CENTERSPACE - Quarter Report: 2019 September (Form 10-Q)

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 September 30, 2019



☐	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 incorporation or organization)				(I.R.S. Employer Identification No.)

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)

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 every Interactive Data File required to be submitted 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, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.



Large accelerated filer	☑	Accelerated filer	☐	Non-accelerated filer	☐
Smaller Reporting Company	☐	Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).



Yes	☐	No	☑

Securities registered pursuant to Section 12(b) of the Exchange Act:



Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common Shares of Beneficial Interest, no par value	IRET	New York Stock Exchange
Series C Cumulative Redeemable Preferred Shares	IRET-C	New York Stock Exchange

The number of common shares of beneficial interest outstanding as of October 29, 2019, was 11,625,141.

Table of Contents

TABLE OF CONTENTS



	Page
Part I. Financial Information
Item 1. Financial Statements - Third Quarter - 2019:	3
Condensed Consolidated Balance Sheets (unaudited) September 30, 2019, and December 31, 2018	3
Condensed Consolidated Statements of Operations (unaudited) For the Three and Nine Months ended September 30, 2019 and 2018	4
Condensed Consolidated Statements of Comprehensive Income (unaudited) For the Three and Nine Months ended September 30, 2019 and 2018	5
Condensed Consolidated Statements of Equity (unaudited) For the Three and Nine Months ended September 30, 2019 and 2018	6
Condensed Consolidated Statements of Cash Flows (unaudited) For the Nine Months ended September 30, 2019 and 2018	8
Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	26
Item 3. Quantitative and Qualitative Disclosures About Market Risk	36
Item 4. Controls and Procedures	37

Part II. Other Information
Item 1. Legal Proceedings	38
Item 1A. Risk Factors	38
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	38
Item 3. Defaults Upon Senior Securities	38
Item 4. Mine Safety Disclosures	38
Item 5. Other Information	38
Item 6. Exhibits	39
Signatures	40

Table of Contents

PART I

Item 1. Financial Statements.

INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)



	(in thousands, except per share data)
	September 30, 2019			December 31, 2018
ASSETS
Real estate investments
Property owned	$	1,720,352		$	1,627,636
Less accumulated depreciation	(370,492		)	(353,871		)
	1,349,860			1,273,765
Unimproved land	1,376			5,301
Mortgage loans receivable	10,140			10,410
Total real estate investments	1,361,376			1,289,476
Cash and cash equivalents	8,500			13,792
Restricted cash	3,339			5,464
Other assets	30,589			27,265
TOTAL ASSETS	$	1,403,804		$	1,335,997
LIABILITIES, MEZZANINE EQUITY, AND EQUITY
LIABILITIES
Accounts payable and accrued expenses	$	40,546		$	40,892
Revolving lines of credit	103,143			57,500
Notes payable, net of unamortized loan costs of $994 and $1,009, respectively	269,006			143,991
Mortgages payable, net of unamortized loan costs of $1,845 and $1,777, respectively	360,886			444,197
TOTAL LIABILITIES	$	773,581		$	686,580
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE NONCONTROLLING INTERESTS – CONSOLIDATED REAL ESTATE ENTITIES	$	—		$	5,968
SERIES D PREFERRED UNITS (Cumulative convertible preferred units, $100 par value, 166 units issued and outstanding at September 30, 2019 and no units issued and outstanding at December 31, 2018, aggregate liquidation preference of $16,560)	16,560			—
EQUITY
Series C Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, $25 per share liquidation preference, 4,118 shares issued and outstanding at September 30, 2019 and December 31, 2018, aggregate liquidation preference of $102,971)	99,456			99,456
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 11,625 shares issued and outstanding at September 30, 2019 and 11,942 shares issued and outstanding at December 31, 2018)	886,598			899,234
Accumulated distributions in excess of net income	(428,680		)	(429,048		)
Accumulated other comprehensive income (loss)	(9,793		)	(856		)
Total shareholders’ equity	$	547,581		$	568,786
Noncontrolling interests – Operating Partnership (1,223 units at September 30, 2019 and 1,368 units at December 31, 2018)	60,169			67,916
Noncontrolling interests – consolidated real estate entities	5,913			6,747
Total equity	$	613,663		$	643,449
TOTAL LIABILITIES, MEZZANINE EQUITY, AND EQUITY	$	1,403,804		$	1,335,997

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)



	(in thousands, except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
REVENUE	$	47,436		$	45,406		$	139,978		$	134,638
EXPENSES
Property operating expenses, excluding real estate taxes	14,485			14,438			43,231			42,618
Real estate taxes	5,425			5,049			16,231			15,073
Property management expense	1,553			1,269			4,552			4,090
Casualty loss	178			225			911			275
Depreciation and amortization	18,751			19,164			55,299			58,812
Impairment of real estate investments	—			—			—			17,809
General and administrative expenses	3,448			3,147			10,803			11,114
TOTAL EXPENSES	$	43,840		$	43,292		$	131,027		$	149,791
Operating income (loss)	3,596			2,114			8,951			(15,153		)
Interest expense	(7,694		)	(8,193		)	(23,180		)	(25,051		)
Loss on extinguishment of debt	(1,087		)	(540		)	(1,496		)	(673		)
Interest and other income	498			395			1,390			1,544
Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations	(4,687		)	(6,224		)	(14,335		)	(39,333		)
Gain (loss) on sale of real estate and other investments	39,105			9,095			39,774			11,399
Gain (loss) on litigation settlement	300			—			6,586			—
Income (loss) from continuing operations	34,718			2,871			32,025			(27,934		)
Income (loss) from discontinued operations	—			570			—			14,690
NET INCOME (LOSS)	$	34,718		$	3,441		$	32,025		$	(13,244	)
Dividends to preferred unitholders	(160		)	—			(377		)	—
Net (income) loss attributable to noncontrolling interests – Operating Partnership	(3,145		)	(112		)	(2,550		)	1,888
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	183			(676		)	913			439
Net income (loss) attributable to controlling interests	31,596			2,653			30,011			(10,917		)
Dividends to preferred shareholders	(1,705		)	(1,705		)	(5,116		)	(5,116		)
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	29,891		$	948		$	24,895		$	(16,033	)

BASIC
Earnings (loss) per common share from continuing operations – basic	$	2.57		$	0.04		$	2.11		$	(2.44	)
Earnings (loss) per common share from discontinued operations – basic	—			0.04			—			1.10
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC	$	2.57		$	0.08		$	2.11		$	(1.34	)

DILUTED
Earnings (loss) per common share from continuing operations – diluted	$	2.54		$	0.04		$	2.11		$	(2.44	)
Earnings (loss) per common share from discontinued operations – diluted	—			0.04			—			1.10
NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED	$	2.54		$	0.08		$	2.11		$	(1.34	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)



	(in thousands)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss)	$	34,718		$	3,441		$	32,025		$	(13,244	)
Other comprehensive income:
Unrealized gain (loss) from derivative instrument	(2,251		)	948			(9,819		)	3,106
(Gain) loss on derivative instrument reclassified into earnings	56			64			26			193
Total comprehensive income (loss)	$	32,523		$	4,453		$	22,232		$	(9,945	)
Net comprehensive (income) loss attributable to noncontrolling interests – Operating Partnership	(2,935		)	(217		)	(1,680		)	1,542
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	183			(676		)	913			439
Comprehensive income (loss) attributable to controlling interests	$	29,771		$	3,560		$	21,465		$	(7,964	)

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)



	(in thousands, except per share data)
	PREFERRED SHARES		NUMBER OF COMMON SHARES		COMMON SHARES			ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			NONREDEEMABLE NONCONTROLLING INTERESTS			TOTAL EQUITY
Balance December 31, 2017	$	99,456	12,004		$	902,305		$	(374,365	)	$	(539	)	$	87,186		$	714,043
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								(10,917		)				(1,764		)	(12,681		)
Change in fair value of derivatives											3,299						3,299
Distributions - common shares and units ($2.10 per share and unit)								(25,129		)				(2,949		)	(28,078		)
Distributions – Series C preferred shares ($1.2421875 per Series C share)								(5,116		)							(5,116		)
Shares issued and share-based compensation			6		1,032												1,032
Redemption of units for common shares			24		658									(658		)	—
Redemption of units for cash														(2,751		)	(2,751		)
Shares repurchased			(67	)	(3,415		)										(3,415		)
Distributions to nonredeemable noncontrolling interests – consolidated real estate entities														(2,428		)	(2,428		)
Cumulative adjustment upon adoption of ASC 606 and ASC 610-20								627									627
Other			(6	)	(212		)							(145		)	(357		)
Balance September 30, 2018	$	99,456	11,961		$	900,368		$	(414,900	)	$	2,760		$	76,491		$	664,175


Balance December 31, 2018	$	99,456	11,942		$	899,234		$	(429,048	)	$	(856	)	$	74,663		$	643,449
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								30,011						1,811			31,822
Change in fair value of derivatives											(8,937		)				(8,937		)
Distributions - common shares and units ($2.10 per share and unit)								(24,527		)				(2,673		)	(27,200		)
Distributions – Series C preferred shares ($1.2421875 per Series C share)								(5,116		)							(5,116		)
Shares issued and share-based compensation			11		1,452												1,452
Redemption of units for common shares			8		(511		)							511			—
Redemption of units for cash														(8,135		)	(8,135		)
Shares repurchased			(329	)	(18,023		)										(18,023		)
Acquisition of redeemable noncontrolling interests					4,529												4,529
Other			(7	)	(83		)							(95		)	(178		)
Balance September 30, 2019	$	99,456	11,625		$	886,598		$	(428,680	)	$	(9,793	)	$	66,082		$	613,663

See accompanying Notes to Condensed Consolidated Financial Statements.

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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EQUITY (unaudited)



	(in thousands, except per share data)
	PREFERRED SHARES		NUMBER OF COMMON SHARES		COMMON SHARES			ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME			ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)			NONREDEEMABLE NONCONTROLLING INTERESTS			TOTAL EQUITY
Balance June 30, 2018	$	99,456	11,939		$	899,480		$	(407,482	)	$	1,748		$	79,181		$	672,383
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								2,653						964			3,617
Change in fair value of derivatives											1,012						1,012
Distributions - common shares and units ($0.70 per share and unit)								(8,366		)				(972		)	(9,338		)
Distributions – Series C preferred shares ($0.4140625 per Series C share)								(1,705		)							(1,705		)
Shares issued and share-based compensation			1		421												421
Redemption of units for common shares			21		624									(624		)	—
Redemption of units for cash														(4		)	(4		)
Distributions to nonredeemable noncontrolling interests – consolidated real estate entities														(2,185		)	(2,185		)
Other			—		(157		)							131			(26		)
Balance September 30, 2018	$	99,456	11,961		$	900,368		$	(414,900	)	$	2,760		$	76,491		$	664,175


Balance June 30, 2019	$	99,456	11,656		$	888,541		$	(450,433	)	$	(7,598	)	$	64,034		$	594,000
Net income (loss) attributable to controlling interests and nonredeemable noncontrolling interests								31,596						2,962			34,558
Change in fair value of derivatives											(2,195		)				(2,195		)
Distributions – common shares and units ($0.70 per share and unit)								(8,138		)				(857		)	(8,995		)
Distributions – Series C preferred shares ($0.4140625 per Series C share)								(1,705		)							(1,705		)
Shares issued and share-based compensation			8		472												472
Redemption of units for common shares			—		10									(10		)	—
Redemption of units for cash														(11		)	(11		)
Shares repurchased			(39	)	(2,346		)										(2,346		)
Other			—		(79		)							(36		)	(115		)
Balance September 30, 2019	$	99,456	11,625		$	886,598		$	(428,680	)	$	(9,793	)	$	66,082		$	613,663

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)



	(in thousands)
	Nine Months Ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income (loss)	$	32,025		$	(13,244	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization, including amortization of capitalized loan costs	56,169			59,895
(Gain) loss on sale of real estate, other investments, and discontinued operations	(39,774		)	(25,799		)
(Gain) loss on litigation settlement	(1,349		)	—
Share-based compensation expense	1,452			1,032
Impairment of real estate investments	—			17,809
Other, net	2,476			1,911
Changes in other assets and liabilities:
Other assets	(705		)	4,433
Accounts payable and accrued expenses	1,348			(2,855		)
Net cash provided by (used by) operating activities	$	51,642		$	43,182
CASH FLOWS FROM INVESTING ACTIVITIES
Increase in notes receivable	(159		)	(7,509		)
Proceeds from sale of real estate and other investments	93,804			85,384
Payments for acquisitions of real estate assets	(156,650		)	(130,144		)
Payments for improvements of real estate assets	(11,860		)	(11,386		)
Other investing activities	247			1,488
Net cash provided by (used by) investing activities	$	(74,618	)	$	(62,167	)
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from mortgages payable	59,900			—
Principal payments on mortgages payable	(145,279		)	(92,577		)
Proceeds from revolving lines of credit	223,643			125,017
Principal payments on revolving lines of credit	(178,000		)	(269,517		)
Proceeds from notes payable	124,878			74,352
Principal payments on construction debt	—			(21,149		)
Payments for acquisition of noncontrolling interests – consolidated real estate entities	(1,260		)	—
Repurchase of common shares	(18,023		)	(3,415		)
Repurchase of partnership units	(8,135		)	(2,751		)
Distributions paid to common shareholders	(32,925		)	(25,129		)
Distributions paid to preferred shareholders	(5,116		)	(5,116		)
Distributions paid to preferred unitholders	(377		)	—
Distributions paid to noncontrolling interests – Unitholders of the Operating Partnership	(3,630		)	(2,949		)
Distributions paid to noncontrolling interests – consolidated real estate entities	(95		)	(2,428		)
Other financing activities	(22		)	—
Net cash provided by (used by) financing activities	$	15,559		$	(225,662	)
NET INCREASE (DECREASE) IN CASH, CASH EQUIVALENTS, AND RESTRICTED CASH	(7,417		)	(244,647		)
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT BEGINNING OF PERIOD	19,256			286,226
CASH, CASH EQUIVALENTS, AND RESTRICTED CASH AT END OF PERIOD	$	11,839		$	41,579



SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES
Accrued capital expenditures	$	9	$	(1,200	)
Distributions declared but not paid to common shareholders	—		9,339
Distributions declared but not paid to preferred shareholders	—		1,705
Gain on litigation settlement	1,349		—
Property acquired through issuance of Series D preferred units	16,560		—

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash paid for interest	$	22,746	$	24,139

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 September 30, 2019 and 2018

NOTE 1 • ORGANIZATION

Investors Real Estate Trust, collectively with our consolidated subsidiaries (“IRET,” “we,” “us,” or “our”), is a real estate investment trust (“REIT”) focused on the ownership, management, acquisition, redevelopment, and development of apartment communities, primarily in Midwest markets. As of September 30, 2019, we owned interests in 84 apartment communities consisting of 13,336 apartment homes.

NOTE 2 • BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

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. 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. On September 20, 2018, our Board of Trustees approved a change in our fiscal year-end from April 30 to December 31, beginning on January 1, 2019. We filed a transition report on Form 10-KT for the transition period ended December 31, 2018, in accordance with SEC rules and regulations. Beginning on January 1, 2019, all fiscal years are from January 1 to December 31.

On December 14, 2018, the Board approved a reverse stock split of our outstanding common shares, no par value per share, and limited partnership units ("Units") at a ratio of 1-for-10. The reverse stock split was effective as of the close of trading on December 27, 2018, with trade commencing on a split-adjusted basis on December 28, 2018. We have adjusted all shares and Units and per share and Unit data for all periods presented.

The condensed consolidated financial statements also reflect the Operating Partnership's ownership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into our operations, with noncontrolling interests reflecting the noncontrolling partners’ share of ownership, income, and expenses.

UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

Our interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, certain disclosures accompanying annual consolidated financial statements prepared in accordance with GAAP are omitted. The year-end balance sheet data was derived from audited consolidated financial statements, but does not include all disclosures required by 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 Transition Report on Form 10-KT for the transition period ended December 31, 2018, as filed with the SEC on February 27, 2019.

USE OF ESTIMATES

The preparation of financial statements in conformity with 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.

RECENT ACCOUNTING PRONOUNCEMENTS

The following table provides a brief description of recent accounting standards updates (“ASUs”).

Table of Contents



Standard	Description	Date of Adoption	Effect on the Financial Statements or Other Significant Matters
ASU 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments; ASU 2018-19, Codification Improvements to Topic 326; ASU 2019-05, Financial Instruments - Credit Losses - Targeted Transition Relief	These ASUs require entities to estimate a lifetime expected credit loss for most financial assets, such as loans and other financial instruments, and to present the net amount expected to be collected. In 2018, another ASU was issued to amend ASU 2016-13, which clarifies that it does not apply to operating lease receivables. In 2019, an additional ASU was issued to provide transition relief in which an entity is allowed to elect the fair value option on an instrument-by-instrument basis for eligible instruments, upon adoption of Topic 326.	These ASUs are effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.	The new standard is not expected to have a material impact on our condensed consolidated financial statements but will require additional disclosures.
ASU 2018-13, Fair Value Measurements (Topic 820) - Disclosure Framework - Changes to the Disclosure Requirement for Fair Value Measurements	This ASU eliminates certain disclosure requirements affecting all levels of measurement, and modifies and adds new disclosure requirements for Level 3 measurements.	This ASU is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.	The new standard is not expected to have a material impact on our condensed consolidated financial statements.
ASU 2018-15, Intangibles - Goodwill and Other - Internal-Use Software (Topic 350-40): Customer's Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement That is a Service Contract	This ASU reduces the complexity for the accounting for costs of implementing a cloud computing service arrangement. The standard aligns various requirements for capitalizing implementation costs.	This ASU is effective for annual reporting periods beginning after December 15, 2019. Early adoption is permitted.	The new standard is not expected to have a material impact on our condensed consolidated financial statements.
ASU 2019-01, Leases (Topic 842) - Codification Improvements	This ASU provides clarification on various lease related issues and provides for reduced transition disclosure requirements.	This ASU has two effective dates. The various lease issues are effective for annual reporting periods beginning after December 15, 2019. The transition disclosures are effective with the ASU 2016-02, Leases. We adopted this standard using the modified retrospective approach effective January 1, 2019.	The adoption of the standard did not have a material impact on our condensed consolidated financial statements. Refer to the "Leases" section below for transition disclosures.
ASU 2019-07, Codification Updates to SEC Sections: Amendments to SEC Paragraphs Pursuant to SEC Final Rule Releases No. 33-10532, Disclosure Update and Simplification, and Nos. 33-10231 and 33-10442, Investment Company Reporting Modernization, and Miscellaneous Updates	This ASU clarifies or improves the disclosure and presentation requirements of a variety of codification topics by aligning them with the SEC's regulations, thereby eliminating redundancies and making the codification easier to apply.	This ASU was effective upon issuance.	The adoption of this ASU did not have a material impact on our condensed consolidated financial statements and the related disclosures.

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CASH, CASH EQUIVALENTS, AND RESTRICTED CASH



	(in thousands)
Balance sheet description	September 30, 2019		September 30, 2018
Cash and cash equivalents	$	8,500	$	36,910
Restricted cash	3,339		4,669
Total cash, cash equivalents and restricted cash	$	11,839	$	41,579

As of September 30, 2019, restricted cash consisted primarily of escrows held by lenders for real estate taxes, insurance, and capital additions.

LEASES

Effective January 1, 2019, we adopted ASUs 2016-02, 2018-10, 2018-11, 2018-20, and 2019-01 related to leases using the modified retrospective approach. We elected to adopt the package of practical expedients permitted under the transition guidance, which permits us to not reassess prior conclusions about lease identification, classification, and initial direct costs under the new standard, and the practical expedient related to land easements, which allows us to not evaluate existing or expired land easements that were not previously accounted for under ASC 840. We made an accounting policy election to exclude leases in which we are a lessee with a term of 12 months or less from the balance sheet.

As a lessor, we primarily lease multifamily apartment homes which qualify as operating leases with terms that are generally one year or less. Rental revenues are recognized in accordance with ASC 842, Leases, using a method that represents a straight-line basis over the term of the lease. Rental income represents approximately 98.0% of our total revenues and includes gross market rent less adjustments for concessions, vacancy loss, and bad debt. Other property revenues represent the remaining 2.0% of our total revenues and are primarily driven by other fee income, which is typically recognized at a point in time.

Some of our apartment communities have commercial spaces available for lease. Lease terms for these spaces typically range from three to fifteen years. The leases for commercial spaces generally include options to extend the lease for additional terms.

Many of our leases contain non-lease components for utility reimbursement from our residents and common area maintenance from our commercial tenants. We have elected the practical expedient to combine lease and non-lease components for all asset classes. The combined components are included in lease income and are accounted for under ASC 842.

The aggregate amount of future scheduled lease income on our operating leases for commercial spaces, excluding any variable lease income and non-lease components, as of September 30, 2019, was as follows:



	(in thousands)
2019 (remainder)	$	862
2020	3,488
2021	3,525
2022	3,541
2023	3,378
Thereafter	8,842
Total scheduled lease income - operating leases	$	23,636

REVENUES

We adopted ASU 2014-09, Revenue from Contracts with Customers, as of May 1, 2018, using the modified retrospective approach. We elected to apply the new standard to contracts that were not complete as of May 1, 2018. We also elected to omit disclosing the value of unsatisfied performance obligations for contracts with an original expected length of one year or less. Under the new standard, revenue is recognized in accordance with the transfer of goods and services to customers at an amount that reflects the consideration to which the company expects to be entitled for those goods and services.

Revenue streams that are included in ASU 2014-09 include:


•	Other property revenues: We recognize revenue for rental related income not included as a component of a lease, such as application fees, as earned, and have concluded that this is appropriate under the new standard.


•	Gains or losses on sales of real estate: Subsequent to the adoption of the new standard, a gain or loss is recognized when the criteria for derecognition of an asset are met, including when (1) a contract exists and (2) the buyer obtained

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control of the nonfinancial asset that was sold. As a result, we may recognize a gain on real estate disposition transactions that previously did not qualify as a sale or for full profit recognition under the previous accounting standard.

The following table presents the disaggregation of revenue streams for the three and nine months ended September 30, 2019:



		(in thousands)
		Three Months Ended September 30,				Nine Months Ended September 30,
Revenue Stream	Applicable Standard	2019		2018		2019		2018
Fixed lease income - operating leases	Leases	$	45,164	$	42,311	$	133,248	$	125,624
Variable lease income - operating leases	Leases	1,367		—		3,999		—
Non-lease components	Revenue from contracts with customers	—		1,243		—		3,790
Other property revenue	Revenue from contracts with customers	905		1,852		2,731		5,224
Total revenue		$	47,436	$	45,406	$	139,978	$	134,638

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. Reducing planned property holding periods may increase the likelihood of recording impairment losses.

During the nine months ended September 30, 2019, we recorded no impairment charges.

During the nine months ended September 30, 2018, we recognized $17.8 million of impairment charges on one apartment community, three commercial properties, and three parcels of land. We recognized impairments of $12.2 million on one apartment community in Grand Forks, North Dakota; $1.4 million on an industrial property in Bloomington, Minnesota; $922,000 on an industrial property in Woodbury, Minnesota; and $630,000 on a retail property in Minot, North Dakota. These properties were written-down to estimated fair value based on independent appraisals and market data or, in the case of the retail property, receipt of a market offer to purchase and our intent to dispose of the property. We recognized impairments of $428,000 on a parcel of land in Williston, North Dakota; $1.5 million on a parcel of land in Grand Forks, North Dakota; and $709,000 on a parcel of land in Bismarck, North Dakota. These parcels were written down to estimated fair value based on independent appraisals and market data.

MORTGAGE RECEIVABLE AND NOTES RECEIVABLE

In August 2017, we sold 13 multifamily communities in exchange for cash and an $11.0 million note secured by a mortgage on the assets. As of September 30, 2019, the balance of the note was $10.1 million, with 12 communities remaining in the pool of assets used to secure the mortgage. The note bears an interest rate of 5.5% and matures in August 2020. Monthly payments are interest-only, with the principal balance payable at maturity. During the nine months ended September 30, 2019 and 2018, we received and recognized approximately $428,000 and $455,000 of interest income, respectively.

In July 2017, we originated a $16.2 million loan in a multifamily development located in New Hope, MN, a Minneapolis suburb. We funded an additional $341,000 upon satisfaction of certain conditions set forth in the loan agreement. The note bears an interest rate of 6.0%, matures in July 2023, and provides us an option to purchase the development prior to the loan maturity date. Interest payments are due when the note matures. As of September 30, 2019, the balance of the note, including accrued interest, was $17.3 million which appears in other assets on our Condensed Consolidated Balance Sheets.

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VARIABLE INTEREST ENTITIES

We have determined that our Operating Partnership and each of our less-than-wholly owned real estate partnerships is a variable interest entity (“VIE”), as the limited partners or the functional equivalent of limited partners lack substantive kick-out rights and substantive participating rights. We are the primary beneficiary of the VIEs, and the VIEs 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 economic performance of the VIEs 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 our Operating Partnership is a VIE, all of our assets and liabilities are held through a VIE.

GAIN ON LITIGATION SETTLEMENT

During the three and nine months ended September 30, 2019, we recorded a gain on litigation settlement of $300,000 and $6.6 million, respectively, from the settlement on a construction defect claim. The gain consisted of $5.2 million of cash received and $1.4 million of liabilities waived under the terms of the settlement.

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 our common shares of beneficial interest (“common shares”) outstanding during the period. We have issued restricted stock units (“RSUs”) under our 2015 Incentive Plan and Series D Convertible Preferred Units ("Series D preferred units"), which could have a dilutive effect on our earnings per share upon exercise of the RSUs or upon conversion of the Series D preferred units (refer to Note 4 for further discussion of the Series D preferred units). Other than the issuance of RSUs and Series D preferred units, we have no outstanding options, warrants, convertible stock or other contractual obligations requiring issuance of additional shares that would result in dilution of earnings. 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 limited partnership units (“Units”) any time following the first anniversary of the date they acquired such Units (“Exchange Right”). Upon the exercise of Exchange Rights, and in our sole discretion, we may issue common shares in exchange for Units on a one-for-one basis.

Performance-based restricted stock awards and RSUs of 37,822 and 24,844 for the three months ended September 30, 2019 and 2018, respectively, and 37,822 and 24,844, respectively, for the nine months ended September 30, 2019 and 2018 were excluded from the calculation of diluted earnings per share because the assumed proceeds per share plus the average unearned compensation were greater than the average market price of the common stock for the periods presented and, therefore, were anti-dilutive.

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 September 30, 2019 and 2018:

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	(in thousands, except per share data)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
NUMERATOR
Income (loss) from continuing operations – controlling interests	$	31,596		$	2,142		$	30,011		$	(24,058	)
Income (loss) from discontinued operations – controlling interests	—			511			—			13,141
Net income (loss) attributable to controlling interests	31,596			2,653			30,011			(10,917		)
Dividends to preferred shareholders	(1,705		)	(1,705		)	(5,116		)	(5,116		)
Numerator for basic earnings (loss) per share – net income available to common shareholders	29,891			948			24,895			(16,033		)
Noncontrolling interests – Operating Partnership	3,145			112			2,550			(1,888		)
Dividends to preferred unitholders	160			—			377			—
Numerator for diluted earnings (loss) per share	$	33,196		$	1,060		$	27,822		$	(17,921	)
DENOMINATOR
Denominator for basic earnings per share weighted average shares	11,625			11,932			11,705			11,944
Effect of redeemable operating partnership units	1,223			1,386			1,282			1,407
Effect of Series D preferred units	228			—			181			—
Effect of dilutive restricted stock awards and restricted stock units	11			—			6			—
Denominator for diluted earnings per share	13,087			13,318			13,174			13,351

Earnings (loss) per common share from continuing operations – basic	$	2.57		$	0.04		$	2.11		$	(2.44	)
Earnings (loss) per common share from discontinued operations – basic	—			0.04			—			1.10
NET EARNINGS (LOSS) PER COMMON SHARE – BASIC	$	2.57		$	0.08		$	2.11		$	(1.34	)

Earnings (loss) per common share from continuing operations – diluted	$	2.54		$	0.04		$	2.11		$	(2.44	)
Earnings (loss) per common share from discontinued operations – diluted	—			0.04			—			1.10
NET EARNINGS (LOSS) PER COMMON SHARE – DILUTED	$	2.54		$	0.08		$	2.11		$	(1.34	)

NOTE 4 • EQUITY AND MEZZANINE EQUITY

Operating Partnership Units. The Operating Partnership had 1.2 million and 1.4 million outstanding Units at September 30, 2019 and December 31, 2018, respectively.

Common Shares and Equity Awards. Common shares outstanding on September 30, 2019 and December 31, 2018, totaled 11.6 million and 11.9 million, respectively. There were 8,662 shares issued upon the vesting of equity awards under our 2015 Incentive Plan during the three months ended September 30, 2019, with a total grant-date fair value of $473,000. During the nine months ended September 30, 2019, we issued 15,380 shares, with a total grant-date fair value $930,000. During the three and nine months ended September 30, 2018, we issued 1,022 shares, with a total grant-date fair value of $67,000 and 7,248 shares, with a total grant-date fair value of $479,000, respectively, under our 2015 Incentive Plan. These shares vest based on performance and service criteria.

Exchange Rights. Pursuant to the exercise of Exchange Rights, we redeemed Units during the three and nine months ended September 30, 2019 and 2018 as detailed in the table below.



	(in thousands, except per Unit amounts)
Three Months Ended September 30,	Number of Units	Aggregate Cost⁽¹⁾		Average Price Per Unit
2019	—	$	11	$	62.10
2018	—	$	4	$	54.70

Nine Months Ended September 30,
2019	136	$	8,135	$	59.99
2018	49	$	2,751	$	55.84


(1)	The redemption price is determined using the volume weighted average price for the ten trading days prior to the date a unitholder provides notification of their intent to redeem units.

We also redeemed Units in exchange for common shares in connection with Unitholders exercising their Exchange Rights during the three and nine months ended September 30, 2019 and 2018 as detailed in the table below.

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	(in thousands)
Three Months Ended September 30,	Number of Units	Total Book Value
2019	—	$	10
2018	21	$	624

Nine Months Ended September 30,
2019	8	$	511
2018	24	$	658

Share Repurchase Program. On December 14, 2018, our Board of Trustees reauthorized our $50 million share repurchase program for an additional one-year period. Under this program, we may repurchase common shares in open-market purchases, including pursuant to Rule 10b5-1 and Rule 10b-18 plans, as determined by management and in accordance with the requirements of the SEC. The extent to which we repurchase our shares, and the timing of repurchases, will depend on a variety of factors, including market conditions, regulatory requirements, and other corporate considerations, as determined by the executive management team. This program may be suspended or discontinued at any time. As of September 30, 2019, $15.4 million remained available under our $50 million authorized share repurchase program. Common shares repurchased during the three and nine months ended September 30, 2019 and 2018 are detailed in the table below.



	(in thousands, except per share amounts)
Three Months Ended September 30,	Number of Shares	Aggregate Cost⁽¹⁾		Average Price Per Share⁽¹⁾
2019	39	$	2,346	$	59.57
2018	—	—		—

Nine Months Ended September 30,
2019	329	$	18,023	$	54.69
2018	67	$	3,415	$	51.26


(1)	Amount includes commissions.

Series C Preferred Shares. Series C preferred shares outstanding were 4.1 million shares at September 30, 2019 and December 31, 2018. The Series C preferred shares are nonvoting and redeemable for cash at $25.00 per share at our option after October 2, 2022. Holders of these shares are entitled to cumulative distributions, payable quarterly (as and if declared by the Board of Trustees). Distributions accrue at an annual rate of $1.65625 per share, which is equal to 6.625% of the $25.00 per share liquidation preference ($103.0 million liquidation preference in the aggregate).

Series D Preferred Units (Mezzanine Equity). On February 26, 2019, we issued 165,600 newly created Series D preferred units at an issuance price of $100 per preferred unit as partial consideration for the acquisition of SouthFork Townhomes. The Series D preferred unit holders receive a preferred distribution at the rate of 3.862% per year. The Series D preferred units have a put option which allows the holder to redeem any or all of the Series D preferred units for cash equal to the issue price. Each Series D preferred unit is convertible, at the holder's option, into 1.37931 Units, representing a conversion exchange rate of $72.50 per unit. The holders of the Series D preferred units do not have any voting rights.

Redeemable Noncontrolling Interests (Mezzanine Equity). Redeemable noncontrolling interests on our 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. During the nine months ended September 30, 2019, we acquired the remaining 34.5% noncontrolling interests in the real estate partnership that owns Commons and Landing at Southgate for $1.3 million. Below is a table reflecting the activity of the redeemable noncontrolling interests for the nine months ended September 30, 2019.



	(in thousands)
Balance at December 31, 2018	$	5,968
Net income	(174		)
Acquisition of redeemable noncontrolling interests	(5,794		)
Balance at September 30, 2019	$	—

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NOTE 5 • SEGMENT REPORTING

We operate in a single reportable segment which includes the ownership, management, development, redevelopment, and acquisition of apartment communities. Each of our operating properties is considered a separate operating segment because each property earns revenues, incurs expenses, and has discrete financial information. Our chief operating decision-makers evaluate each property's operating results to make decisions about resources to be allocated and to assess performance. We do not group our operations based on geography, size, or type. Our apartment communities have similar long-term economic characteristics and provide similar products and services to our residents. No apartment community comprises more than 10% of consolidated revenues, profits, or assets. Accordingly, our apartment communities are aggregated into a single reportable segment.

Our executive management team comprises our chief operating decision-makers. This team measures the performance of our reportable segment based on net operating income (“NOI”), which we define as total real estate revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expense. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.

The following tables present NOI for the three and nine months ended September 30, 2019 and 2018, respectively, along with reconciliations to net income in 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 September 30, 2019	Multifamily		All Other		Total
Revenue	$	43,916	$	3,520	$	47,436
Property operating expenses, including real estate taxes	18,455		1,455		19,910
Net operating income	$	25,461	$	2,065	$	27,526
Property management					(1,553		)
Casualty gain (loss)					(178		)
Depreciation and amortization					(18,751		)
General and administrative expenses					(3,448		)
Interest expense					(7,694		)
Loss on debt extinguishment					(1,087		)
Interest and other income					498
Income (loss) before gain (loss) on sale of real estate and other investments and gain (loss) on litigation settlement					(4,687		)
Gain (loss) on sale of real estate and other investments					39,105
Gain (loss) on litigation settlement					300
Net income (loss)					$	34,718

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	(in thousands)
Three Months Ended September 30, 2018	Multifamily		All Other		Total
Revenue	$	40,885	$	4,521	$	45,406
Property operating expenses, including real estate taxes	17,491		1,996		19,487
Net operating income	$	23,394	$	2,525	$	25,919
Property management					(1,269		)
Casualty gain (loss)					(225		)
Depreciation and amortization					(19,164		)
General and administrative expenses					(3,147		)
Interest expense					(8,193		)
Loss on debt extinguishment					(540		)
Interest and other income					395
Income (loss) before gain (loss) on sale of real estate and other investments and income (loss) from discontinued operations					(6,224		)
Gain (loss) on sale of real estate and other investments					9,095
Income (loss) from continuing operations					2,871
Income (loss) from discontinued operations					570
Net income (loss)					$	3,441



	(in thousands)
Nine Months Ended September 30, 2019	Multifamily		All Other		Total
Real estate revenue	$	129,457	$	10,521	$	139,978
Real estate expenses	54,888		4,574		59,462
Net operating income	$	74,569	$	5,947	$	80,516
Property management expenses					(4,552		)
Casualty gain (loss)					(911		)
Depreciation and amortization					(55,299		)
General and administrative expenses					(10,803		)
Interest expense					(23,180		)
Loss on debt extinguishment					(1,496		)
Interest and other income					1,390
Income (loss) before gain (loss) on sale of real estate and other investments and gain (loss) on litigation settlement					(14,335		)
Gain (loss) on sale of real estate and other investments					39,774
Gain (loss) on litigation settlement					6,586
Net income (loss)					$	32,025

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	(in thousands)
Nine Months Ended September 30, 2018	Multifamily		All Other		Total
Real estate revenue	$	119,069	$	15,569	$	134,638
Real estate expenses	51,342		6,349		57,691
Net operating income	$	67,727	$	9,220	$	76,947
Property management expenses					(4,090		)
Casualty gain (loss)					(275		)
Depreciation and amortization					(58,812		)
Impairment of real estate investments					(17,809		)
General and administrative expenses					(11,114		)
Interest expense					(25,051		)
Loss on debt extinguishment					(673		)
Interest and other income					1,544
Income (loss) before gain (loss) on sale of real estate and other investments and income (loss) from discontinued operations					(39,333		)
Gain (loss) on sale of real estate and other investments					11,399
Income (loss) from continuing operations					(27,934		)
Income (loss) from discontinued operations					14,690
Net income (loss)					$	(13,244	)

Segment Assets and Accumulated Depreciation

Segment assets are summarized as follows as of September 30, 2019, and December 31, 2018, respectively, along with reconciliations to the condensed consolidated financial statements:



	(in thousands)
As of September 30, 2019	Multifamily			All Other			Total
Segment assets
Property owned	$	1,684,943		$	35,409		$	1,720,352
Less accumulated depreciation	(360,955		)	(9,537		)	(370,492		)
Total property owned	$	1,323,988		$	25,872		$	1,349,860
Cash and cash equivalents							8,500
Restricted cash							3,339
Other assets							30,589
Unimproved land							1,376
Mortgage loans receivable							10,140
Total Assets							$	1,403,804



	(in thousands)
As of December 31, 2018	Multifamily			All Other			Total
Segment assets
Property owned	$	1,582,917		$	44,719		$	1,627,636
Less accumulated depreciation	(340,081		)	(13,790		)	(353,871		)
Total property owned	$	1,242,836		$	30,929		$	1,273,765
Cash and cash equivalents							13,792
Restricted cash							5,464
Other assets							27,265
Unimproved land							5,301
Mortgage loans receivable							10,410
Total Assets							$	1,335,997

NOTE 6 • COMMITMENTS AND CONTINGENCIES

Litigation. In the ordinary course of our operations, we become involved in litigation. At this time, we know of no material pending or threatened legal proceedings, or other proceedings contemplated by governmental authorities, that would have a material impact on us.

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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 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. Twenty-four of our properties, consisting of 4,180 apartment homes, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties and are effective for varying periods. We do not believe that the agreements materially affect the conduct of our business or our decisions whether to dispose of restricted properties during the restriction period because we generally hold these and our other properties for investment purposes rather than for sale. In addition, where we deem it to be in our shareholders' best interests to dispose of such properties, we generally seek to structure sales of such properties as tax deferred transactions under Section 1031 of the Internal Revenue Code (the "Code"). Otherwise, we may be required to provide tax indemnification payments to the parties to these agreements.

NOTE 7 • DISCONTINUED OPERATIONS

We report in discontinued operations the results of operations and the related gains or losses on the sales of properties that have either been disposed of or classified as held for sale and meet the classification of a discontinued operation as described in ASC 205, "Presentation of Financial Statements," and ASC 360, "Property, Plant, and Equipment: Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity." Under this standard, a disposal (or classification as held for sale) of a component of an entity or a group of components of an entity is required to be reported in discontinued operations if the disposal represents a strategic shift that has (or will have) a major effect on an entity’s operations and financial results.

We classified no new dispositions or properties held for sale as discontinued operations during the three and nine months ended September 30, 2019 and 2018.

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 September 30, 2019 and 2018, respectively:



	(in thousands)
	Three Months Ended September 30,			Nine Months Ended September 30,
	2019	2018		2019	2018
REVENUE	—	—		—	$	353
EXPENSES
Property operating expenses, excluding real estate taxes	—	—		—	25
Real estate taxes	—	—		—	35
Depreciation and amortization	—	—		—	2
General and administrative	—	—		—	14
TOTAL EXPENSES	—	—		—	$	76
Operating income (loss)	—	—		—	277
Interest expense	—	—		—	(1		)
Other income	—	—		—	14
Income (loss) from discontinued operations before gain (loss) on sale of discontinued operations	—	—		—	290
Gain (loss) on sale of discontinued operations	—	$	570	—	14,400
INCOME (LOSS) FROM DISCONTINUED OPERATIONS	—	$	570	—	$	14,690

NOTE 8 • ACQUISITIONS AND DISPOSITIONS

ACQUISITIONS

We acquired $125.3 million of new real estate during the three months ended September 30, 2019, compared to no acquisitions in the three months ended September 30, 2018. Our acquisitions during the nine months ended September 30, 2019 and 2018 are detailed below.

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Nine Months Ended September 30, 2019



	Date Acquired	(in thousands)
		Total Acquisition Cost		Form of Consideration				Investment Allocation
Acquisitions		Total Acquisition Cost		Cash		Units⁽¹⁾		Land		Building		Intangible Assets
Multifamily
272 homes - SouthFork Townhomes - Lakeville, MN	February 26, 2019	$	44,000	$	27,440	$	16,560	$	3,502	$	39,950	$	548
96 homes - FreightYard Townhomes and Flats - Minneapolis, MN	September 6, 2019	26,000		26,000		—		1,889		23,615		496
328 homes - Lugano at Cherry Creek - Denver, CO⁽³⁾	September 25, 2019	99,250		99,250		—		7,679		89,365		1,781
		$	169,250	$	152,690	$	16,560	$	13,070	$	152,930	$	2,825

Other
Minot 3100 10th St SW - Minot, ND⁽²⁾	May 23, 2019	$	2,112	$	2,112	—		$	246	$	1,866	—

Total Acquisitions		$	171,362	$	154,802	$	16,560	$	13,316	$	154,796	$	2,825


(1)	Value of Series D preferred units at the acquisition date.


(2)	Acquired for use as our Minot corporate office building after renovations have been completed.


(3)	Investment allocation excludes a $425,000 acquisition credit related to retail space lease-up.

Nine Months Ended September 30, 2018



	Date Acquired	(in thousands)
		Total Acquisition Cost⁽¹⁾		Investment Allocation
Acquisitions		Total Acquisition Cost⁽¹⁾		Land		Building		Intangible Assets
390 homes - Westend - Denver, CO	March 28, 2018	$	128,700	$	25,525	$	102,101	$	1,074

Total Acquisitions		$	128,700	$	25,525	$	102,101	$	1,074


(1)	Acquisition cost was paid in cash.

DISPOSITIONS

During the three months ended September 30, 2019, we sold one parcel of unimproved land and six apartment communities for an aggregate sale price of $85.0 million. After deductions for closing costs and other costs associated with the dispositions, we recognized a $38.9 million aggregate gain on sale. During the three months ended September 30, 2018, we sold three apartment communities, two commercial properties, and three parcels of unimproved land. The following tables detail our dispositions for the nine months ended September 30, 2019 and 2018:

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Nine Months Ended September 30, 2019



		(in thousands)
Dispositions	Date Disposed	Sale Price		Book Value and Sale Cost		Gain/(Loss)
Multifamily
21 homes - Pinehurst - Billings, MT	July 26, 2019	$	1,675	$	961	$	714
160 homes - Brookfield Village - Topeka, KS	September 24, 2019	10,350		5,853		4,497
220 homes - Crown Colony - Topeka, KS	September 24, 2019	17,200		7,876		9,324
54 homes - Mariposa - Topeka, KS	September 24, 2019	6,100		4,290		1,810
300 homes - Sherwood - Topeka, KS	September 24, 2019	26,150		11,536		14,614
308 homes - Villa West - Topeka, KS	September 24, 2019	22,950		15,165		7,785
		$	84,425	$	45,681	$	38,744

Other
Minot 1400 31st Ave SW - Minot, ND⁽¹⁾	May 23, 2019	$	6,530	$	6,048	$	482

Unimproved Land
Creekside Crossing - Bismarck, ND	March 1, 2019	$	3,049	$	3,205	$	(156	)
Minot 1525 24th Ave SW - Minot, ND	April 3, 2019	725		593		132
Weston - Weston, WI	July 31, 2019	600		427		173
		$	4,374	$	4,225	$	149

Total Dispositions		$	95,329	$	55,954	$	39,375


(1)	This property currently houses our Minot corporate office. During the second quarter of 2019, we purchased an office building which will become our Minot corporate office after renovations are completed. We will lease space in the Minot 1400 31st Ave SW building until the new office is placed in service.

Nine Months Ended September 30, 2018



		(in thousands)
Dispositions	Date Disposed	Sale Price		Book Value and Sale Cost		Gain/(Loss)
Multifamily
44 homes - Dakota Commons - Williston, ND	July 26, 2018	$	4,420	$	3,878	$	542
145 homes - Williston Garden - Williston, ND⁽¹⁾	July 26, 2018	12,310		11,313		997
288 homes - Renaissance Heights - Williston, ND⁽²⁾	July 26, 2018	24,770		17,856		6,914
		$	41,500	$	33,047	$	8,453

Other
43,404 sq ft Garden View - St. Paul, MN	January 19, 2018	$	14,000	$	6,191	$	7,809
52,116 sq ft Ritchie Medical - St. Paul, MN	January 19, 2018	16,500		10,419		6,081
22,187 sq ft Bismarck 715 East Broadway - Bismarck, ND	March 7, 2018	5,500		3,215		2,285
7,849 sq ft Minot Southgate Retail - Minot, ND	July 12, 2018	1,925		2,056		(131		)
9,052 sq ft Fresenius - Duluth, MN	July 27, 2018	1,900		1,078		822
		$	39,825	$	22,959	$	16,866

Unimproved Land
Grand Forks - Grand Forks, ND	July 16, 2018	$	3,000	$	2,986	$	14
Renaissance Heights - Williston, ND⁽³⁾	July 26, 2018	750		684		66
Badger Hills Unimproved - Rochester, MN	August 29, 2018	1,400		1,528		(128		)
		$	5,150	$	5,198	$	(48	)

Total Dispositions		$	86,475	$	61,204	$	25,271


(1)	This apartment community was owned by a joint venture entity in which we had an interest of approximately 74.11% .


(2)	This apartment community was owned by a joint venture entity in which we had an interest of approximately 87.14%.


(3)	This parcel of land was owned by a joint venture entity in which we had an interest of approximately 70.00%.

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NOTE 9 • DEBT

As of September 30, 2019, we owned 84 apartment communities, of which 35 served as collateral for mortgage loans. All of these mortgage loans were non-recourse to us other than for standard carve-out obligations. As of September 30, 2019, we believe that there are no material defaults or instances of noncompliance in regards to any of these mortgages payable.

During the three months ended September 30, 2019, we closed a $59.9 million mortgage loan. This mortgage loan is secured by four apartment communities and is priced at a fixed rate of 3.88% for the full twelve-year term of the loan. Proceeds from this loan were used to pay down balances under our line of credit.

During the three months ended September 30, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes ("unsecured senior notes"). Under this agreement, we issued $75.0 million of Series A notes due September 13, 2029 bearing interest at a rate of 3.84% annually and $50.0 million of Series B notes due September 30, 2028 bearing interest at a rate of 3.69% annually.

As of September 30, 2019, we owned 49 apartment communities that were not encumbered by mortgages, with 44 of those properties providing credit support for our unsecured borrowings. Our primary unsecured credit facility ("unsecured credit facility") is a revolving, multi-bank line of credit, with the Bank of Montreal serving as administrative agent. Our line of credit has total commitments of $250.0 million, with borrowing capacity based on the value of properties contained in the unencumbered asset pool ("UAP"). As of September 30, 2019, the UAP provided for a borrowing capacity of $250.0 million, with additional borrowing availability of $146.9 million beyond the $103.1 million drawn, including the balance on our operating line of credit (discussed below). The unsecured credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.

Under our unsecured credit facility, we also have unsecured term loans of $70.0 million and $75.0 million, included within notes payable on the condensed consolidated balance sheets, which mature on January 15, 2024 and on August 31, 2025, respectively.

The interest rates on the line of credit and term loans are based, at our option, on either the lender's base rate plus a margin, ranging from 35-85 basis points, or the London Interbank Offered Rate ("LIBOR"), plus a margin that ranges from 135-190 basis points based on our consolidated leverage. Our unsecured credit facility and unsecured senior notes are subject to customary financial covenants and limitations. We believe that we are in compliance with all such financial covenants and limitations as of September 30, 2019.

We also have a $6.0 million operating line of credit. This operating line of credit is designed to enhance treasury management activities and more effectively manage cash balances. This operating line has a one-year term, with pricing based on a market spread plus the one-month LIBOR index rate. As of September 30, 2019, we had $293,000 outstanding on this operating line compared to no outstanding balance as of December 31, 2018.

The following table summarizes our indebtedness at September 30, 2019:



	(in thousands)
	September 30, 2019			December 31, 2018			Weighted Average Maturity in Years at September 30, 2019
Lines of credit	$	103,143		$	57,500		2.9
Term loans	145,000			145,000			5.1
Unsecured senior notes	125,000			—			9.6
Unsecured debt	373,143			202,500			6.0
Mortgages payable - fixed	362,731			445,974			5.7
Total debt	$	735,874		$	648,474		5.9
Weighted average interest rate on lines of credit (rate with swap)	3.73		%	3.72		%
Weighted average interest rate on term loans (rate with swap)	4.14		%	4.01		%
Weighted average interest rate on unsecured senior notes	3.78		%	—
Weighted average interest rate on mortgages payable	4.15		%	4.58		%

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The aggregate amount of required future principal payments on mortgages payable, term loans, and senior notes as of September 30, 2019, was as follows:



	(in thousands)
2019 (remainder)	$	1,599
2020	23,531
2021	55,877
2022	40,740
2023	48,359
Thereafter	462,625
Total payments	$	632,731

NOTE 10 • DERIVATIVE INSTRUMENTS

Our objective in using interest rate derivatives is to add stability to interest expense and to manage our exposure to interest rate fluctuations. To accomplish this objective, we primarily use interest rate swap contracts to fix the variable interest rate on our term loans and a portion of our revolving line of credit. The interest rate swap contracts qualify as cash flow hedges.

Under ASU 2017-12, Derivatives and Hedging (Topic 815): Targeted Improvements to Accounting for Hedging Activities, the ineffective portion of a hedging instrument is not required to be recognized currently in earnings or disclosed. Changes in the fair value of cash flow hedges are recorded in accumulated other comprehensive income and subsequently reclassified into earnings in the period that the hedged transaction affects earnings. Amounts reported in accumulated other comprehensive income for our interest rate swap will be reclassified to interest expense as interest expense is incurred on our term loans. During the next twelve months, we estimate an additional $1.4 million will be reclassified as an increase to interest expense.

During the nine months ended September 30, 2019, we entered into a $50.0 million interest rate swap to fix the interest rate on a portion of our primary line of credit.

At September 30, 2019, we had three interest rate swap contracts in effect with a notional amount of $195.0 million and one additional interest rate swap that becomes effective on January 31, 2023, with a notional amount of $70.0 million.

The table below presents the fair value of our derivative financial instruments as well as their classification on our Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018.

(in thousands)

September 30, 2019

December 31, 2018

September 30, 2019

December 31, 2018

Balance Sheet Location

Fair Value

Balance Sheet Location

Fair Value

Total derivative instruments designated as hedging instruments - interest rate swaps

Other Assets

—

818

Accounts Payable and Accrued Expenses

9,793

1,675

The table below presents the effect of the Company’s derivative financial instruments on the Condensed Consolidated Statements of Operations as of September 30, 2019 and 2018.



	(in thousands)
	Gain (Loss) Recognized in OCI					Location of Gain (Loss) Reclassified from Accumulated OCI into Income	Gain (Loss) Reclassified from Accumulated OCI into Income
Three months ended September 30,	2019			2018			2019		2018
Total derivatives in cash flow hedging relationships - Interest rate contracts	$	(2,251	)	$	948	Interest expense	$	56	$	64

Nine months ended September 30,
Total derivatives in cash flow hedging relationships - Interest rate contracts	$	(9,819	)	$	3,106	Interest expense	$	26	$	193

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NOTE 11 • FAIR VALUE MEASUREMENTS

Cash and cash equivalents, restricted cash, accounts payable, accrued expenses, and other liabilities are carried at amounts that reasonably approximate their fair value due to their short-term nature. For variable rate line of credit debt that re-prices frequently, fair values are based on carrying values.

In determining the fair value of other financial instruments, we apply FASB ASC 820, "Fair Value Measurement and Disclosures." Fair value hierarchy under ASC 820 distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (Levels 1 and 2) and the reporting entity’s own assumptions about market participant assumptions (Level 3). Fair value estimates may differ from the amounts that may ultimately be realized upon sale or disposition of the assets and liabilities.

Fair Value Measurements on a Recurring Basis

The fair value of our interest rate swaps is determined using the market standard methodology of netting discounted expected variable cash payments and receipts. The variable cash payments and receipts are based on an expectation of future interest rates (a forward curve) derived from observable market interest rate curves. We also consider both our own nonperformance risk and the counterparty's nonperformance risk in the fair value measurement (Level 3).

Fair Value Measurements on a Nonrecurring Basis

There were no non-financial assets or liabilities measured at fair value on a nonrecurring basis at September 30, 2019. Non-financial assets measured at fair value on a nonrecurring basis at December 31, 2018, consisted of real estate investments that were written-down to estimated fair value during the transition period ended December 31, 2018. 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
December 31, 2018
Real estate investments valued at fair value	$	3,049	—	—	$	3,049

As of December 31, 2018, we estimated the fair value of our real estate investments using a market offer to purchase.

Financial Assets and Liabilities Not Measured at Fair Value

The fair value of mortgages payable and mortgage and notes receivable are estimated based on the discounted cash flows of the loans using market research and management estimates of comparable interest rates (Level 3).

The estimated fair values of our financial instruments as of September 30, 2019, and December 31, 2018, respectively, are as follows:



	(in thousands)
	September 30, 2019				December 31, 2018
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
FINANCIAL ASSETS
Cash and cash equivalents	$	8,500	$	8,500	$	13,792	$	13,792
Mortgage and note receivable	$	26,697	$	26,697	$	26,809	$	26,809
FINANCIAL LIABILITIES
Revolving lines of credit⁽¹⁾	$	103,143	$	103,143	$	57,500	$	57,500
Notes payable⁽¹⁾	$	270,000	$	270,000	$	145,000	$	145,000
Mortgages payable	$	362,731	$	366,144	$	445,974	$	444,241


(1)	Excluding the effect of interest rate swap agreements.

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, unrestricted and restricted common shares, and restricted stock units ("RSUs") up to an aggregate of 425,000 shares over the ten-year period in which the plan is in effect. Under our 2015 Incentive Plan, officers and non-officer employees may earn share awards under a long-term incentive plan,

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which is a forward-looking program that measures long-term performance over the stated performance period. These 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.

2019 LTIP Awards

Awards granted to officers on March 8, 2019, consist of time-based RSU awards for 6,391 shares and performance-based RSU awards based on relative total shareholder return (“TSR”), for 12,781 shares. All of these awards are classified as equity awards. The time-based RSU awards vest as to one-third of the shares on each of March 8, 2020, March 8, 2021, and March 8, 2022.

Awards granted on June 15, 2019, consist of 169 time-based RSUs that vest on June 15, 2020. Awards granted on August 10, 2019, consist of 100 time-based RSUs that vest on August 10, 2020. Awards granted on August 29, 2019, consist of 444 time-based RSUs that vest as to one-third on each of August 29, 2020, August 29, 2021, and August 29, 2022; 98 time-based RSUs that vest as to one-third on March 8, 2020, March 8, 2021, and March 8, 2022; and 197 performance RSUs based on TSR.

The performance-based RSU awards are earned based on our TSR as compared to the MSCI U.S. REIT Index over a forward-looking three-year period. The maximum number of RSUs eligible to be earned under this performance-based award is 25,562 RSUs, which is 200% of the RSUs 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, regardless of whether the market conditions are achieved and the 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, 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, and the expected term on the performance period of the award. The assumptions used to value the performance RSU awards were an expected volatility of 25.5%, a risk-free interest rate of 2.43%, and an expected life of 2.82 years. The share price at the grant date, March 8, 2019, was $58.06 per share.

Awards granted to trustees on May 17, 2019, consist of 812 RSUs which vested immediately and awards granted on June 13, 2019 consist of 7,521 time-based RSU awards which vest on June 13, 2020. All of these awards are classified as equity awards.

Share-Based Compensation Expense

Share-based compensation expense recognized in the consolidated financial statements for all outstanding share-based awards was $1.5 million and $1.0 million for the nine months ended September 30, 2019 and 2018, respectively. The increase in expense was primarily due to the timing of award grants in connection with the change in our fiscal year end, additional officers included in award grants, and a decrease in forfeitures in the current period compared to the prior period.

NOTE 13 • SUBSEQUENT EVENTS

On October 29, 2019, we sold five apartment communities containing 414 apartment homes in Bismarck, North Dakota for a sale price of $24.0 million. These properties included Crestview, Kirkwood Manor, North Pointe, Pebble Springs, and Westwood Park.

On November 1, 2019, we sold a commercial property in Woodbury, Minnesota for a sale price of $5.8 million.

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Item 2. Management's Discussion and Analysis of Financial Conditions 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, our audited financial statements for the transition period ended December 31, 2018, which are included in our Form 10-KT filed with the SEC on February 27, 2019, and the risk factors in Item 1A., “Risk Factors,” of our Form 10-KT for the transition period ended December 31, 2018.

We consider this and other sections of this Report to contain 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 (the “Exchange Act”), with respect to our expectations for future periods. Forward-looking statements do not discuss historical fact, but instead include statements related to expectations, projections, intentions or other items related to the future. Words such as “expects,” “anticipates,” “intends,” “plans,” “believes,” “seeks,” “estimates,” and variations of those words and similar expressions are intended to identify forward-looking statements. These forward-looking statements involve known and unknown risks, uncertainties, and other factors that may cause the actual results, performance, or achievements to be materially different from the results of operations, financial conditions, or plans expressed or implied by the forward-looking statements. Although we believe the expectations reflected in our forward-looking statements are based upon reasonable assumptions, we can give no assurance that our expectations will be achieved. Any statements contained herein that are not statements of historical fact should be deemed forward-looking statements. As a result, reliance should not be placed on these forward-looking statements, as these statements are subject to known and unknown risks, uncertainties, and other factors beyond our control and could differ materially from our actual results and performance.

The following factors, among others, could cause our future results to differ materially from those expressed in the forward-looking statements:


•	economic conditions in the markets where we own properties or markets in which we may invest in the future;


•	rental conditions in our markets, including occupancy levels and rental rates, our potential inability to renew residents or obtain new residents upon expiration of existing leases, changes in tax and housing laws, or other factors;

•

adverse changes in real estate markets, including future demand for apartment homes in our significant markets, barriers of entry into new markets, limitations on our ability to increase rental rates, our ability to identify and consummate attractive acquisitions and dispositions on favorable terms, our ability to reinvest sales proceeds successfully, and our inability to accommodate any significant decline in the market value of real estate serving as collateral for our mortgage obligations;


•	reliance on a single asset class (multifamily) and certain geographic areas (Midwest and West regions) of the U.S.;


•	inability to succeed in any new markets we enter;


•	failure of new acquisitions to achieve anticipated results or be efficiently integrated;


•	inability to complete lease-up of our projects on schedule and on budget;


•	inability to sell our non-core properties on terms that are acceptable;


•	failure to reinvest proceeds from sales of properties into tax-deferred exchanges, which could necessitate special dividend and tax protection payments;


•	inability to fund capital expenditures out of cash flow;


•	inability to pay, or need to reduce, dividends on our common shares;


•	inability to raise additional equity capital;


•	financing risks, including our potential inability to obtain debt or equity financing on favorable terms, or at all;


•	level and volatility of interest or capitalization rates or capital market conditions;


•	changes in operating costs, including real estate taxes, utilities, and insurance costs;


•	availability and cost of casualty insurance for losses;


•	inability to continue to satisfy complex rules in order to maintain our status as a REIT for federal income tax purposes, inability of the Operating Partnership to satisfy the rules to maintain its status as a partnership for federal income tax purposes, and the risk of changes in laws affecting REITs;


•	inability to attract and retain qualified personnel;


•	cyber liability or potential liability for breaches of our privacy or information security systems;


•	inability to address catastrophic weather, natural events, and climate change;


•	inability to comply with environmental laws and regulations; and


•	other risks identified in this Report, in other SEC reports, or in other documents that we publicly disseminate.

New factors may also arise from time to time that could have a material adverse effect on our business and results of operations. Except as otherwise required by law, we undertake no obligation to publicly update or revise these forward-looking statements to reflect events, circumstances, or changes in expectations after the date on which this Report is filed. Readers also should review the risks and uncertainties detailed from time to time in our filings with the SEC, including the “Management’s

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Discussion and Analysis of Financial Condition and Results of Operations” and “Risk Factors” contained in our Transition Report on Form 10-KT for the transition period ended December 31, 2018.

Executive Summary

We own, manage, acquire, redevelop, and develop apartment communities. We primarily focus on investing in markets characterized by stable and growing economic conditions, strong employment, and an attractive quality of life that we believe, in combination, lead to higher demand for our apartment homes and retention of our residents. As of September 30, 2019, we owned interests in 84 apartment communities consisting of 13,336 apartment homes. Property owned, as presented in the condensed consolidated balance sheets, was $1.7 billion at September 30, 2019, compared to $1.6 billion at December 31, 2018.

Renting apartment homes is our primary source of revenue, and our business objective is to provide great homes for our residents. We strive to maximize resident satisfaction and retention by investing in high-quality assets in desirable locations and creating vibrant apartment communities through service-oriented operations. We believe that delivering superior resident experiences will enhance resident satisfaction while also driving profitability for our business and our shareholders. We have paid quarterly distributions continuously since our first distribution in 1971.

Overview of the Three Months Ended September 30, 2019

For the three months ended September 30, 2019, revenue increased by $2.0 million to $47.4 million, compared to $45.4 million for the three months ended September 30, 2018. Total expenses increased by $548,000 to $43.8 million for the three months ended September 30, 2019, compared to $43.3 million for the three months ended September 30, 2018. Funds from Operations ("FFO") applicable to common shares and Units for the three months ended September 30, 2019 increased to $12.2 million compared to $11.0 million for the comparable period ended September 30, 2018, primarily due to higher NOI from apartment communities. The drivers of these changes are discussed in more detail in the “Results of Operations” section below.

In our ongoing efforts to improve the quality of our portfolio and balance sheet, we completed the following transactions during the third quarter of 2019:


•	We acquired FreightYard Townhomes and Flats, a 96-home apartment community located in Minneapolis, Minnesota, and Lugano at Cherry Creek, a 328-home apartment community located in Denver, Colorado, for an aggregate purchase price of $125.3 million.


•	We sold one apartment community in Billings, Montana and our entire portfolio of five properties in Topeka, Kansas for an aggregate sale price of $84.4 million. We also sold one parcel of unimproved land for $600,000.


•	We repurchased approximately 39,000 common shares for an aggregate purchase price of $2.3 million, including commissions, representing an average price of $59.57 per common share.


•	We entered into a $59.9 million mortgage loan. This mortgage loan is secured by four apartment communities and is priced at a fixed rate of 3.88% for the full twelve-year term of the loan.


•	We entered into a private shelf agreement for the issuance of up to $150.0 million of senior unsecured promissory notes. In September 2019, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually, under this facility.

See Note 8 of the Notes to Condensed Consolidated Financial Statements in this Report for a table detailing our acquisitions and dispositions during the three-month periods ended September 30, 2019 and 2018.

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Results of Operations

The discussion that follows is based on our consolidated results of operations for the three and nine months ended September 30, 2019 and 2018.

Consolidated Results of Operations for the Three and Nine Months Ended September 30, 2019 and 2018



	(in thousands, except percentages)
	Three Months Ended											Nine Months Ended
	September 30,						2019 vs. 2018					September 30,						2019 vs. 2018
	2019			2018			$ Change			% Change		2019			2018			$ Change			% Change
Revenue
Same-store	$	37,633		$	36,198		$	1,435		4.0	%	$	112,052		$	108,031		$	4,021		3.7	%
Non-same-store	6,283			4,687			1,596			34.1	%	17,405			11,038			6,367			57.7	%
Other properties and dispositions	3,520			4,521			(1,001		)	(22.1	)%	10,521			15,569			(5,048		)	(32.4	)%
Total	47,436			45,406			2,030			4.5	%	139,978			134,638			5,340			4.0	%
Property operating expenses, including real estate taxes
Same-store	16,147			15,795			352			2.2	%	48,561			47,227			1,334			2.8	%
Non-same-store	2,308			1,696			612			36.1	%	6,327			4,115			2,212			53.8	%
Other properties and dispositions	1,455			1,996			(541		)	(27.1	)%	4,574			6,349			(1,775		)	(28.0	)%
Total	19,910			19,487			423			2.2	%	59,462			57,691			1,771			3.1	%
Net operating income
Same-store	21,486			20,403			1,083			5.3	%	63,491			60,804			2,687			4.4	%
Non-same-store	3,975			2,991			984			32.9	%	11,078			6,923			4,155			60.0	%
Other properties and dispositions	2,065			2,525			(460		)	(18.2	)%	5,947			9,220			(3,273		)	(35.5	)%
Total	$	27,526		$	25,919		$	1,607		6.2	%	$	80,516		$	76,947		$	3,569		4.6	%
Property management expenses	(1,553		)	(1,269		)	284			22.4	%	(4,552		)	(4,090		)	462			11.3	%
Casualty gain (loss)	(178		)	(225		)	(47		)	(20.9	)%	(911		)	(275		)	636			231.3	%
Depreciation and amortization	(18,751		)	(19,164		)	(413		)	(2.2	)%	(55,299		)	(58,812		)	(3,513		)	(6.0	)%
Impairment of real estate investments	—			—			—			—		—			(17,809		)	(17,809		)	(100.0	)%
General and administrative expenses	(3,448		)	(3,147		)	301			9.6	%	(10,803		)	(11,114		)	(311		)	(2.8	)%
Interest expense	(7,694		)	(8,193		)	(499		)	(6.1	)%	(23,180		)	(25,051		)	(1,871		)	(7.5	)%
Loss on extinguishment of debt	(1,087		)	(540		)	547			101.3	%	(1,496		)	(673		)	823			122.3	%
Interest and other income	498			395			103			26.1	%	1,390			1,544			(154		)	(10.0	)%
Income (loss) before gain (loss) on sale of real estate and other investments, gain (loss) on litigation settlement, and income (loss) from discontinued operations	(4,687		)	(6,224		)	1,537			24.7	%	(14,335		)	(39,333		)	24,998			63.6	%
Gain (loss) on sale of real estate and other investments	39,105			9,095			30,010			(330.0	)%	39,774			11,399			28,375			248.9	%
Gain (loss) on litigation settlement	300			—			300			100.0	%	6,586			—			6,586			100.0	%
Income (loss) from continuing operations	34,718			2,871			31,847			1,109.3	%	32,025			(27,934		)	59,959			(214.6	)%
Income (loss) from discontinued operations	—			570			(570		)	(100.0	)%	—			14,690			(14,690		)	(100.0	)%
NET INCOME (LOSS)	$	34,718		$	3,441		$	31,277		909.0	%	$	32,025		$	(13,244	)	$	45,269		(341.8	)%
Dividends to preferred unitholders	(160		)	—			160			100.0	%	(377		)	—			377			100.0	%
Net (income) loss attributable to noncontrolling interests – Operating Partnership	(3,145		)	(112		)	(3,033		)	2,708.0	%	(2,550		)	1,888			(4,438		)	(235.1	)%
Net (income) loss attributable to noncontrolling interests – consolidated real estate entities	183			(676		)	859			(127.1	)%	913			439			474			108.0	%
Net income (loss) attributable to controlling interests	31,596			2,653			28,943			1,091.0	%	30,011			(10,917		)	40,928			(374.9	)%
Dividends to preferred shareholders	(1,705		)	(1,705		)	—			—		(5,116		)	(5,116		)	—			—
NET INCOME (LOSS) AVAILABLE TO COMMON SHAREHOLDERS	$	29,891		$	948		$	28,943		3,053.1	%	$	24,895		$	(16,033	)	$	40,928		(255.3	)%

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	Three Months Ended September 30,				Nine Months Ended September 30,
Weighted Average Occupancy⁽¹⁾	2019		2018		2019		2018
Same-store	93.3	%	91.9	%	94.3	%	93.4	%
Non-same-store	94.2	%	93.4	%	94.6	%	87.1	%
Total	93.4	%	92.2	%	94.4	%	92.8	%

(1)

Weighted average occupancy is defined as the percentage resulting from dividing actual rental revenue by scheduled rental revenue. Scheduled rental revenue represents the value of all apartment homes, with occupied homes valued at contractual rental rates pursuant to leases and vacant homes valued at estimated market rents. When calculating actual rents for occupied homes and market rents for vacant homes, delinquencies, and concessions are not taken into account. Market rates are determined using the currently offered effective rates on new leases at the community and are used as the starting point in determination of the market rates of vacant apartment homes. We believe that weighted average occupancy is a meaningful measure of occupancy because it considers the value of each vacant unit at its estimated market rate. Weighted average occupancy may not completely reflect short-term trends in physical occupancy, and our calculation of weighted average occupancy may not be comparable to that disclosed by other REITs.



Number of Apartment Homes	September 30, 2019	September 30, 2018
Same-store	11,785	12,847
Non-same-store	1,551	855
Total	13,336	13,702

Net Operating Income, or NOI, is a non-GAAP measure, which we define as total real estate revenues less property operating expenses, including real estate taxes. We believe that NOI is an important supplemental measure of operating performance for real estate because it provides a measure of operations that is unaffected by depreciation, amortization, financing, property management overhead, casualty losses, and general and administrative expenses. NOI does not represent cash generated by operating activities in accordance with GAAP and should not be considered an alternative to net income, net income available for common shareholders, or cash flow from operating activities as a measure of financial performance.

We have provided certain information on a same-store and non-same-store basis. Same-store apartment communities are owned or in service for the entirety of the periods being compared, and, in the case of development properties, have achieved a target level of physical occupancy of 90%. On the first day of each calendar year, we determine the composition of our same-store pool for that year as well as adjust the previous year, which allows us to evaluate full period-over-period operating comparisons for existing apartment communities and their contribution to net income. We believe that measuring performance on a same-store basis is useful to investors because it enables evaluation of how a fixed pool of our communities are performing year-over-year. We use this measure to assess whether or not we have been successful in increasing NOI, renewing the leases on existing residents, controlling operating costs, and making prudent capital improvements. The discussion below focuses on the main factors affecting real estate revenue and expenses from same-store apartment communities because changes from one year to another in real estate revenue and expenses from non-same-store apartment communities are generally due to the addition of those properties to our real estate portfolio, and accordingly provide less useful information for evaluating ongoing operational performance of our real estate portfolio.

For the comparison of the nine months ended September 30, 2019 and 2018, six apartment communities were non-same-store. Sold communities are included in "Other," which also includes non-multifamily properties and the non-multifamily components of mixed-use properties.

Revenues. Revenue increased by 4.5% to $47.4 million for the three months ended September 30, 2019, compared to $45.4 million in the three months ended September 30, 2018. Non-same-store communities contributed $1.6 million to the increase, offset by a $1.0 million decrease from dispositions and other properties. Revenue from same-store communities increased 4.0% or $1.4 million in the three months ended September 30, 2019, compared to the same period in the prior year. The increase was attributable to 2.6% growth in average rental revenue and 1.4% growth in occupancy as weighted average occupancy increased to 93.3% from 91.9% for the three months ended September 30, 2019 and 2018, respectively.

Revenue increased by 4.0% to $140.0 million for the nine months ended September 30, 2019, compared to $134.6 million in the nine months ended September 30, 2018. Non-same-store communities contributed $6.4 million to the increase, offset by a $5.0 million decrease from dispositions and other properties. Revenue from same-store communities increased 3.7% or $4.0 million in the nine months ended September 30, 2019, compared to the same period in the prior year. The increase was attributable to 2.8% growth in average rental revenue and 0.9% growth in occupancy as weighted average occupancy increased to 94.3% from 93.4% for the nine months ended September 30, 2019 and 2018, respectively.

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Property operating expenses, including real estate taxes. Property operating expenses, including real estate taxes, increased by 2.2% to $19.9 million in the three months ended September 30, 2019, compared to $19.5 million in the same period of the prior year. An increase of $612,000 at non-same-store communities was offset by a decrease of $541,000 from other properties and dispositions. Property operating expenses, including real estate taxes, at same-store communities increased by 2.2% or $352,000 in the three months ended September 30, 2019, compared to the same period in the prior year. At same-store communities, real estate taxes increased by $200,000, of which $130,000 was due to an adjustment in the prior comparable period. Insurance expense at same-store properties increased by $383,000, of which $304,000 was due to higher deductible costs with the remainder due to an increase in premiums. These same-store increases were partially offset by a decrease in controllable operating expenses (which exclude insurance and real estate taxes) of $232,000, primarily due to lower maintenance costs.

Property operating expenses, including real estate taxes, increased by 3.1% to $59.5 million in the nine months ended September 30, 2019, compared to $57.7 million in the same period of the prior year. An increase of $2.2 million at non-same-store communities was offset by a decrease of $1.8 million from other properties and dispositions. Property operating expenses, including real estate taxes, at same-store communities increased by 2.8% or $1.3 million in the nine months ended September 30, 2019, compared to the same period in the prior year. At same-store communities, real estate taxes increased by $474,000, of which $130,000 was due to an adjustment in the prior year comparable period from the reallocation of cost at a mixed use property. Insurance expense at same-store properties increased by $969,000, of which $324,000 was due to an adjustment in the prior comparable period from the favorable resolution of insurance claims and $383,000 was due to higher deductible costs, with the remainder due to an increase in premiums. Controllable expenses decreased by $109,000, which was primarily due to lower compensation costs as a result of a reduction in employee headcount but was partially offset by higher snow removal costs as a result of historically high levels of snowfall during the winter as well as landscaping and other maintenance costs.

Property management expenses. Property management expense, consisting of property management overhead and property management fees paid to third parties, was $1.6 million in the three months ended September 30, 2019 compared to 1.3 million in the same period of the prior year. The increase was primarily driven by technology initiatives and compensation costs.

Property management expense increased by 11.3% to $4.6 million in the nine months ended September 30, 2019, compared to $4.1 million in the same period of the prior year. The increase in property management expense was primarily due to technology initiatives and compensation costs, including severance.

Casualty gain (loss). Casualty loss was $178,000 in the three months ended September 30, 2019, compared to $225,000 in the same period of the prior year.

Casualty loss was $911,000 in the nine months ended September 30, 2019, an increase of $636,000 from the same period of the prior year. During the nine months ended September 30, 2019, many of our markets were impacted by a series of adverse weather-related events. These events included extreme cold and record-setting snowfall, which caused excess ice and snow accumulation, resulting in water damage to some of our apartment communities. We believe that the damages will be covered by insurance and have recorded casualty losses of $641,000 during the period, representing the aggregate annual stop loss under our insurance coverage. The remaining increase is a result of uninsured water intrusion damage at one apartment community and uninsured water damage due to mechanical failure at another apartment community. In the same period of the prior year, we recorded only $50,000 in aggregate annual stop loss under our insurance coverage as a result of favorable claims experience.

Depreciation and amortization. Depreciation and amortization decreased by 2.2% to $18.8 million in the three months ended September 30, 2019, compared to $19.2 million in the same period of the prior year, primarily due to sold properties.

Depreciation and amortization decreased by 6.0% to $55.3 million in the nine months ended September 30, 2019, compared to $58.8 million in the same period of the prior year, primarily attributable to sold properties, certain intangible assets becoming fully amortized, and an adjustment in the prior comparable period due to shortening the estimated useful life of a non-multifamily property, which elevated depreciation expense in the nine months ended September 30, 2018.

General and administrative expenses. General and administrative expenses increased by 9.6% to $3.4 million in the three months ended September 30, 2019, compared to $3.1 million in the same period of the prior year, primarily attributable to increases in consulting fees and compensation costs as a result of a decrease in open positions. These increases were partially offset by a decrease in legal fees related to our pursuit of recovery on a construction defect claim.

General and administrative expenses decreased by 2.8% to $10.8 million in the nine months ended September 30, 2019, compared to $11.1 million in the same period of the prior year, primarily attributable to decreases of $476,000 in legal fees related to our pursuit of recovery on a construction defect claim, $707,000 in severance-related costs, and $241,000 in real

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estate tax on sold parcels of land. These decreases were partially offset by an increase of $927,000 in compensation costs as a result of a decrease in open positions and higher incentive compensation related to expanding the participant pool in the long-term incentive plan.

Interest expense. Interest expense decreased by 6.1% to $7.7 million in the three months ended September 30, 2019, compared to $8.2 million in the same period of the prior year, primarily due to the replacement of maturing debt with lower rate debt.

Interest expense decreased by 7.5% to $23.2 million in the nine months ended September 30, 2019, compared to $25.1 million in the same period of the prior year, primarily due to a decrease in the average balance of our outstanding indebtedness and the replacement of maturing debt with lower rate debt.

Loss on extinguishment of debt. We recorded a loss on extinguishment of debt in the three month ended September 30, 2019 and 2018 of $1.1 million and $540,000, respectively. We recorded a loss on extinguishment of debt in the nine months ended September 30, 2019 and 2018 of $1.5 million and $673,000, respectively.

Interest and other income. We recorded interest and other income in the three months ended September 30, 2019 and 2018 of $498,000 and $395,000, respectively. We recorded interest and other income in the nine months ended September 30, 2019 and 2018 of $1.4 million and $1.5 million, respectively.

Gain (loss) on sale of real estate and other investments. We recorded net gains of $39.1 million in continuing operations in the three months ended September 30, 2019, compared to $9.1 million in the same period of the prior year. We recorded net gains of $39.8 million and $11.4 million in the nine months ended September 30, 2019 and 2018, respectively.

Gain (loss) on litigation settlement. We recorded a gain on litigation settlement of $300,000 and $6.6 million in the three and nine months ended September 30, 2019, respectively, from the settlement of a construction defect claim.

Income from discontinued operations. We recorded no income from discontinued operations in the three months ended September 30, 2019, compared to $570,000 in the same period of the prior year. We recorded no income from discontinued operations in the nine months ended September 30, 2019, compared to $14.7 million in the same period of the prior year. See Note 7 of the Notes to the Condensed Consolidated Financial Statements in this report for further information on discontinued operations.

Net income (loss) available to common shareholders. Net income available to common shareholders was $29.9 million for the three months ended September 30, 2019, compared to net income of $948,000 in the three months ended September 30, 2018. The increase in net income available to common shareholders was driven by increases in gain on sale of properties and revenue.

Net income (loss) available to common shareholders was $24.9 million for the nine months ended September 30, 2019, compared to net loss of $16.0 million in the nine months ended September 30, 2018. The change in net income (loss) available to common shareholders was driven by increases in gain on sale of properties, gain on litigation settlement, and revenue and decreases in impairment charges and depreciation expense.

Funds from Operations.

We use the definition of Funds from Operations ("FFO") adopted by the National Association of Real Estate Investment Trusts, Inc. (“Nareit”). Nareit defines FFO as net income or loss calculated in accordance with GAAP, excluding:


•	depreciation and amortization related to real estate;


•	gains and losses from the sale of certain real estate assets; and


•	impairment write-downs of certain real estate assets and investments in entities when the impairment is directly attributable to decreases in the value of depreciable real estate held by the entity.

Due to limitations of the Nareit FFO definition, we have made certain interpretations in applying this definition. We believe that all such interpretations not specifically provided for in the Nareit definition are consistent with this definition. Nareit's FFO White Paper 2018 Restatement clarified that impairment write-downs of land related to a REIT's main business are excluded from FFO and a REIT has the option to exclude impairment write-downs of assets that are incidental to the main business.

We believe that FFO, which is a standard supplemental measure for equity real estate investment trusts, is helpful to investors in understanding our operating performance, primarily because its calculation excludes depreciation and amortization expense on real estate assets, thereby providing an additional perspective on our operating results. We believe that GAAP historical cost depreciation of real estate assets is not correlated with changes in the value of those assets, whose value does not diminish predictably over time, as historical cost depreciation implies. The exclusion in Nareit’s definition of FFO of impairment write-

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downs and gains and losses from the sale of real estate assets helps to identify the operating results of the long-term assets that form the base of our investments, and assists management and investors in comparing those operating results between periods.

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 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 or any other GAAP measurement of performance, but rather should be considered as an additional, supplemental measure. FFO also does not represent cash generated from operating activities in accordance with GAAP, and is not necessarily indicative of sufficient cash flow to fund all of our needs or our ability to service indebtedness or make distributions.

FFO applicable to common shares and Units for the three months ended September 30, 2019, increased to $12.2 million compared to $11.0 million for the comparable period ended September 30, 2018, an increase of 10.8%. This increase was primarily due to higher NOI at same-store and non-same store communities, reductions in interest expense, and a gain on litigation settlement. The increase was partially offset by a decrease in NOI from sold properties and increases in loss on debt extinguishment, property management expense, and general and administrative expense. FFO applicable to common shares and Units for the nine months ended September 30, 2019, increased to $41.1 million, compared to $31.7 million for the comparable period ended September 30, 2018, an increase of 29.7%. This increase was primarily due to a $6.6 million gain on litigation settlement, as well as higher NOI at same-store and non-same-store communities and reductions in interest expense and general and administrative expenses. The increase in FFO was partially offset by decreases in NOI from sold properties and increases in weather-related casualty loss, loss on debt extinguishment, and property management expenses.

Reconciliation of Net Income Available to Common Shareholders to Funds from Operations



	(in thousands, except per share and unit amounts)
	Three Months Ended September 30,						Nine Months Ended September 30,
	2019			2018			2019			2018
Net income (loss) available to common shareholders	$	29,891		$	948		$	24,895		$	(16,033	)
Adjustments:
Noncontrolling interests – Operating Partnership	3,145			112			2,550			(1,888		)
Depreciation and amortization	18,751			19,164			55,299			58,814
Less depreciation – non real estate	(71		)	(76		)	(235		)	(231		)
Less depreciation – partially owned entities	(452		)	(673		)	(1,604		)	(2,115		)
Impairment of real estate	—			—			—			17,809
(Gain) loss on sale of real estate	(39,105		)	(8,499		)	(39,774		)	(24,633		)
Funds from operations applicable to common shares and Units	$	12,159		$	10,976		$	41,131		$	31,723

Funds from operations applicable to common shares and Units	$	12,159		$	10,976		$	41,131		$	31,723
Dividends to preferred unitholders	160			—			377			—
Funds from operations applicable to common shares and Units - diluted	$	12,319		$	10,976		$	41,508		$	31,723

Per Share Data
Earnings (loss) per common share - diluted	$	2.54		$	0.08		$	2.11		$	(1.34	)
FFO per share and Unit - diluted	$	0.93		$	0.82		$	3.15		$	2.38

Weighted average shares and Units - diluted	13,087			13,318			13,174			13,351

Acquisitions and Dispositions

During the third quarter of 2019, we acquired a 96-home apartment community in Minneapolis, Minnesota, and a 328-home apartment community in Denver, Colorado, for an aggregate purchase price of $125.3 million, compared to no acquisitions in the same period of the prior year. During the third quarter of 2019, we sold one parcel of unimproved land and six apartment communities for an aggregate sale price of $85.0 million, compared to eight dispositions in the third quarter of 2018. 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 September 30, 2019 and 2018.

Distributions Declared

Distributions of $0.70 and $2.10 per common share and Unit were declared during the three and nine months ended September 30, 2019 and 2018, respectively. Distributions of $0.4140625 and $1.2421875 per Series C preferred share were

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declared during the three and nine months ended September 30, 2019 and 2018, respectively. Distributions of $0.9655 and $2.2743 per Series D preferred unit were declared during the three and nine months ended September 30, 2019, respectively.

Liquidity and Capital Resources

Liquidity and Financial Condition

We desire to create and maintain a strong balance sheet that offers financial flexibility and enables us to pursue and acquire apartment communities that enhance our portfolio composition, operating metrics, and cash flow growth prospects. We intend to strengthen our capital and liquidity positions by continuing to focus on improving our core fundamentals, which include generating positive cash flows from operations, maintaining appropriate debt levels and leverage ratios, and controlling overhead costs.

Our primary sources of liquidity are cash and cash equivalents on hand, our unsecured credit facility, and cash flows generated from operations. Other sources include availability under our unsecured lines of credit, proceeds from property dispositions, offerings of preferred and common stock under our shelf registration statement, offerings of preferred and common units under our limited partnership agreement, and unsecured debt or long-term secured mortgages.

Our primary liquidity demands are normally-recurring operating and overhead expenses, debt service and repayments, capital improvements to our communities, distributions to the holders of our preferred shares, common shares, and Units, value-add redevelopment, common share buybacks and Unit redemptions, and acquisitions of additional communities.

We believe that our financial condition and liquidity are sufficient to meet our reasonably anticipated liquidity demands during 2019 and 2020. Factors that could increase or decrease our future liquidity include, but are not limited to, volatility in capital and credit markets, our ability to access capital and credit markets, the minimum REIT dividend requirements, and our ability to complete asset purchases, sales, or developments.

Capital Resources and Cash Flows

As of September 30, 2019, we had total liquidity of approximately $155.4 million, which included $146.9 million available on our line of credit and $8.5 million of cash and cash equivalents. As of December 31, 2018, we had total liquidity of approximately $188.8 million, which included $175.0 million on our line of credit and $13.8 million of cash and cash equivalents.

We also had restricted cash of $3.3 million and $5.5 million as of September 30, 2019 and December 31, 2018, respectively, consisting primarily of loan application deposits and escrows held by lenders for real estate taxes, insurance, and capital additions.

We have an unsecured credit facility for $395.0 million, with the commitment allocated to a revolving line of credit for $250.0 million and the remaining $145.0 million allocated between two term loans: a $70.0 million unsecured term loan that matures on January 15, 2024 and a $75.0 million unsecured term loan that matures on August 31, 2025.

As of September 30, 2019, our line of credit had total commitments of $250.0 million, with borrowing capacity based on the value of properties contained in an unencumbered asset pool ("UAP"). The UAP provided for a borrowing capacity of approximately $250.0 million at quarter-end, offering additional borrowing availability of $146.9 million beyond the $103.1 million drawn, including the balance on our operating line of credit, as of September 30, 2019. At December 31, 2018, the line of credit borrowing capacity was $232.5 million based on the UAP, of which $57.5 million was drawn on the line. This credit facility matures on August 31, 2022, with one twelve-month option to extend the maturity date at our election.

During the three months ended September 30, 2019, we closed on a $59.9 million mortgage loan. This mortgage loan is secured by four apartment communities and is priced at a fixed rate of 3.88% for the full twelve-year term of the loan. Proceeds from this loan were used to pay down balances on our line of credit under our revolving credit facility.

During the three months ended September 30, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes. In September 2019, we issued $75.0 million of Series A notes due September 13, 2029, bearing interest at a rate of 3.84% annually, and $50.0 million of Series B notes due September 30, 2028, bearing interest at a rate of 3.69% annually, under this facility. An additional $25.0 million remains available under this agreement.

As of September 30, 2019, we had 49 unencumbered apartment communities representing 56.0% of third quarter 2019 multifamily NOI.

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For information regarding our cash flows for the nine months ended September 30, 2019 and 2018, see the Condensed Consolidated Statements of Cash Flows in Part I, Item 1 above.

In addition to cash flow from operations, during the nine months ended September 30, 2019, we generated capital from various activities, including:


•	The disposition of three parcels of land, one commercial property, and six apartment communities, for a total sale price of $95.3 million; and


•	The receipt of $5.2 million from the settlement of our pursuit of a recovery on a construction defect claim.


•	The receipt of $59.9 million from a mortgage secured by four apartment communities and $125.0 million from a private shelf agreement.

During the nine months ended September 30, 2019, we used capital for various activities, including:


•	Acquiring SouthFork Townhomes, a 272-home residential apartment community located in Lakeville, Minnesota, for a total purchase price of $44.0 million, with $27.4 million paid in cash and $16.6 million paid through the issuance of Series D preferred units;


•	Repaying $143.1 million of mortgage principal;


•	Repurchasing 329,369 common shares for an aggregate total cost of approximately $18.0 million and 135,596 Units for a total cost of $8.1 million;


•	Acquiring an office building for $2.1 million, which will become our Minot, North Dakota corporate office building after renovations have been completed;


•	Acquiring the remaining 34.5% noncontrolling interests in the real estate partnership that owns Commons and Landing at Southgate, located in Minot, North Dakota, for $1.3 million;


•	Acquiring FreightYard Townhomes & Flats, a 96-home residential apartment community located in Minneapolis, Minnesota, and Lugano at Cherry Creek, a 328-home residential apartment community located in Denver, Colorado, for an aggregate purchase price of $125.3 million; and


•	Funding capital improvements for apartment communities of approximately $11.9 million.

Contractual Obligations and Other Commitments

During the three months ended September 30, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes. In September 2019, we issued $75.0 million of Series A notes due September 13, 2029 bearing interest at a rate of 3.84% annually and $50.0 million of Series B notes due September 30, 2028 bearing interest at a rate of 3.69% annually under this facility.

Contractual obligations and other commitments were disclosed in our Form 10-KT for the transition period ended December 31, 2018. Other than the unsecured senior notes, there have been no material changes to our contractual obligations and other commitments since that report was filed.

Off-Balance Sheet Arrangements

As of September 30, 2019, we had no significant off-balance sheet arrangements, as defined in Item 303(a)(4)(ii) of SEC Regulation S-K.

Critical Accounting Policies

In preparing the condensed consolidated financial statements, management has made estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Actual results could differ from those estimates. A summary of our critical accounting policies is included in our Form 10-KT for the transition period ended December 31, 2018, filed with the SEC on February 27, 2019 under the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Effective January 1, 2019, we adopted ASU 2016-02, "Leases" which required lessees to recognize most leases on the balance sheet through right of use assets and lease liabilities. It also made

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certain changes to lessor accounting. Refer to Note 2 of the Notes to Condensed Consolidated Financial Statements in this report for additional information. There have been no other significant changes to our critical accounting policies during the nine months ended September 30, 2019.

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Item 3. Quantitative and Qualitative Disclosures About Market Risk

Our exposure to market risk is primarily related to fluctuations in the general level of interest rates on our current and future fixed and variable rate debt obligations. We currently use interest rate swaps to offset the impact of interest rate fluctuations on our variable-rate term loans. We do not enter into derivative instruments for trading or speculative purposes. The interest rate swaps expose us to credit risk in the event of non-performance by the counterparties under the terms of the agreements.

During the three months ended September 30, 2019, we entered into a private shelf agreement for the issuance of up to $150.0 million of unsecured senior promissory notes with fixed rates that reduce our exposure to interest rate fluctuation. In September 2019, we issued $75.0 million of Series A notes due September 13, 2029 bearing interest at a rate of 3.84% annually and $50.0 million of Series B notes due September 30, 2028 bearing interest at a rate of 3.69% annually under this facility. The proceeds from this facility were used to repay outstanding amounts under our credit facility and retire mortgage debt and partially fund the acquisition of Lugano at Cherry Creek. As a result of entering into this facility, we have been able to eliminate the 2019 maturities, lengthen the average debt maturity duration, and lower our weighted average interest rate of debt.

See our Transition Report on Form 10-KT for the eight months ended December 31, 2018 under the heading "Item 7A. Quantitative and Qualitative Disclosures About Market Risk" for a more complete discussion of our interest rate sensitivity. As of September 30, 2019, our exposure to market risk has not changed materially since our Transition Report on Form 10-KT for the eight months ended December 31, 2018.

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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 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 September 30, 2019, 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 SEC’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:

In connection with the evaluation required by Rule 13a-15(d), management, with the participation of the Chief Executive Officer and Chief Financial Officer, has identified no changes in our internal controls over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) that occurred during that quarter ended September 30, 2019 and 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

In the ordinary course of our operations, we become involved in litigation. At this time, we know of no material pending legal proceedings, other than ordinary routine litigation incidental to the business, to which we or any of our subsidiaries is a party or of which any of our property is the subject.

Item 1A. Risk Factors

There have been no material changes to the Risk Factors previously disclosed in Item 1A in our Transition Report on Form 10-KT for the transition period ended December 31, 2018.

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

Sales of Securities

During the third quarter of 2019, we issued no unregistered Common Shares to limited partners of the Operating Partnership in exchange for their Units, in reliance on the private offering exemption under Section 4(a)(2) of the Securites Act of 1933, as amended.

Issuer Purchases of Equity Securities



					Maximum Dollar
				Total Number of Shares	Amount of Shares That
	Total Number of	Average Price		Purchased as Part of	May Yet Be Purchased
	Shares and Units	Paid per		Publicly Announced	Under the Plans or
Period	Purchased ⁽¹⁾	Share and Unit⁽²⁾		Plans or Programs	Programs⁽³⁾
July 1 - 31, 2019	39,441	$	59.57	39,381	$	15,378,896
August 1 - 31, 2019	30	60.40		—	15,378,896
September 1 - 30, 2019	92	64.68		—	15,378,896
Total	39,563	$	59.58	39,381


(1)	Includes a total of 182 Units redeemed for cash pursuant to the exercise of exchange rights.


(2)	Amount includes commissions paid.


(3)	Represents amounts outstanding under our $50 million share repurchase program, which was reauthorized by our Board of Trustees on December 14, 2018 for an additional one-year period.

Item 3. Defaults Upon Senior Securities

None

Item 4. Mine Safety Disclosures

Not Applicable

Item 5. Other Information

None

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Item 6. Exhibits

The following exhibits are filed as part of this Report.

EXHIBIT INDEX



Exhibit No.	Description
4.1	Note Purchase and Private Shelf Agreement, dated as of September 13, 2019, by and among IRET Properties, a North Dakota Limited Partnership, as the Issuer, Investors Real Estate Trust, as the Parent, IRET, Inc., as the General Partner, certain subsidiaries of the Parent, PGIM, Inc., an affiliate of Prudential Financial, Inc., certain affiliates of PGIM, Inc., and the Purchasers of the Series A Notes (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated September 16, 2019).
4.2	Form of Series A Senior Note under the Note Agreement (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated September 16, 2019).
4.3	Form of Series B Notes under the Note Agreement (incorporated by reference to Exhibit 4.3 to the Company's Current Report on Form 8-K dated October 1, 2019).
4.4	Form of Guaranty Agreement under the Note Agreement (incorporated by reference to Exhibit 4.3 to the Company’s Current Report on Form 8-K dated September 16, 2019).
4.5	Second Amendment to Second Amended and Restated Credit Agreement and related Annex I attached thereto, by and among IRET Properties, a North Dakota Limited Partnership, as the Borrower, the Guarantors party thereto, the several financial institutions party thereto, as Lenders, and the Bank of Montreal, as Administrative Agent (incorporated by reference to Exhibit 4.4 to the Company’s Current Report on Form 8-K dated September 16, 2019).
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
99.1	Press Release announcing Note Agreement and Credit Agreement Amendment (incorporated by reference to Exhibit 99.1 to the Company's Current Report on Form 8-K dated September 16, 2019).
99.2	Investor Presentation (incorporated by reference to Exhibit 99.2 to the Company's Current Report on Form 8-K dated September 16, 2019).
101 INS**	INSTANCE DOCUMENT
101 SCH**	SCHEMA DOCUMENT
101 CAL**	CALCULATION LINKBASE DOCUMENT
101 LAB**	LABELS LINKBASE DOCUMENT
101 PRE**	PRESENTATION LINKBASE DOCUMENT
101 DEF**	DEFINITION LINKBASE DOCUMENT
104**	COVER PAGE


*	Filed herewith

Submitted electronically herewith. Attached as Exhibit 101 are the following materials from our Quarterly Report on Form 10-Q for the quarter ended September 30, 2019, formatted in Inline eXtensible Business Reporting Language (“iXBRL”): (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; (v) notes to these condensed consolidated financial statements; and (vi) the Cover Page to our Quarterly Report on Form 10-Q.

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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/ Mark O. Decker, Jr.
Mark O. Decker, Jr.
President and Chief Executive Officer

/s/ John A. Kirchmann
John A. Kirchmann
Executive Vice President and Chief Financial Officer

Date: November 6, 2019