 2017. We recognize compensation expense associated with the time-based restricted share awards ratably over the requisite service periods.

Total Compensation Expense

Share-based compensation expense recognized in the consolidated financial statements for all outstanding share based awards was approximately $562,000 and $787,000 for the three months ended January 31, 2017 and 2016, respectively, and approximately $1.4 million and $1.4 million for the nine months ended January 31, 2017 and 2016, respectively.

NOTE 13 • SUBSEQUENT EVENTS 

Common and Preferred Share Distributions. On March 7, 2017, our Board of Trustees declared the following distributions:

 

 

 

 

 

 

 

 

 

 

    

Quarterly Amount

    

 

    

 

 

Class of shares/units

 

per Share or Unit

 

Record Date

 

Payment Date

 

Common shares and limited partnership units

 

$

0.0700

 

March 20, 2017

 

April 3, 2017

 

Preferred shares:

 

 

 

 

 

 

 

 

Series B

 

$

0.4968

 

March 20, 2017

 

March 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Completed Dispositions.  On February 1, 2017, we sold five senior housing properties for a sale price of $49.6 million. On February 15, 2017, we sold nine senior housing properties for a sale price of $30.7 million. On March 1, 2017, we sold four senior housing properties for a sale price of $35.3 million. On March 6, 2017, we sold a healthcare property in for a sale price of $20.7 million.

 

 

 

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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 our audited financial statements for the fiscal year ended April 30, 2016, which are included in our Form 10-K filed with the SEC on June 29, 2016.

Forward Looking Statements: This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements, which may be identified by the use of words such as “expects,” “plans,” “estimates,” “anticipates,” “projects,” “intends,” “believes,” “outlook” and similar expressions that do not relate to historical matters, specifically including our future plans, anticipated operating results, anticipated market conditions, and anticipated timing of properties becoming same-store properties, among others, are based on our expectations, forecasts and assumptions at the time. Such statements involve known and unknown risks, uncertainties and other factors that may cause actual results to differ materially from those expressed or implied in such forward-looking statements.

 

Such risks, uncertainties and other factors that might cause such differences include, but are not limited to: intentions and expectations regarding future distributions on common shares and units; changes in operating costs; fluctuations in interest rates; adverse capital and credit market conditions that might affect our access to various sources of capital and cost of capital; ability to manage our current debt levels and repay or refinance its indebtedness upon maturity or other payment dates; ability to maintain financial covenant compliance under our debt agreements; adequate insurance coverage; the effect of government regulation; delays or inability to obtain necessary governmental permits and authorizations; changes in general and local economic and real estate market conditions; changes in demand for our properties that may result in lower than expected occupancy and/or rental rates; ability to acquire quality properties in targeted markets; ability to successfully dispose of certain assets; competition for tenants from similar competing properties; ability to attract and retain skilled personnel; cyber-intrusion; abandonment of development or redevelopment opportunities for which we have already incurred costs; delays in completing development, redevelopment and/or lease up of properties and increased costs; ability to maintain effective internal controls over financial reporting and disclosure controls and procedures; and those risks and uncertainties detailed from time to time in our filings with the Securities and Exchange Commission, including our Form 10-K for the fiscal year ended April 30, 2016 and subsequent quarterly reports on Form 10-Q. We assume no obligation to update or supplement forward-looking statements that become untrue because of subsequent events.

 

Overview

We are a self-advised equity REIT focused on the acquisition, development, redevelopment and management of multifamily communities located primarily in select growth markets throughout the Midwest. As of January 31, 2017, we owned interest in 130 properties that were held for investment, consisting of: (1) 86 multifamily properties, containing 12,813 apartment units, and (2) 44 commercial properties, including 30 healthcare properties, containing a total of approximately 2.7 million net rentable square feet, and having a total real estate investment amount net of accumulated depreciation of $328.5 million. We held for sale 14 multifamily properties, 22 healthcare properties, 1 retail property and 1 parcel of land as of January 31, 2017. We conduct a majority of our business activities through our Operating Partnership, as well as through a number of other consolidated subsidiary entities.

Our primary source of income and cash is rents associated with multifamily and commercial leases. Our business objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is implemented by growing income-producing assets in desired geographical markets in real estate classes we believe will provide a consistent return on investment for our shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.

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

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could differ from those estimates. A summary of our critical accounting policies is included in our Form 10-K for the fiscal year ended April 30, 2016, filed with the SEC on June 29, 2016, under the section titled “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, 2017.

Third Quarter Activities

Summarized below are transactions that occurred during the third quarter of our fiscal year 2017:

·

As part of our strategic plan to sell our senior housing portfolios, we disposed of five senior housing properties for a sale price totaling $69.9 million.

·

We disposed of a retail property in Grand Forks, ND, for a sale price of $4.0 million.

·

Our Operating Partnership entered into a Credit Agreement providing for an unsecured, variable interest rate, syndicated revolving line of credit with an initial aggregate credit commitment of $250.0 million.

·

We redeemed all 1,150,000 8.25% Series A Cumulative Redeemable Preferred Shares for an aggregate redemption price of $29.164 million.

Same-store and Non-same-store Properties

Throughout this Quarterly Report on Form 10-Q, we have provided certain information on a same-store and non-same-store properties basis. Information provided on a same-store properties basis includes the results of properties that we have owned and operated for the entirety of both periods being compared except for properties for which significant redevelopment or expansion occurred during either of the periods being compared and properties sold or classified as held for sale, and which, in the case of development or re-development properties, have achieved a target level of occupancy of 90% for multifamily properties and 85% for healthcare and other properties.

For the comparison of the three and nine months ended January 31, 2017 and 2016, all or a portion of 50 properties were non-same-store, of which 12 were redevelopment or in-service development properties. 

While there are judgments to be made regarding changes in designation, we typically remove properties from same-store to non-same-store when redevelopment has or is expected to have a significant impact on property net operating income within the fiscal year. Acquisitions are moved to same-store once we have owned the property for the entirety of comparable periods and the property is not under significant redevelopment or expansion. Our development projects in progress are not included in our non-same-store properties category until they are placed in-service, which occurs upon the substantial completion for a commercial development property and upon receipt of a certificate of occupancy for a multifamily development project. They are then subsequently moved from non-same-store to same-store when the property has been in-service for the entirety of both periods being compared and has reached the target level of occupancy specified above.

Market Conditions and Outlook

 

The demand for investment and institutional quality real estate in our markets is strong. Investors have abundant equity and access to debt to facilitate acquisitions and developments, though anecdotally we sense that development capital, particularly debt capital, is moderating due, in part, to heightened supply concerns among lenders. Prices and sales volumes are strong. Fundamentals are favorable across property types. The exception for us is in various North Dakota markets where energy and commodity market weakness coupled with increased supply caused us to experience elevated vacancies and offer lower rents to attract residents.

 

We experienced generally stable trends across most of our apartment investments during the quarter ended January 31, 2017, except in certain commodity and supply impacted markets. Our ability to maintain occupancy levels and raise rents remains dependent on continued healthy employment and wage growth. We continue to observe considerable multifamily development activity in our markets, and as this new construction is completed, we will experience increased competition for residents. However, developers of new apartment projects are trying to push up market rents to

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support the increasing costs of new developments. Many existing apartment owners of modestly older properties are making significant upgrades to their units and raising rents. The calendar 2016 economic outlook of the Ninth Federal Reserve District, which overlays most of our geographic footprint, is positive according to the Federal Reserve Bank of Minneapolis.  Increases in employment and personal income growth are projected. The biggest challenge facing employers is hiring qualified workers. The unemployment rate is generally below the national average in most of the district’s states.

Our healthcare segment consists of medical office properties. The same-store healthcare segment remains stable with occupancy at 92.7%. A significant portion of our medical office portfolio is on campus and located in the Minneapolis Metropolitan Statistical Area (“MSA”) which has a 8.8% on campus vacancy rate as of Q4 2016 according to Colliers International.

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RESULTS OF OPERATIONS

Consolidated Results of Operations for the Three and Nine Months Ended January 31, 2017 and 2016

The discussion that follows is based on our consolidated results of operations for the three and nine months ended January 31, 2017 and 2016.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

January 31, 

 

2017 vs. 2016

 

 

January 31, 

 

2017 vs. 2016

 

 

 

    

2017

  

2016

  

$ Change

  

% Change

  

  

2017

  

2016

  

$ Change

  

% Change

 

 

Real estate rentals

 

$

46,278

 

$

44,015

 

$

2,263

 

5.1

%  

 

$

137,122

 

$

126,633

 

$

10,489

 

8.3

%

 

Tenant reimbursement

 

 

4,896

 

 

4,391

 

 

505

 

11.5

%  

 

 

14,272

 

 

13,164

 

 

1,108

 

8.4

%

 

TOTAL REVENUE

 

 

51,174

 

 

48,406

 

 

2,768

 

5.7

%  

 

 

151,394

 

 

139,797

 

 

11,597

 

8.3

%

 

Property operating expenses, excluding real estate taxes

 

 

17,034

 

 

15,412

 

 

1,622

 

10.5

%  

 

 

48,905

 

 

43,952

 

 

4,953

 

11.3

%

 

Real estate taxes

 

 

5,759

 

 

4,909

 

 

850

 

17.3

%  

 

 

17,095

 

 

14,624

 

 

2,471

 

16.9

%

 

Depreciation and amortization

 

 

13,475

 

 

12,693

 

 

782

 

6.2

%  

 

 

41,273

 

 

36,315

 

 

4,958

 

13.7

%

 

Impairment of real estate investments

 

 

 —

 

 

162

 

 

(162)

 

(100.0)

%  

 

 

54,153

 

 

3,320

 

 

50,833

 

1,531.1

%

 

General and administrative expenses

 

 

3,130

 

 

2,929

 

 

201

 

6.9

%  

 

 

8,438

 

 

8,316

 

 

122

 

1.5

%

 

Acquisition and investment related costs

 

 

5

 

 

35

 

 

(30)

 

(85.7)

%  

 

 

52

 

 

433

 

 

(381)

 

(88.0)

%

 

Other expenses

 

 

1,037

 

 

51

 

 

986

 

1,933.3

%  

 

 

2,705

 

 

1,281

 

 

1,424

 

111.2

%

 

TOTAL EXPENSES

 

 

40,440

 

 

36,191

 

 

4,249

 

11.7

%  

 

 

172,621

 

 

108,241

 

 

64,380

 

59.5

%

 

Operating income (loss)

 

 

10,734

 

 

12,215

 

 

(1,481)

 

(12.1)

%  

 

 

(21,227)

 

 

31,556

 

 

(52,783)

 

(167.3)

%

 

Interest expense

 

 

(10,680)

 

 

(9,151)

 

 

(1,529)

 

16.7

%  

 

 

(31,670)

 

 

(25,706)

 

 

(5,964)

 

23.2

%

 

Loss on extinguishment of debt

 

 

(1,907)

 

 

 —

 

 

(1,907)

 

n/a

 

 

 

(1,907)

 

 

(106)

 

 

(1,801)

 

1,699.1

%

 

Interest income

 

 

816

 

 

566

 

 

250

 

44.2

%  

 

 

1,988

 

 

1,687

 

 

301

 

17.8

%

 

Other income

 

 

158

 

 

135

 

 

23

 

17.0

%  

 

 

668

 

 

286

 

 

382

 

133.6

%

 

(Loss) income before gain on sale of real estate and other investments and income from discontinued operations

 

 

(879)

 

 

3,765

 

 

(4,644)

 

(123.3)

%  

 

 

(52,148)

 

 

7,717

 

 

(59,865)

 

(775.8)

%  

 

Gain on sale of real estate and other investments

 

 

2,437

 

 

1,446

 

 

991

 

68.5

 

 

 

11,292

 

 

1,271

 

 

10,021

 

788.4

%  

 

Income (loss) from continuing operations

 

 

1,558

 

 

5,211

 

 

(3,653)

 

(70.1)

%  

 

 

(40,856)

 

 

8,988

 

 

(49,844)

 

(554.6)

%  

 

Income from discontinued operations

 

 

23,631

 

 

38,232

 

 

(14,601)

 

(38.2)

%  

 

 

37,741

 

 

55,859

 

 

(18,118)

 

(32.4)

%  

 

NET INCOME (LOSS)

 

 

25,189

 

 

43,443

 

 

(18,254)

 

(42.0)

%  

 

 

(3,115)

 

 

64,847

 

 

(67,962)

 

(104.8)

%  

 

Net (income) loss attributable to noncontrolling interests – Operating Partnership

 

 

(2,525)

 

 

(4,227)

 

 

1,702

 

(40.3)

%  

 

 

(403)

 

 

(5,940)

 

 

5,537

 

(93.2)

%  

 

Net loss attributable to noncontrolling interests – consolidated real estate entities

 

 

446

 

 

581

 

 

(135)

 

(23.2)

%  

 

 

16,585

 

 

2,096

 

 

14,489

 

691.3

%  

 

Net income attributable to Investors Real Estate Trust

 

 

23,110

 

 

39,797

 

 

(16,687)

 

(41.9)

%  

 

 

13,067

 

 

61,003

 

 

(47,936)

 

(78.6)

%  

 

Dividends to preferred shareholders

 

 

(2,503)

 

 

(2,879)

 

 

376

 

(13)

%  

 

 

(8,260)

 

 

(8,636)

 

 

376

 

(4)

%  

 

Redemption of Preferred Shares

 

 

(1,435)

 

 

 —

 

 

(1,435)

 

n/a

 

 

 

(1,435)

 

 

 —

 

 

(1,435)

 

n/a

 

 

NET INCOME AVAILABLE TO COMMON SHAREHOLDERS

 

$

19,172

 

$

36,918

 

 

(17,746)

 

(48.1)

%  

 

$

3,372

 

$

52,367

 

$

(48,995)

 

(93.6)

%  

 

 

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Revenues.  Revenues for the three months ended January 31, 2017 were $51.2 million compared to $48.4 million in the three months ended January 31, 2016, an increase of $2.8 million or 5.7%. The increase in revenue for the three months ended January 31, 2017 resulted primarily from properties acquired and development projects placed in service in fiscal year 2016, as shown in the table below.

 

 

 

 

 

 

    

(in thousands)

 

 

 

Increase in Total

Revenue Three Months Ended January 31, 2017

 

Increase in revenue primarily from development project placed in service in fiscal year 2017

 

$

404

 

Increase in revenue primarily from properties acquired and development projects placed in service in fiscal year 2016

 

 

3,922

 

Decrease in revenue from same-store properties(1)

 

 

(147)

 

Decrease in revenue from properties sold or classified as held for sale in fiscal years 2017 and 2016

 

 

(1,411)

 

Net increase in total revenue

 

$

2,768

 

(1)

See analysis of NOI by segment below for additional information.

 

Revenues for the nine months ended January 31, 2017 were $151.4 million compared to $139.8 million in the nine months ended January 31, 2016, an increase of $11.6 million or 8.3%. The increase in revenue for the nine months ended January 31, 2017 resulted primarily from properties acquired and development projects placed in service in fiscal year 2016, as shown in the table below.

 

 

 

 

 

 

    

(in thousands)

 

 

 

Increase in Total
Revenue Nine Months Ended January 31, 2017

 

Increase in revenue primarily from development project placed in service in fiscal year 2017

 

$

571

 

Increase in revenue primarily from properties acquired and development projects placed in service in fiscal year 2016

 

 

16,497

 

Decrease in revenue from same-store properties(1)

 

 

(1,632)

 

Decrease in revenue from properties sold or classified as held for sale in fiscal years 2017 and 2016

 

 

(3,839)

 

Net increase in total revenue

 

$

11,597

 

(1)

See analysis of NOI by segment below for additional information.

 

Property operating expenses, excluding real estate taxes.  Property operating expenses, excluding real estate taxes, increased by 10.5% to $17.0 million in the third quarter of fiscal year 2017 compared to $15.4 million in the same period of the prior fiscal year.  Same-store properties realized an increase of $937,000 while expenses at non-same-store properties increased by $684,000.  The increase at same-store properties was primarily attributable to increased snow removal costs.

 

Property operating expenses, excluding real estate taxes, increased by 11.3% to $48.9 million for the nine months ended January 31, 2017 compared to $44.0 million in the same period of the prior fiscal year.  Same-store properties realized an increase of $2.0 million while expenses at non-same-store properties increased by $2.9 million.  The increase at same-store properties was attributable to an increase in snow removal costs, an increase in general maintenance items, and an increase in the bad debt provision expense.

 

Real Estate Taxes.  Real estate taxes increased by 17.3% to $5.8 million in the third quarter of fiscal year 2017 compared to $4.9 million in the same period of the prior fiscal year.  An increase of $588,000 was attributable to non-same store properties while same-store properties realized an increase of $262,000.

 

Real estate taxes increased 16.9% to 17.1 million for the nine months ended January 31, 2017 compared to $14.6 million in the same period of the prior fiscal year.  An increase of $2.0 million was attributable to non-same store properties while same-store properties realized an increase of $475,000. 

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Depreciation and Amortization. Depreciation and amortization increased by 6.2% to $13.5 million in the third quarter of fiscal year 2017, compared to $12.7 million in the same period of the prior fiscal year. This increase was primarily due to depreciation on new developments placed in service and acquisitions.

Depreciation and amortization related to real estate investments increased by 13.7% to $41.3 million in the nine months ended January 31, 2017, compared to $36.3 million in the same period of the prior fiscal year. This increase was primarily due to depreciation on new developments placed in service and acquisitions.

Impairment of Real Estate Investments.  We recognized $0 and approximately $162,000 of impairment in continuing operations during the three months ended January 31, 2017 and 2016, respectively. We recognized $54.2 million and $3.3 million of impairment in continuing operations during the nine months ended January 31, 2017 and 2016, respectively. See Note 2 of the Notes to the Condensed Consolidated Financial Statements in this report for additional information.

General and Administrative Expenses.  General and administrative expenses increased by 6.9% to $3.1 million in the three months ended January 31, 2017, compared to $2.9 million in the same period of the prior fiscal year, primarily due to increased health insurance costs. The increase in general and administrative expense in the nine months ended January 31, 2017, compared to the same period of the prior fiscal year was immaterial.

Acquisition and Investment Related Costs.  The decrease in acquisition and investment related costs in the three months ended January 31, 2017, compared to the same period of the prior fiscal year was immaterial. Acquisition and investment related costs decreased to approximately $52,000 in the nine months ended January 31, 2017, compared to approximately $433,000 in the same period of the prior fiscal year, primarily due to decreased acquisition and abandoned pursuit costs.

 

Other Expenses.  Other expenses increased approximately $986,000 to $1.0 million in the three months ended January 31, 2017, compared to the same period of the prior fiscal year, primarily due to a post-sale reduction in property expenses in the prior year and an increase in legal expenses. Other expenses increased $1.4 million to $2.7 million in the nine months ended January 31, 2017, compared to the same period of the prior fiscal year, primarily due to a post-sale reduction in property expenses in the prior year and an increase in legal and third-party consulting costs.

Interest Expense.  Components of interest expense in the three and nine months ended January 31, 2017 and 2016 were as follows.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

 

January 31, 

 

2017 vs. 2016

 

 

January 31, 

 

2017 vs. 2016

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

  

  

2017

    

2016

    

$ Change

    

% Change

 

 

Mortgage debt

    

$

9,408

    

$

8,698

 

$

710

    

8.2

%  

 

$

28,207

    

$

24,829

 

$

3,378

    

13.6

%

 

Line of credit

 

 

467

 

 

212

 

 

255

 

120.3

%  

 

 

961

 

 

1,367

 

 

(406)

 

(29.7)

%

 

Other

 

 

805

 

 

240

 

 

565

 

235.4

%  

 

 

2,502

 

 

(491)

 

 

2,993

 

(609.6)

%

 

Total interest expense

 

$

10,680

 

$

9,150

 

$

1,530

 

16.7

%  

 

$

31,670

 

$

25,705

 

$

5,965

 

23.2

%

 

Mortgage interest increased by 8.2% to $9.4 million in the third quarter of fiscal year 2017, compared to $8.7 million in the same period of the prior fiscal year. Mortgages on non-same-store properties added approximately $419,000 and $2.5 million to our mortgage interest expense in the three and nine months ended January 31, 2017, respectively, while mortgage interest on same-store properties decreased approximately $666,000 and $1.9 million, respectively, compared to the three and nine months ended January 31, 2016, primarily due to loan payoffs and refinancings.

Interest expense on our line of credit increased to approximately $467,000 in the three months ended January 31, 2017, compared to approximately $212,000 in the same period of the prior fiscal year, primarily due to a higher average outstanding balance during the third quarter of fiscal year 2017. Interest expense on our line of credit decreased to approximately $961,000 in the nine months ended January 31, 2017, compared to approximately $1.4 million in the same period of the prior fiscal year, primarily due to a lower average outstanding balance during fiscal year 2017.

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Other interest consists of interest on construction loans, security deposits and special assessments, as well as amortization of loan costs, offset by capitalized construction interest. Other interest increased by approximately $565,000 to approximately $805,000 in the third quarter of fiscal year 2017, compared to the same period of the prior fiscal year, primarily due to a decrease in capitalized construction interest. Other interest increased by $3.0 million in the nine months ended January 31, 2017, compared to the same period of the prior fiscal year, primarily due to a decrease in capitalized construction interest.

Loss on extinguishment of debt. Loss on extinguishment of debt consists of prepayment penalties and the write off of unamortized loan costs.  We recorded $1.9 million of loss on extinguishment of debt in continuing operations in the third quarter of fiscal year 2017, primarily due to prepayment penalties on mortgages that were paid off in conjunction with our new line of credit. No loss on extinguishment of debt was recorded in continuing operations in same period of the prior fiscal year.

Loss on extinguishment of debt was $1.9 million and approximately $106,000 in the nine months ended January 31, 2017 and 2016, respectively.  The increase was primarily due to prepayment penalties on mortgages that were paid off in conjunction with our new line of credit during the current fiscal year.

Interest and Other Income. We recorded interest income in the third quarter of fiscal years 2017 and 2016 of approximately $816,000 and $566,000, respectively, and during the nine months ended January 31, 2017 and 2016 of $2.0 million and $1.7 million, respectively. The change between periods was primarily due to an increase in notes receivable.

Other income decreased approximately $23,000 in the third quarter of fiscal year 2017 compared to the same period of the prior fiscal year, an immaterial change. Other income increased 133.6% to approximately $668,000 in the nine months ended January 31, 2017 compared to the same period of the prior fiscal year, primarily due to changes in real estate tax appeal refunds.

Gain on Sale of Real Estate and Other Investments. We recorded in continuing operations a net gain of $2.4 million in the third quarter of fiscal year 2017 compared to $1.4 million in the same period of the prior fiscal year.  We recorded in continuing operations a net gain of $11.3 million and $1.3 million in the nine months ended January 31, 2017 and 2016, respectively. Properties sold in the nine months ended January 31, 2017 and 2016 are detailed below in the section captioned “Property Acquisitions and Dispositions.”  

Income from Discontinued Operations.  We recorded income from discontinued operations of $23.6 million and $38.2 million, respectively, in the three months ended January 31, 2017 and 2016, and $37.7 million and $55.9 million in the nine months ended January 31, 2017 and 2016, respectively. See Note 7 of the Notes to the Condensed Consolidated Financial Statements in this report for further information on discontinued operations.

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Occupancy

Occupancy as of January 31, 2017 compared to January 31, 2016 decreased in our multifamily and healthcare segments on a same-store basis. Occupancy represents the actual number of units or square footage leased divided by the total number of units or square footage at the end of the period.

Occupancy Levels on a Same-Store Property and All Property Basis:

 

 

 

 

 

 

 

 

 

 

 

 

Same-Store Properties

 

All Properties

 

 

 

As of January 31, 

 

As of January 31, 

 

Segments

    

2017

    

2016

    

2017

    

2016

 

Multifamily

    

92.7

%

95.0

%

91.5

%

91.1

%

Healthcare

 

92.7

%

95.3

%

89.3

%

89.5

%

 

Net Operating Income

Net Operating Income (“NOI”) is a non-US GAAP measure which we define as total real estate revenues less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance, property management expenses and other property expenses). We believe that NOI is an important supplemental measure of operating performance for a REIT’s operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense.  NOI does not represent cash generated by operating activities in accordance with US GAAP and should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.

The following tables show real estate revenues, real estate operating expenses and NOI by reportable operating segment for the three and nine months ended January 31, 2017 and 2016.  For a reconciliation of NOI 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 same-store property and non-same-store property basis. This comparison allows us to evaluate the performance of existing properties and their contribution to net income. Management believes that measuring performance on a same-store property basis is useful to investors because it enables evaluation of how our properties are performing year over year. Management uses this measure to assess whether or not it has been successful in increasing NOI, renewing the leases of existing tenants, controlling operating costs and appropriately handling capital improvements. The discussion below focuses on the main factors affecting real estate revenue and real estate expenses from same-store properties. Since changes from one fiscal year to another in real estate revenue and expenses from non-same-store properties are due to the addition of those properties to our real estate portfolio, such information is less useful for evaluating the ongoing operational performance of our real estate portfolio.

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Table of Contents

All Segments

The following table of selected operating data reconciles NOI to net income and provides the basis for our discussion of NOI by segment in the three and nine months ended January 31, 2017 and 2016. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

 

 

 

Three Months Ended January 31, 

 

Nine Months Ended January 31, 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

  

  

2017

    

2016

    

$ Change

    

% Change

  

 

All Segments

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

40,148

 

$

40,295

 

$

(147)

 

(0.4)

%  

 

$

120,038

 

$

121,670

 

$

(1,632)

 

(1.3)

%

 

Non-same-store(1)

 

 

11,026

 

 

8,111

 

 

2,915

 

35.9

%  

 

 

31,356

 

 

18,127

 

 

13,229

 

73.0

%

 

Total

 

$

51,174

 

$

48,406

 

$

2,768

 

5.7

%  

 

$

151,394

 

$

139,797

 

$

11,597

 

8.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate expenses

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

18,162

 

$

16,962

 

$

1,200

 

7.1

%  

 

$

53,193

 

$

50,704

 

$

2,489

 

4.9

%

 

Non-same-store(1)

 

 

4,631

 

 

3,359

 

 

1,272

 

37.9

%  

 

 

12,807

 

 

7,872

 

 

4,935

 

62.7

%

 

Total

 

$

22,793

 

$

20,321

 

$

2,472

 

12.2

%  

 

$

66,000

 

$

58,576

 

$

7,424

 

12.7

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

21,986

 

$

23,333

 

$

(1,347)

 

(5.8)

%  

 

$

66,845

 

$

70,966

 

$

(4,121)

 

(5.8)

%

 

Non-same-store(1)

 

 

6,395

 

 

4,752

 

 

1,643

 

34.6

%  

 

 

18,549

 

 

10,255

 

 

8,294

 

80.9

%

 

Total

 

$

28,381

 

$

28,085

 

$

296

 

1.1

%  

 

$

85,394

 

$

81,221

 

$

4,173

 

5.1

%

 

Depreciation/amortization

 

 

(13,475)

 

 

(12,693)

 

 

 

 

 

 

 

 

(41,273)

 

 

(36,315)

 

 

 

 

 

 

 

Impairment of real estate investments

 

 

 —

 

 

(162)

 

 

 

 

 

 

 

 

(54,153)

 

 

(3,320)

 

 

 

 

 

 

 

General and administrative expenses

 

 

(3,130)

 

 

(2,929)

 

 

 

 

 

 

 

 

(8,438)

 

 

(8,316)

 

 

 

 

 

 

 

Acquisition and investment related costs

 

 

(5)

 

 

(35)

 

 

 

 

 

 

 

 

(52)

 

 

(433)

 

 

 

 

 

 

 

Other expenses

 

 

(1,037)

 

 

(51)

 

 

 

 

 

 

 

 

(2,705)

 

 

(1,281)

 

 

 

 

 

 

 

Interest expense

 

 

(10,680)

 

 

(9,151)

 

 

 

 

 

 

 

 

(31,670)

 

 

(25,706)

 

 

 

 

 

 

 

Loss on debt extinguishment

 

 

(1,907)

 

 

 —

 

 

 

 

 

 

 

 

(1,907)

 

 

(106)

 

 

 

 

 

 

 

Interest and other income

 

 

974

 

 

701

 

 

 

 

 

 

 

 

2,656

 

 

1,973

 

 

 

 

 

 

 

(Loss) income before gain on sale of real estate and other investments and income from discontinued operations

 

 

(879)

 

 

3,765

 

 

 

 

 

 

 

 

(52,148)

 

 

7,717

 

 

 

 

 

 

 

Gain on sale of real estate and other investments

 

 

2,437

 

 

1,446

 

 

 

 

 

 

 

 

11,292

 

 

1,271

 

 

 

 

 

 

 

Income (loss) from continuing operations

 

 

1,558

 

 

5,211

 

 

 

 

 

 

 

 

(40,856)

 

 

8,988

 

 

 

 

 

 

 

Income from discontinued operations(2)

 

 

23,631

 

 

38,232

 

 

 

 

 

 

 

 

37,741

 

 

55,859

 

 

 

 

 

 

 

Net income (loss) 

 

$

25,189

 

$

43,443

 

 

 

 

 

 

 

$

(3,115)

 

$

64,847

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Non-same-store properties consist of the following properties (re-development and in-service development properties are listed in bold type):

Held for Investment -

Multifamily  -

71 France, Edina, MN; Arcata, Golden Valley, MN; Avalon Cove, Rochester, MN; Cardinal Point, Grand Forks, ND; Cascade Shores, Rochester, MN; Chateau II, Minot, ND; Crystal Bay, Rochester, MN; Deer Ridge, Jamestown, ND; French Creek, Rochester, MN; Gardens, Grand Forks, ND; GrandeVille at Cascade Lake, Rochester, MN; Legacy Heights, Bismarck, ND; Monticello Crossings, Monticello, MN;  Red 20, Minneapolis, MN and Renaissance Heights, Williston, ND.

Total number of units, 2,301.

 

Healthcare  -

Edina 6525 Drew Ave, Edina, MN; Edina 6565 France SMC III, Edina, MN; Lakeside Medical Plaza, Omaha, NE and PrairieCare Medical, Brooklyn Park, MN.

Total rentable square footage, 156,211.

 

Other -

Minot Southgate Retail, Minot, ND and Roseville 3075 Long Lake Road, Roseville, MN. 

Total rentable square footage, 228,406.

 

 

 

 

 

 

Held for Sale -

Multifamily  -

11th Street 3 Plex, Minot, ND; 4th Street 4 Plex, Minot, ND; Apartments on Main, Minot, ND; Brooklyn Heights, Minot, ND; Colton Heights, Minot, ND; Fairmont, Minot, ND; First Avenue, Minot, ND; Pinecone Villas, Sartell, MN; Pines, Minot, ND; Southview, Minot, ND; Summit Park, Minot, ND; Temple, Minot, ND; Terrace Heights, Minot, ND; and Westridge, Minot, ND.

Total number of units, 351.

 

Healthcare  -

Sartell 2000 23rd St, Sartell, MN.

Total rentable square footage, 59,760.

 

Other -

17 South Main, Minot, ND and 1st Avenue Building, Minot, ND.

Total rentable square footage, 6,881.

 

Total NOI for held for sale properties for the three months ended January 31, 2017 and 2016, respectively, $245 and $325.

Total NOI for held for sale properties for the nine months ended January 31, 2017 and 2016, respectively, $843 and $1,161.

 

 

 

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Table of Contents

Sold -

Multifamily -

Campus Center, St. Cloud, MN; Campus Heights, St. Cloud, MN; Campus Knoll, St. Cloud, MN; Campus Plaza, St. Cloud, MN; Campus Side, St. Cloud, MN; Campus View, St. Cloud, MN; Cornerstone, St. Cloud, MN; and University Park Place, St. Cloud, MN.

 

Healthcare  -

Nebraska Orthopaedic Hospital, Omaha, NE

 

Other -

Minot Arrowhead First International, Minot, ND; Minot Plaza, Minot, ND; Stone Container, Fargo, ND and Thresher Square, Minneapolis, MN.

 

Total NOI for sold properties for the three months ended January 31, 2017 and 2016, respectively, $50 and $1,083.

Total NOI for sold properties for the nine months ended January 31, 2017 and 2016, respectively, $490 and $3,038.

 

 

(2)

Discontinued operations include gain on disposals and income from operations for:

 

Held for Sale:  Casper 1930 E 12th St, Casper 3955 E 12th St, Cheyenne 4010 N College Dr, Cheyenne 4606 N College Dr, Edgewood Vista (“EV”) Belgrade, EV Billings, EV Columbus, EV Fremont, EV Grand Island, EV Hastings, EV Hermantown I and II, EV Kalispell, EV Minot, EV Missoula, EV Norfolk, EV Omaha, EV Sioux Falls, EV Virginia, Laramie 1072 N 22nd St and Legends at Heritage Place.

 

2017 Dispositions:  EV Bismarck, EV Brainerd, EV East Grand Forks, EV Fargo, EV Spearfish, Grand Forks Carmike, Spring Creek (“SC”) American Falls, SC Boise, SC Eagle, SC Fruitland, SC Meridian, SC Overland, SC Soda Springs and SC Ustick.

 

2016 Dispositions:  610 Business Center, 7800 West Brown Deer Road, American Corporate Center, Ameritrade, Barry Pointe Office Park, Benton Business Park, Brenwood, Brook Valley I, Burnsville Strip Center, Champlin South Pond, Chan West Village, Corporate Center West, Crosstown Centre, Duluth 4615 Grand, Duluth Denfeld Retail, Eden Prairie 6101 Blue Circle Drive, Farnam Executive Center, Flagship Corporate Center, Forest Lake Auto, Forest Lake Westlake Center, Gateway Corporate Center, Golden Hills Office Center, Grand Forks Medpark Mall, Granite Corporate Center, Great Plains, Highlands Ranch I and II, Interlachen Corporate Center, Intertech Building, Jamestown Buffalo Mall, Jamestown Business Center, Lakeville Strip Center, Mendota Office Center I-IV, Minnesota National Bank, Miracle Hills One,  Monticello C-Store, Northpark Corporate Center, Omaha 10802 Farnam Dr, Omaha Barnes & Noble, Pacific Hills, Pine City C-Store, Pine City Evergreen Square, Plaza VII, Plymouth 5095 Nathan Lane, Prairie Oak Business Center, Rapid City 900 Concourse Drive, Riverport, Rochester Maplewood Square, Spring Valley IV, V, X and XI, St. Cloud Westgate, Superior Office Building, TCA Building, Three Paramount Plaza, Timberlands, UHC Office, US Bank Financial Center, Wells Fargo Center, West River Business Park, Westgate and Woodlands Plaza IV.

An analysis of NOI by segment follows.

Multifamily

Real estate revenue from same-store properties in our multifamily segment decreased by 1.8% or $490,000 in the three months ended January 31, 2017 compared to the same period in the prior fiscal year.  The decrease was primarily attributable to an increase in vacancy of $622,000.  This decrease was offset by an increase in the resident utility billings system “RUBS” revenue of $334,000 while all other rental revenue items combined decreased by $202,000.  

Real estate expenses at same-store properties in our multifamily segment increased by 5.7% or $683,000 in the three months ended January 31, 2017 compared to the same period in the prior fiscal year.  The increase was attributable to an increase in maintenance expenses of $728,000 and a decrease in all other rental expenses combined of $45,000.   The increase in maintenance expenses was due primarily to an increase in snow removal costs.

Real estate revenue from same-store properties in our multifamily segment decreased by 2.1% or $1.8 million in the nine months ended January 31, 2017 compared to the same period in the prior fiscal year.  The decrease was primarily attributable to a decrease in scheduled rent of $599,000 and an increase in vacancy and concessions of $1.7 million.  These decreases were offset by an increase in the resident utility billings system “RUBS” revenue of $847,000 while all other rental revenue combined decreased by $352,000.   The overall decrease of 2.1% was attributable to the operating results in our Minot and Williston, North Dakota markets.  The balance of our portfolio in our ten other markets realized an increase in revenue of $476,000 or 0.6%.

Real estate expenses at same-store properties in our multifamily segment increased by 1.4% or $494,000 in the nine months ended January 31, 2017 compared to the same period in the prior fiscal year.  This increase was attributable to an increase in maintenance expenses of $922,000.  This increase was offset by a decrease in insurance premiums of $467,000 while all other rental expenses combined increased by $39,000.   The increase in maintenance expenses was due primarily to an increase in snow removal costs.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

 

 

 

Three Months Ended January 31, 

 

Nine Months Ended January 31, 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

  

  

2017

   

2016

    

$ Change

    

% Change

 

 

Multifamily

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

27,228

 

$

27,718

 

$

(490)

 

(1.8)

%  

 

$

82,226

 

$

83,986

 

$

(1,760)

 

(2.1)

%

 

Non-same-store

 

 

9,041

 

 

5,707

 

 

3,334

 

58.4

%  

 

 

25,333

 

 

13,048

 

 

12,285

 

94.2

%

 

Total

 

$

36,269

 

$

33,425

 

$

2,844

 

8.5

%  

 

$

107,559

 

$

97,034

 

$

10,525

 

10.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate expenses(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

12,592

 

$

11,909

 

$

683

 

5.7

%  

 

$

36,404

 

$

35,910

 

$

494

 

1.4

%

 

Non-same-store

 

 

3,744

 

 

2,655

 

 

1,089

 

41.0

%  

 

 

10,377

 

 

6,284

 

 

4,093

 

65.1

%

 

Total

 

$

16,336

 

$

14,564

 

$

1,772

 

12.2

%  

 

$

46,781

 

$

42,194

 

$

4,587

 

10.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

14,636

 

$

15,809

 

$

(1,173)

 

(7.4)

%  

 

$

45,822

 

$

48,076

 

$

(2,254)

 

(4.7)

%

 

Non-same-store

 

 

5,297

 

 

3,052

 

 

2,245

 

73.6

%  

 

 

14,956

 

 

6,764

 

 

8,192

 

121.1

%

 

Total

 

$

19,933

 

$

18,861

 

$

1,072

 

5.7

%  

 

$

60,778

 

$

54,840

 

$

5,938

 

10.8

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy

    

 

2017

 

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

 

92.7

%

 

95.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same-store

 

 

86.9

%

 

73.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

91.5

%

 

91.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Number of Units

    

 

2017

 

    

2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

 

10,512

 

 

10,511

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same-store

 

 

2,652

 

 

2,281

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

13,164

 

 

12,792

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Excludes offsite costs associated with property management and casualty-related amounts. Property management costs increased by approximately $303,000 and $523,000 respectively, for the three and nine months ended January 31, 2017 as compared to the same period of the prior year. Casualty-related costs decreased by approximately $71,000 and increased by approximately $21,000, respectively, for the three and nine months ended January 31, 2017 as compared to the same period of the prior year.

Healthcare

Real estate revenue from same-store properties in our healthcare segment increased by 5.7% or $568,000 in the three months ended January 31, 2017 compared to the same period in the prior fiscal year.  This increase was primarily due to an increase in the straight-line rent receivable of $670,000 which was offset by an increase in vacancy of $168,000.  All other revenue items combined increased by $66,000.

Real estate expenses from same-store properties in our healthcare segment increased by 6.2% or $219,000 in the three months ended January 31, 2017 compared to the same period in the prior fiscal year.  The increase was primarily due to an increase in real estate taxes of $159,000 while all other rental expense items combined increased by $60,000.

Real estate revenue from same-store properties in our healthcare segment increased by 1.4% or $441,000 in the nine months ended January 31, 2017 compared to the same period in the prior fiscal year.  This increase was primarily due to an increase in the straight-line rent receivable of $824,000 which was offset by an increase in vacancy of $539,000.  All other revenue items combined increased by $156,000.

Real estate expenses from same-store properties in our healthcare segment increased by 10.3% or $1.0 million in the nine months ended January 31, 2017 compared to the same period in the prior fiscal year.  The increase was due to an increase in maintenance expenses of 370,000, an increase in real estate taxes of $362,000, and an increase in other property expenses of 266,000.   The increase in maintenance expense was due to more general maintenance items being completed while the increase in other property expenses was due an increase in the bad debt provision expense.  All other rental expenses combined increased by $51,000.

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Table of Contents

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except percentages)

 

 

 

 

Three Months Ended January 31, 

 

Nine Months Ended January 31, 

 

 

 

    

2017

    

2016

    

$ Change

    

% Change

  

  

2017

    

2016

    

$ Change

    

% Change

 

 

Healthcare

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate revenue

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

10,552

 

$

9,984

 

$

568

 

5.7

%  

 

$

30,874

 

$

30,433

 

$

441

 

1.4

%

 

Non-same-store

 

 

1,547

 

 

1,875

 

 

(328)

 

(17.5)

%  

 

 

4,427

 

 

3,556

 

 

871

 

24.5

%

 

Total

 

$

12,099

 

$

11,859

 

$

240

 

2.0

%  

 

$

35,301

 

$

33,989

 

$

1,312

 

3.9

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate expenses(1)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

3,756

 

$

3,537

 

$

219

 

6.2

%  

 

$

11,257

 

$

10,208

 

$

1,049

 

10.3

%

 

Non-same-store

 

 

460

 

 

434

 

 

26

 

6.0

%  

 

 

1,303

 

 

1,079

 

 

224

 

20.8

%

 

Total

 

$

4,216

 

$

3,971

 

$

245

 

6.2

%  

 

$

12,560

 

$

11,287

 

$

1,273

 

11.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating income

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Same-store

 

$

6,796

 

$

6,447

 

$

349

 

5.4

%  

 

$

19,617

 

$

20,225

 

$

(608)

 

(3.0)

%

 

Non-same-store

 

 

1,087

 

 

1,441

 

 

(354)

 

(24.6)

%  

 

 

3,124

 

 

2,477

 

 

647

 

26.1

%

 

Total

 

$

7,883

 

$

7,888

 

$

(5)

 

(0.1)

%  

 

$

22,741

 

$

22,702

 

$

39

 

0.2

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Occupancy

    

 

2017

 

    

2016

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

Same-store

 

 

92.7

%

 

95.3

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same-store

 

 

69.1

%

 

63.1

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

89.3

%

 

89.5

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Rentable Square Footage

 

 

2017

 

    

2016

 

 

 

 

 

 

 

 

 

 

    

 

 

 

 

 

 

 

 

Same-store

 

 

1,285,749

 

 

1,285,749

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Non-same-store

 

 

215,971

 

 

281,148

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

1,501,720

 

 

1,566,897

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

Excludes offsite costs associated with property management, which increased by approximately $34,000 and decreased by approximately $120,000, respectively, for the three and nine months ended January 31, 2017 as compared to the same period of the prior year.

Analysis of Commercial Credit Risk and Leases

Credit Risk

The following table lists our top ten commercial tenants on January 31, 2017, for all commercial properties owned by us, including healthcare, other commercial properties and those held for sale, measured by percentage of total commercial minimum rents as of January 1, 2017.  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 22.6% of our total commercial minimum rents as of January 1, 2017.

As of January 31, 2017, 14 of our 34 commercial properties held for investment, along with our held for sale properties including all 15 of our Edgewood Vista properties and all 5 of our Wyoming senior housing properties, were leased under triple net leases under which the tenant pays a monthly lump sum base rent as well as all costs associated with the property, including property taxes, insurance, replacement, repair or restoration, in addition to maintenance. The failure by any of our triple net tenants to effectively conduct their operations or to maintain and improve our properties in accordance with the terms of their respective triple net leases could adversely affect their business reputations and ability to attract and retain residents and customers to our properties, which could have an indirect adverse effect on us.

We regularly monitor the relative credit risk of our significant tenants, including our triple net tenants. The metrics we use to evaluate a significant tenant’s liquidity and creditworthiness depend on facts and circumstances specific to that tenant and to the industry in which it operates, and include the tenant’s credit history and economic conditions related to the tenant, its operations and the markets in which it operates. These factors may change over time. Prior to signing a lease with a tenant, we generally assesses the prospective tenant’s credit quality through review of its financial statements and tax returns, and the result of that review is a factor in establishing the rent to be charged (e.g., higher risk

41


 

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tenants will be charged higher rent). Over the course of a lease, our property management and asset management personnel have regular contact with tenants and tenant employees, and, where the terms of the lease permit, receive tenant financial information for periodic review or review publicly-available financial statements in the case of public company tenants or non-profit entities, such as hospital systems, whose financial statements are required to be filed with state agencies. Through these means we monitor tenant credit quality.

 

 

 

 

 

    

% of Total Commercial

 

 

 

Minimum Rents

 

Lessee

 

 as of January 1, 2017

 

Affiliates of Edgewood Vista(1)

 

22.6

%

Fairview Health Services

 

9.3

%

St. Luke's Hospital of Duluth, Inc.

 

6.8

%

PrairieCare Medical LLC

 

5.9

%

HealthEast Care System

 

4.4

%

Quality Manufacturing Corp

 

2.6

%

Children's Hospitals & Clinics

 

2.1

%

Allina Health

 

2.1

%

Noran Neurological Clinic

 

1.9

%

Amerada Hess

 

1.8

%

All Others

 

40.5

%

Total Monthly Commercial Rent as of January 1, 2017

 

100.0

%

(1)

Affiliates of Edgewood Vista are tenants in our senior housing properties which are classified as held for sale and discontinued operations at January 31, 2017.

Healthcare Leasing Activity

During fiscal year 2017, we have executed new and renewal healthcare leases for our same-store properties on 67,891 square feet for the three months ended January 31, 2017 and 121,958 square feet for the nine months ended January 31, 2017. Due to our leasing efforts, occupancy in our same-store healthcare portfolio remained strong at 92.7% as of January 31, 2017.

The total leasing activity for our same-store healthcare properties, expressed in square feet of leases signed during the period, and the resulting occupancy levels, are as follows:

Three Months Ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Square Feet of

 

Square Feet of

 

Square Feet of

 

 

 

 

 

 

 

New Leases(1)

 

Leases Renewed(1)

 

Leases Executed(1)

 

Occupancy

 

Segment

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

 

Healthcare

 

888

 

40,630

 

67,003

 

16,576

 

67,891

 

57,206

 

92.7

%  

95.3

%

 

Nine Months Ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

 

 

 

 

 

 

Square Feet of

 

Square Feet of

 

Square Feet of

 

 

 

 

 

 

 

New Leases(1)

 

Leases Renewed(1)

 

Leases Executed(1)

 

Occupancy

 

Segment

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

 

Healthcare

 

17,919

 

45,085

 

104,039

 

123,119

 

121,958

 

168,204

 

92.7

%  

95.3

%

(1)

The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period.

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Table of Contents

Healthcare New Leases

The following table sets forth the average effective rents and the estimated costs of tenant improvements and leasing commissions, on a per square foot basis, that we are obligated to fulfill under the new leases signed for our same-store healthcare properties: 

Three Months Ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Tenant

 

Leasing

 

 

 

Square Feet of

 

Average Term

 

Average

 

Improvement Cost

 

Commissions per

 

 

 

New Leases(1)

 

in Years

 

Effective Rent(2)

 

per Square Foot(1)

 

Square Foot(1)

 

Segment

    

2017

    

2016

   

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

 

Healthcare

    

888

    

40,630

    

7.2

    

7.1

    

21.86

    

19.86

    

70.00

    

11.45

    

6.50

    

3.09

 

 

Nine Months Ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated Tenant

 

Leasing

 

 

 

Square Feet of

 

Average Term

 

Average

 

Improvement Cost

 

Commissions per

 

 

 

New Leases(1)

 

in Years

 

Effective Rent(2)

 

per Square Foot(1)

 

Square Foot(1)

 

Segment

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

 

Healthcare

    

17,919

    

45,085

    

8.1

    

7.1

    

21.02

    

19.97

    

40.83

    

13.10

    

6.25

    

3.27

 

(1)

The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period. Tenant improvements and leasing commissions presented are based on square feet leased during the period. 

(2)

Effective rents represent average annual base rental payments, on a straight-line basis for the term of each lease, excluding operating expense reimbursements. The underlying leases contain various expense structures including gross, modified gross, net and triple net.

Healthcare Lease Renewals

The following table summarizes our lease renewal activity within our same-store healthcare segment (square feet data in thousands):

Three Months Ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated 

 

 

 

 

 

 

 

 

   

 

   

 

    

 

    

 

    

 

    

Weighted Average

    

Tenant Improvement

   

Leasing

 

 

 

Square Feet of

 

Percent of Expiring

 

Average Term

 

Growth (Decline)

 

Cost per Square

 

Commissions per

 

 

 

Leases Renewed(1)

 

Leases Renewed(2)

 

in Years

 

 in Effective Rents(3)

 

Foot(1)

 

Square Foot(1)

 

Segment

  

2017

 

2016

 

2017

    

2016

    

2017

 

2016

 

2017

 

2016

 

2017

    

2016

   

2017

    

2016

 

Healthcare

 

67,003

 

16,576

 

81.8

%  

93.8

%  

8.9

 

0.4

 

0.4

%  

4.3

%  

2.46

 

 —

 

5.39

 

 —

 

 

Nine Months Ended January 31, 2017 and 2016

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Estimated 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

 

    

 

    

Weighted Average

    

Tenant Improvement

    

Leasing

 

 

 

Square Feet of

 

Percent of Expiring

 

Average Term 

 

Growth (Decline)

 

Cost per Square

 

Commissions per

 

 

 

Leases Renewed(1)

 

Leases Renewed(2)

 

in Years

 

 in Effective Rents(3)

 

Foot(1)

 

Square Foot(1)

 

Segment

    

2017

    

2016

 

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

    

2017

    

2016

 

Healthcare

 

104,039

 

123,119

 

87.4

%  

91.5

%  

6.1

 

4.9

 

1.9

%  

5.8

%  

2.38

 

9.19

 

4.04

 

2.84

 

(1)

The leasing activity presented is based on leases signed or executed for our same-store rental properties during the period and is not intended to coincide with the commencement of rental revenue in accordance with US GAAP.  Prior periods reflect amounts previously reported and exclude retroactive adjustments for properties reclassified to discontinued operations or non-same-store in the current period. Tenant improvements and leasing commissions are based on square feet leased during the period.

(2)

Renewal percentage of expiring leases is based on square footage of renewed leases and not the number of leases renewed. The category of renewed leases does not include leases that have become month-to-month leases, as the month-to-month leases are considered lease amendments.

(3)

Represents the percentage change in effective rent between the original leases and the renewal leases. Effective rents represent average annual base rental payments, on a straight-line basis for the term of each lease, excluding operating expense reimbursements. The underlying leases contain various expense structures including gross, modified gross, net and triple net.

 

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Healthcare Lease Expirations

Our ability to maintain and improve occupancy rates and base rents primarily depends upon our continuing ability to re-lease expiring space. The following table reflects the in-service portfolio lease expiration schedule of our consolidated healthcare properties, including square footage and annualized base rent for expiring leases, as of January 31, 2017. 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage of Total

 

 

 

 

 

 

 

Percentage of Total

 

Annualized Base 

 

Healthcare

 

Fiscal Year of Lease

 

 

 

Square Footage of

 

Healthcare Segment

 

Rent of Expiring 

 

Segment

 

Expiration

    

# of Leases

    

 Expiring Leases(3)

    

Leased Square Footage

    

Leases at Expiration(2)

    

Annualized Base Rent

 

2017¹

 

16

 

26,218

 

2.0

%  

$

400,438

 

1.4

%

2018

 

14

 

83,845

 

6.3

%  

 

1,699,617

 

5.9

%

2019

 

16

 

183,880

 

13.7

%  

 

3,800,484

 

13.1

%

2020

 

15

 

83,762

 

6.3

%  

 

1,737,054

 

6.0

%

2021

 

20

 

95,575

 

7.0

%  

 

2,050,677

 

7.1

%

2022

 

16

 

75,819

 

5.7

%  

 

1,384,452

 

4.8

%

2023

 

13

 

62,080

 

4.6

%  

 

1,194,763

 

4.1

%

2024

 

28

 

174,936

 

13.1

%  

 

4,064,090

 

14.0

%

2025

 

5

 

76,691

 

5.7

%  

 

1,687,922

 

5.8

%

2026

 

8

 

84,368

 

6.3

%  

 

1,504,781

 

5.2

%

Thereafter

 

27

 

392,951

 

29.3

%  

 

9,449,398

 

32.6

%

Totals

 

178

 

1,340,125

 

100.0

%  

$

28,973,676

 

100.0

%

(1)

Includes month-to-month leases. As of January 31, 2017, month-to-month leases accounted for 9,911 square feet.

(2)

Assuming that none of the tenants exercise renewal or termination options, and including leases renewed prior to expiration. Also excludes 1,361 square feet of space occupied by us.

(3)

Annualized Base Rent is monthly scheduled rent as of January 1, 2017, multiplied by 12.

Because of the dispersed locations of a substantial portion of the portfolio’s properties in secondary and tertiary markets, information on current market rents is difficult to obtain, is highly subjective and is often not directly comparable between properties. As a result, we believe that the increase or decrease in effective rent on our recent leases is the most objective and meaningful information available regarding rent trends and the relationship between rents on leases expiring in the near term and current market rents across our markets. We believe that rents on our new and renewed leases generally approximate market rents.

PROPERTY ACQUISITIONS AND DISPOSITIONS

During the third quarter of fiscal year 2017, we had no acquisitions of property. During the third quarter of fiscal year 2017, we sold one retail and five healthcare properties for a total sales price of $73.9 million. See Note 8 of the Notes to Condensed Consolidated Financial Statements in this report for a table detailing our acquisitions and dispositions during the nine month periods ended January 31, 2017 and 2016.

Development Projects

The following tables provide additional detail, as of January 31, 2017, on our in-service (completed) development project and development project in progress. These projects are excluded from the same-store pool. We measure initial yield on our development projects upon completion and achievement of target lease-up levels by measuring net operating income from the development against the cost of the project. Estimated initial yield on the project in progress listed below is approximately 6.0%.

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Project Placed in Service in the Nine Months Ended January 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Percentage

 

 

 

 

 

 

 

Date

 

Anticipated

 

 

 

 

 

Number

 

Leased or

 

Anticipated

 

Costs as of

 

Cost per

 

Placed in

 

Same-Store

 

Project Name and Location

 

Segment

 

of Units

 

Committed

 

Total Cost

 

Jan 31, 2017

 

Unit

 

Service

 

Date

 

71 France I - Edina, MN (1)

 

Multifamily

 

241 units

 

89.6

%  

$

72,367

 

$

72,363

 

$

300,278

 

Q1 2017

 

Q1 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)

We are currently a 52.6% partner in the joint venture entity constructing this project. Anticipated total cost is the total cost to the joint venture entity.

Project in Progress at January 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

    

 

    

 

    

 

    

(in thousands)

    

 

 

Project Name and Location

 

Planned Segment

 

Number of Units

 

Percentage Leased or Committed

 

Anticipated Total Cost

 

Costs as of January 31, 2017(1)

 

Anticipated Construction Completion

 

Monticello Crossing - Monticello, MN

 

Multifamily

 

202 units

 

82.7

%  

$

32,134

 

$

29,345

 

4Q 2017

 

Other

 

n/a

 

n/a

 

n/a

 

 

n/a

 

 

3,161

 

n/a

 

 

 

 

 

 

 

 

 

 

 

 

$

32,506

 

 

 

(1)

Amount for Monticello Crossings includes costs related to portions of the development project that were placed into service during the quarters ended October 31, 2016 and January 31, 2017.

 

FUNDS FROM OPERATIONS

We consider Funds from Operations (“FFO”) a useful measure of performance for an equity REIT. We use 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 FFO on the same basis.” In addition, in October 2011, NAREIT clarified its computation of FFO to exclude impairment charges for all periods presented. Because of limitations of the FFO definition adopted by NAREIT, we have made certain interpretations in applying the definition. We believe all such interpretations not specifically provided for in the NAREIT definition are consistent with the definition.

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 US GAAP, is useful to investors in providing an additional perspective on our operating results. Historical cost accounting for real estate assets in accordance with US 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 US 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 our management and investors in identifying the operating results of the long-term assets that form the core of our investments, and assists in comparing those operating results between periods. FFO is used by our management and investors to identify trends in occupancy rates, rental rates and operating costs.

While FFO is widely used by us 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 US GAAP as a measure of our 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 US GAAP, and is not necessarily indicative of sufficient cash flow to fund all of our needs or our ability to service indebtedness or make distributions.

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FFO applicable to Common Shares and Units for the three months ended January 31, 2017 decreased to $12.7 million compared to $54.5 million for the comparable period ended January 31, 2016, a decrease of 76.7%. FFO applicable to Common Shares and Units for the nine months ended January 31, 2017 decreased to $45.0 million compared to $84.7 million for the comparable period ended January 31, 2016, a decrease of 46.9%.

RECONCILIATION OF NET INCOME ATTRIBUTABLE TO

INVESTORS REAL ESTATE TRUST TO FUNDS FROM OPERATIONS 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share and unit amounts)

 

Three Months Ended January 31, 

 

2017

 

2016

 

 

    

    

 

    

    

    

Per

    

    

 

    

    

    

Per

 

 

 

 

 

 

Weighted Avg

 

Share

 

 

 

 

Weighted Avg

 

Share

 

 

 

 

 

 

Shares and

 

and

 

 

 

 

Shares and

 

and

 

 

 

Amount

 

Units(1)

 

Unit(2)

 

Amount

 

Units(1)

 

Unit(2)

 

Net income attributable to Investors Real Estate Trust

 

$

23,110

 

 

 

$

 

 

$

39,797

 

 

 

$

 

 

Less dividends to preferred shareholders

 

 

(2,503)

 

 

 

 

 

 

 

(2,879)

 

 

 

 

 

 

Less redemption of preferred shares

 

 

(1,435)

 

 

 

 

 

 

 

 —

 

 

 

 

 

 

Net income available to common shareholders

 

 

19,172

 

121,255

 

 

0.16

 

 

36,918

 

121,864

 

 

0.30

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests – Operating Partnership

 

 

2,525

 

16,120

 

 

 

 

 

4,227

 

13,877

 

 

 

 

Depreciation and amortization

 

 

12,933

 

 

 

 

 

 

 

14,975

 

 

 

 

 

 

Impairment of real estate attributable to Investors Real Estate Trust

 

 

 —

 

 

 

 

 

 

 

162

 

 

 

 

 

 

Gains on depreciable property sales attributable to Investors Real Estate Trust

 

 

(21,972)

 

 

 

 

 

 

 

(1,777)

 

 

 

 

 

 

Funds from operations applicable to common shares and Units(3)

 

$

12,658

 

137,375

 

$

0.09

 

$

54,505

 

135,741

 

$

0.40

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands, except per share and unit amounts)

 

Nine Months Ended January 31, 

 

2017

 

2016

 

 

    

    

 

    

    

    

Per

    

    

 

    

    

    

Per

 

 

 

 

 

 

Weighted Avg

 

Share

 

 

 

 

Weighted Avg

 

Share

 

 

 

 

 

 

Shares and

 

and

 

 

 

 

Shares and

 

and

 

 

 

Amount

 

Units(1)

 

Unit(2)

 

Amount

 

Units(1)

 

Unit(2)

 

Net income attributable to Investors Real Estate Trust

 

$

13,067

 

 

 

$

 

 

$

61,003

 

 

 

$

 

 

Less dividends to preferred shareholders

 

 

(8,260)

 

 

 

 

 

 

 

(8,636)

 

 

 

 

 

 

Less redemption of preferred shares

 

 

(1,435)

 

 

 

 

 

 

 

 —

 

 

 

 

 

 

Net income available to common shareholders

 

 

3,372

 

121,175

 

 

0.03

 

 

52,367

 

123,793

 

 

0.42

 

Adjustments:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noncontrolling interests – Operating Partnership

 

 

403

 

16,229

 

 

 

 

 

5,940

 

13,913

 

 

 

 

Depreciation and amortization

 

 

39,341

 

 

 

 

 

 

 

48,095

 

 

 

 

 

 

Impairment of real estate attributable to Investors Real Estate Trust

 

 

39,190

 

 

 

 

 

 

 

3,760

 

 

 

 

 

 

Gains on depreciable property sales attributable to Investors Real Estate Trust

 

 

(37,330)

 

 

 

 

 

 

 

(25,512)

 

 

 

 

 

 

Funds from operations applicable to common shares and Units(4)

 

$

44,976

 

137,404

 

$

0.33

 

$

84,650

 

137,706

 

$

0.61

 

 

(1)    Upon the exercise of Exchange Rights, Units of the Operating Partnership are exchangeable for cash or, at our discretion, for Common Shares on a one-for-one basis.

(2)Net income attributable to Investors Real Estate Trust is calculated on a per Common Share basis. FFO is calculated on a per Common Share and Unit basis.

(3)Excluding loss on extinguishment of debt and redemption costs of preferred shares, FFO would have been $16.0 million and $0.12 per Common Share and Unit for the three months ended January 31, 2017. Excluding gain on extinguishment of debt and default interest, FFO would have been $19.6 million and $0.14 per Common Share and Unit for the three months ended January 31, 2016.

(4)Excluding loss on extinguishment of debt and redemption costs of preferred shares, FFO would have been $48.4 million and $0.35 per Common Share and Unit for the nine months ended January 31, 2017. Excluding gain on extinguishment of debt and default interest, FFO would have been $60.1 million and $0.44 per Common Share and Unit for the nine months ended January 31, 2016.

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DISTRIBUTIONS

The following distributions per Common Share and Unit were paid during the nine months ended January 31 of fiscal years 2017 and 2016:

 

 

 

 

 

 

 

 

Month

    

Fiscal Year 2017

    

Fiscal Year 2016

 

July

 

$

0.13 

 

$

0.13

 

October

 

 

0.13 

 

 

0.13

 

January

 

 

0.13 
(1)

 

0.13

 


(1) Includes a special distribution of $.06 per Common Share/Unit

 

On December 12, 2016, we announced a reduction in our quarterly Common Share and Unit distribution from $0.13 to $0.07 per share/Unit, which we believe will enable us to improve our balance sheet and finance future growth.

 

 

LIQUIDITY AND CAPITAL RESOURCES

OVERVIEW

Our principal liquidity demands are maintaining distributions to the holders of Common Shares, preferred shares and Units; capital improvements and repairs and maintenance to properties; acquisition of additional properties; property development; tenant improvements; and debt service and repayments.

We have historically met our short-term liquidity requirements through net cash flows provided by our operating activities, and, from time to time, through draws on secured and unsecured lines of credit. As of January 31, 2017, our Operating Partnership had one unsecured multi-bank line of credit with a total commitment capacity of $250.0 million, with a borrowing capacity based on the value of 26 properties contained in the unencumbered asset pool (UAP). Management considers our ability to generate cash from property operating activities, cash-out refinancing of existing properties and, from time to time, draws on lines of credit to be adequate to meet all operating requirements and to make distributions to our 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 real estate market continues to be subject to various market factors that can result in reduced tenant demand, occupancies and rental rates. In the event of deterioration in property operating results, or absent our ability to successfully continue cash-out refinancing of existing properties and/or new borrowings, we 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 we do not satisfy our long-term liquidity requirements, which consist primarily of maturities under long-term debt, construction and development activities and potential acquisition opportunities, through net cash flows provided by operating activities and our credit facilities, we intend to satisfy such requirements through a combination of funding sources which we believe will be available to us, including the issuance of 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

Credit markets continue to be stable, with credit availability relatively unconstrained and benchmark interest rates remaining at or near historic lows.  While to date there has been no material negative impact on our ability to borrow in our multifamily segment, we continue to monitor the roles of the Federal Home Loan Mortgage Corporation (Freddie Mac) and the Federal National Mortgage Association (Fannie Mae) in financing multifamily properties and their general capacity to lend given allocations set by the Federal Housing Finance Agency. We consider that one of the consequences of a modification in the agencies’ roles in recent years could potentially lead to a narrowing of their lending focus away from the smaller secondary or tertiary markets which we generally target, to multifamily properties in major metropolitan markets. We have historically obtained a significant portion of our multifamily debt from Freddie Mac, and

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we continue to plan to refinance portions of our maturing multifamily debt with these two entities, so any change in their ability or willingness to lend going forward could result in higher loan costs and/or more constricted availability of financing for us. Underwriting on commercial real estate continues to be more conservative compared to the underwriting standards employed prior to the recessionary period and we continue to find recourse security more frequently required, lower amounts of proceeds available and lenders limiting the amount of financing available in an effort to manage capital allocations and credit risk.  While we continue to expect to be able to refinance our debt maturing in the next twelve months without significant issues, we also expect lenders to continue to employ conservative underwriting regarding asset quality, occupancy levels and tenant creditworthiness. Accordingly, we remain cautious regarding our ability to rely on cash-out refinancing at levels we had achieved in recent years to provide funds for investment opportunities and other corporate purposes.

As of January 31, 2017, 100%, or $18.1 million, of our mortgage debt maturing in the fourth quarter of fiscal year 2017 and first quarter of fiscal year 2018 is debt placed on commercial properties. Of this $18.1 million, we expect to pay off $10.8 million and plan to extend $7.3 in the fourth quarter of fiscal year 2017 and first quarter of fiscal year 2018. As of January 31, 2017, approximately 16.7%, or $5.7 million, of our mortgage debt maturing in the next twelve months is debt placed on multifamily assets, and approximately 83.3%, or $28.3 million, is debt placed on commercial properties.

On January 31, 2017, we repaid the FIB Line of Credit in full in the amount of $17.5 million, along with applicable fees, and terminated the FIB Line of Credit. On January 31, 2017, the BMO Line of Credit was obtained with a credit limit or $174.0 million based on the unencumbered asset pool, of which $157.0 million was drawn on the line, consisting of $40.0 million at an interest rate of 4.50% and $117.0 million at an interest rate of 2.53%. The funds were used primarily to repay the FIB Line of Credit and existing debt encumbering the 26 properties that were included in the UAP as of the same date.

We maintain 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, 2017, our compensating balances totaled $2.1 million and consisted of the following:

 

 

 

 

 

Financial Institution

    

 

 

 

Bremer Bank, Saint Paul, MN

 

 

1,285,000

 

Dacotah Bank, Minot, ND

 

 

250,000

 

Peoples State Bank, Velva, ND

 

 

225,000

 

American National Bank, Omaha, NE

 

 

200,000

 

Commerce Bank a Minnesota Banking Corporation

 

 

100,000

 

Total

 

$

2,060,000

 

Current anticipated total project costs for development projects in progress at January 31, 2017 total approximately $32.1 million, of which approximately $29.3 million has been incurred as of January 31, 2017. As of January 31, 2017, the Operating Partnership had entered into construction loans totaling approximately $22.0 million for development projects in progress. In addition to current planned expenditures for development projects in progress, as of January 31, 2017, we are committed to fund $5.6 million in tenant improvements within approximately the next 12 months.

The issuance of Units for property acquisitions continues to be an expected source of capital for us. There were no Units issued in the three and nine months ended January 31, 2017.  In the three months ended January 31, 2016, there were no Units issued. In the nine months ended January 31, 2016, approximately 44,000 Units, valued at issuance at $400,000 were issued in connection with our acquisition of property.

Under our DRIP, common shareholders and Unitholders have an opportunity to use their cash distributions to purchase additional Common Shares, and to purchase additional shares through voluntary cash contributions. As permitted under the DRIP, starting on October 1, 2015, we changed the source from which Common Shares will be purchased under the DRIP to open market transactions, which are not eligible for purchase price discounts. During the nine months ended January 31, 2017, no shares were issued under the DRIP. During the nine months ended January 31, 2016, approximately 821,000 Common Shares with a total value included in equity of $5.6 million, and an average price per share after applicable discounts of $6.85, were issued under the DRIP.

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Cash and cash equivalents at January 31, 2017 totaled $57.0 million, compared to $47.1 million at January 31, 2016, an increase of $9.9 million. Net cash provided by operating activities for the nine months ended January 31, 2017 increased by $8.8 million compared to the nine months ended January 31, 2016, primarily due to an decrease in accounts payable net of an increase in net income adjusted for depreciation, loss on impairment, loss on extinguishment of debt, and gain on sale of real estate investments. Net cash provided by investing activities for the nine months ended January 31, 2017 decreased by $95.3 million compared to the nine months ended January 31, 2016, primarily due to a decrease in proceeds from sale of discontinued operations and payments for acquisition and development of real estate. Net cash used by financing activities for the nine months ended January 31, 2017 decreased by $78.7 million compared to the nine months ended January 31, 2016, primarily due to an increase in proceeds from revolving lines of credit, net of an increase in payments on construction debt and a decrease in proceeds from mortgage debt and construction debt.

FINANCIAL CONDITION

Mortgage Loan Indebtedness. Mortgage loan indebtedness, including mortgages on properties held for sale, decreased by approximately $147,000 as of January 31, 2017, compared to April 30, 2016, due to loan payoffs. As of January 31, 2017, approximately 89.0% of our $739.5 million of mortgage debt is at fixed rates of interest, with staggered maturities. This limits our exposure to changes in interest rates, which minimizes the effect of interest rate fluctuations on our results of operations and cash flows. As of January 31, 2017, the weighted average rate of interest on our mortgage debt was 4.71%, compared to 4.54% on April 30, 2016.

Property Owned. Property owned was $1.4 billion at January 31, 2017 and April 30, 2016, respectively. During the three months ended January 31, 2017, we had no new acquisitions and disposed of six properties, 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, 2017 were $57.0 million, compared to $66.7 million on April 30, 2016.

Operating Partnership Units. Outstanding Units in the Operating Partnership were 16.0 million Units at January 31, 2017 and 16.3 million Units at April 30, 2016.

Common and Preferred Shares of Beneficial Interest. Common Shares outstanding on January 31, 2017 and April 30, 2016 totaled 121.9 million and 121.1 million, respectively. We issued approximately 499,000 Common Shares, with a total grant-date value of approximately $1.9 million, under our 2015 Incentive Award Plan for executive officer and trustee share based compensation for future performance. We also issued approximately 59,000 Common Shares, with a total grant-date value of approximately $352,000, under our 2008 Incentive Award Plan for trustee share based compensation for fiscal year 2016 performance. Approximately 10,000 shares were retired in fiscal year 2017.

 

Preferred A Redemption. On September 1, 2016, our Board of Trustees authorized the redemption of some or all of the 8.25% Series A Cumulative Redeemable Preferred Shares (“Preferred A Shares”) from time to time, but no later than by December 31, 2016. On November 1, 2016, we delivered notice to holders of the Preferred A Shares that we intended to redeem all 1,150,000 Preferred A Shares at a redemption price equal to $25.00 per share plus any accrued but unpaid distributions per share up to and including the redemption date of December 2, 2016. On December 2, 2016, we completed the redemption of the Preferred A Shares for an aggregate redemption price of $29.164 million, and such shares are no longer deemed outstanding as of such date and were delisted from trading on the New York Stock Exchange.

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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.

Approximately 89.0% and 77.8% of our mortgage debt, including mortgage debt related to properties held for sale, as of January 31, 2017 and April 30, 2016, respectively, is at fixed interest rates. Therefore, we have little exposure to interest rate fluctuation risk on our existing mortgage debt. Accordingly, interest rate fluctuations during the third quarter of fiscal year 2017 did not have a material effect on us. Even though our goal is to maintain a fairly low exposure to interest rate risk, we may become 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, 2017, we had the following amounts of future principal and interest payments due on mortgages, including mortgages held for sale, secured by our real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(In thousands)

 

 

 

Future Principal Payments 

 

 

  

Remaining

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

Mortgages

 

Fiscal 2017

 

Fiscal 2018

 

Fiscal 2019

 

Fiscal 2020

 

Fiscal 2021

 

Thereafter

 

Total

 

Fair Value

 

Fixed Rate

 

$

4,173

 

$

35,763

 

$

78,019

 

$

64,648

 

$

137,852

 

$

321,905

 

$

642,360

 

$

643,906

 

Avg Fixed Interest Rate(1)

 

 

4.76

%  

 

4.66

%  

 

4.51

%  

 

4.32

%  

 

3.83

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Variable Rate

 

$

7,674

 

$

11,747

 

$

1,088

 

$

30,444

 

$

28

 

$

608

 

$

51,589

 

$

51,589

 

Avg Variable Interest Rate(1)

 

 

3.41

%  

 

3.55

%  

 

4.69

%  

 

5.06

%  

 

3.92

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held for Sale

 

$

30,478

 

$

819

 

$

2,326

 

$

668

 

$

710

 

$

10,588

 

$

45,589

 

$

53,321

 

Avg Fixed Interest Rate(1)

 

 

3.39

%  

 

5.94

%  

 

5.92

%  

 

5.89

%  

 

5.86

%  

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

739,538

 

$

748,816

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(in thousands)

 

 

 

Future Interest Payments

 

 

 

Remaining 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long Term Debt

   

Fiscal 2017

   

Fiscal 2018

    

Fiscal 2019

    

Fiscal 2020

    

Fiscal 2021

    

Thereafter

    

Total

 

Fixed Rate

 

$

7,649

 

$

29,716

 

$

27,141

 

$

22,637

 

$

17,598

 

$

28,231

 

$

132,972

 

Variable Rate

 

 

440

 

 

1,558

 

 

1,509

 

 

741

 

 

25

 

 

6

 

 

4,279

 

Held for Sale

 

 

386

 

 

897

 

 

846

 

 

704

 

 

662

 

 

966

 

 

4,461

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

141,712

 

(1)

Interest rate given is for the entire year.

The weighted average interest rate on our fixed rate and variable rate debt, excluding mortgages related to assets held for sale, as of January 31, 2017, was 4.74%. Any fluctuations in variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $51.6 million of variable rate mortgage indebtedness would increase our annual interest expense by approximately $516,000 and an increase of one percent per annum on our line of credit balance of $157.0 million at January 31, 2017, would increase our annual interest expense by approximately $1.6 million.

 

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ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures:  

Management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”)) as of the end of the period covered by this report. Based on such evaluation, the Chief Executive Officer and Chief Financial Officer have concluded that, as of January 31, 2017, such disclosure controls and procedures were effective to ensure that information required to be disclosed by us in the reports that we file or submit 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 Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

Internal Control Over Financial Reporting:  

There have not been any changes in our internal control over financial reporting (as such term is defined in Rule 13a-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1. Legal Proceedings

None

Item 1A. Risk Factors

The restrictive terms of indebtedness may cause acceleration of debt payments and constrain our ability to conduct certain transactions.  At January 31, 2017, we and our Operating Partnership had outstanding borrowings of approximately $943.8 million. Some of this indebtedness contains financial covenants as to fixed charge coverage ratios, maximum secured debt, maintenance of unencumbered asset value, and total debt to gross assets, among others. In addition, some covenants present new constraints as we navigate investments and dispositions with respect to our ability to invest in smaller markets, add incremental secured and recourse debt and add overall leverage. In the event that an event of default occurs, our lenders may declare borrowings under the loan agreements to be due and payable immediately, which could have a material adverse effect on us and our ability to make distributions to our shareholders and pay amounts due on our debt.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 

Sales of Securities

During the third quarter of fiscal year 2017, we issued an aggregate of 133,104 unregistered Common Shares to limited partners of the Operating Partnership, upon exercise of their Exchange Rights regarding an equal number of Units. All such issuances of Common Shares were exempt from registration as private placements under Section 4(2) of the Securities Act, including Regulation D promulgated thereunder. We have registered the re-sale of such Common Shares under the Securities Act.

Redemption of Preferred A Shares

On September 1, 2016, our Board of Trustees authorized the redemption of some or all of the Preferred A Shares from time to time, but no later than by December 31, 2016. On November 1, 2016, we delivered notice to holders of the Preferred A Shares that we intended to redeem all 1,150,000 Preferred A Shares at a redemption price equal to $25.00 per share plus any accrued but unpaid distributions per share up to and including the redemption date of December 2, 2016. On December 2, 2016, we completed the redemption of the Preferred A Shares for an aggregate redemption price of $29.164 million, and such shares were no longer deemed outstanding as of such date and were delisted from trading on the New York Stock Exchange.  The following is a summary of the Preferred A Shares redeemed during the third quarter of fiscal year 2017:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Maximum Number (or

 

 

 

 

 

 

 

 

 

 

Approximate Dollar

 

 

 

 

 

 

 

 

Total Number of Shares

 

Value) of Shares That

 

 

 

 

 

Average Price

 

Purchased as Part of

 

May Yet Be Purchased 

 

 

 

Total Number of

 

Paid per

 

Publicly Announced

 

Under the Plans or

 

Period

  

Shares Purchased

    

Share

    

Plans or Programs1

    

Programs

 

Beginning Balance

 

 

 

 

 

 

 

 

 

1,150,000

 

November 1 - 30, 2016

 

 —

 

$

 —

 

 —

 

 

1,150,000

 

December 1 - 31, 2016

 

1,150,000

 

 

25.36

 

1,150,000

 

 

 —

 

January 1 - 31, 2017

 

 —

 

 

 —

 

 —

 

 

 —

 

Total

 

1,150,000

 

$

25.36

 

1,150,000

 

 

 —

 

 

Item 3. Defaults Upon Senior Securities 

None

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Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

Item 6. Exhibits

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EXHIBIT INDEX

Exhibit No.

Description

 

10.1*

 

Credit Agreement, dated January 31, 2017, between IRET Properties, as borrower; Investors Real Estate Trust, IRET, Inc., and other subsidiaries as guarantors; lenders; KeyBank, NA and PNC Bank, NA as syndication agents; and Bank of Montreal as administrative Agent.

31.1*

Section 302 Certification of Chief Executive Officer

31.2*

Section 302 Certification of Executive Vice President and Chief Financial Officer 

32.1*

Section 906 Certifications of Chief Executive Officer

32.2*

Section 906 Certifications of Executive Vice President and Chief Financial Officer 

101*

The following materials from our Quarterly Report on Form 10-Q for the quarter ended January 31, 2017 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.

 

 

* Filed herewith

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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

 

Chief Executive Officer

 

 

 

/s/ Ted E. Holmes

 

Ted E. Holmes

 

Executive Vice President and Chief Financial Officer

 

 

 

Date: March 13, 2017

 

 

 

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