INVESTORS REAL ESTATE TRUST, 10-Q filed on 3/12/2012
Quarterly Report
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (USD $)
In Thousands, unless otherwise specified
Jan. 31, 2012
Apr. 30, 2011
Real estate investments
 
 
Property owned
$ 1,861,321 
$ 1,770,798 
Less accumulated depreciation
(364,190)
(328,952)
1,497,131 
1,441,846 
Development in progress
22,281 
9,693 
Unimproved land
6,390 
6,550 
Mortgage loans receivable, net of allowance of $0 and $3, respectively
0 
156 
Total real estate investments
1,525,802 
1,458,245 
Other assets
 
 
Cash and cash equivalents
35,502 
41,191 
Other investments
633 
625 
Receivable arising from straight-lining of rents, net of allowance of $1,156 and $996, respectively
21,965 
18,933 
Accounts receivable, net of allowance of $185 and $317, respectively
3,977 
5,646 
Real estate deposits
578 
329 
Prepaid and other assets
4,107 
2,351 
Intangible assets, net of accumulated amortization of $46,674 and $42,154, respectively
49,055 
49,832 
Tax, insurance, and other escrow
11,427 
15,268 
Property and equipment, net of accumulated depreciation of $1,499 and $1,231, respectively
1,464 
1,704 
Goodwill
1,120 
1,127 
Deferred charges and leasing costs, net of accumulated amortization of $16,622 and $13,675, respectively
22,014 
20,112 
TOTAL ASSETS
1,677,644 
1,615,363 
LIABILITIES
 
 
Accounts payable and accrued expenses
43,439 
37,879 
Revolving line of credit
49,000 
30,000 
Mortgages payable
1,038,717 
993,803 
Other
6,326 
8,404 
TOTAL LIABILITIES
1,137,482 
1,070,086 
COMMITMENTS AND CONTINGENCIES (NOTE 6)
   
   
REDEEMABLE NONCONTROLLING INTERESTS - CONSOLIDATED REAL ESTATE ENTITIES
0 
987 
Investors Real Estate Trust shareholders' equity
 
 
Preferred Shares of Beneficial Interest (Cumulative redeemable preferred shares, no par value, 1,150,000 shares issued and outstanding at January 31, 2012 and April 30, 2011, aggregate liquidation preference of $28,750,000)
27,317 
27,317 
Common Shares of Beneficial Interest (Unlimited authorization, no par value, 85,743,308 shares issued and outstanding at January 31, 2012, and 80,523,265 shares issued and outstanding at April 30, 2011)
657,304 
621,936 
Accumulated distributions in excess of net income
(269,942)
(237,563)
Total Investors Real Estate Trust shareholders' equity
414,679 
411,690 
Noncontrolling interests - Operating Partnership (19,596,222 units at January 31, 2012 and 20,067,350 units at April 30, 2011)
114,852 
123,627 
Noncontrolling interests - consolidated real estate entities
10,631 
8,973 
Total equity
540,162 
544,290 
TOTAL LIABILITIES AND EQUITY
$ 1,677,644 
$ 1,615,363 
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited) (Parenthetical) (USD $)
In Thousands, except Share data, unless otherwise specified
Jan. 31, 2012
Apr. 30, 2011
Real estate investments
 
 
Mortgage loans receivable, net of allowance (in dollars)
$ 0 
$ 3 
Other assets
 
 
Receivable arising from straight-lining of rents, net of allowance (in dollars)
1,156 
996 
Accounts receivable, net of allowance (in dollars)
185 
317 
Intangible assets, net of accumulated amortization (in dollars)
46,674 
42,154 
Property and equipment, net of accumulated depreciation (in dollars)
1,499 
1,231 
Deferred charges and leasing costs, net of accumulated amortization (in dollars)
16,622 
13,675 
EQUITY
 
 
Preferred Shares of Beneficial Interest, no par value (in dollars per share)
$ 0.0000 
$ 0.0000 
Preferred Shares of Beneficial Interest, shares issued (in shares)
1,150,000 
1,150,000 
Preferred Shares of Beneficial Interest, shares outstanding (in shares)
1,150,000 
1,150,000 
Preferred Shares of Beneficial Interest, aggregate liquidation preference (in dollars)
$ 28,750,000 
$ 28,750,000 
Common Shares of Beneficial Interest, no par value (in dollars per share)
$ 0.0000 
$ 0.0000 
Common Shares of Beneficial Interest, shares issued (in shares)
85,743,308 
80,523,265 
Common Shares of Beneficial Interest, shares outstanding (in shares)
85,743,308 
80,523,265 
Noncontrolling interests - Operating Partnership (in shares)
19,596,222 
20,067,350 
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) (USD $)
In Thousands, except Per Share data, unless otherwise specified
3 Months Ended 9 Months Ended
Jan. 31, 2012
Jan. 31, 2011
Jan. 31, 2012
Jan. 31, 2011
REVENUE
 
 
 
 
Real estate rentals
$ 50,318 
$ 47,792 
$ 148,981 
$ 143,333 
Tenant reimbursement
10,705 
12,354 
32,301 
34,785 
TOTAL REVENUE
61,023 
60,146 
181,282 
178,118 
EXPENSES
 
 
 
 
Depreciation/amortization related to real estate investments
14,359 
13,892 
42,710 
41,573 
Utilities
4,526 
4,775 
13,424 
13,184 
Maintenance
6,395 
8,358 
20,185 
22,001 
Real estate taxes
8,049 
7,780 
23,528 
23,068 
Insurance
890 
646 
2,552 
1,866 
Property management expenses
4,989 
5,474 
15,836 
15,525 
Administrative expenses
1,493 
1,716 
5,356 
5,055 
Advisory and trustee services
166 
134 
588 
482 
Other expenses
359 
441 
1,509 
1,357 
Amortization related to non-real estate investments
903 
689 
2,395 
1,978 
Impairment of real estate investments
135 
0 
135 
0 
TOTAL EXPENSES
42,264 
43,905 
128,218 
126,089 
Interest expense
(16,533)
(15,868)
(48,756)
(48,335)
Interest income
25 
75 
115 
194 
Other income
270 
32 
546 
217 
Income from continuing operations
2,521 
480 
4,969 
4,105 
Income from discontinued operations
0 
14,108 
616 
19,936 
NET INCOME
2,521 
14,588 
5,585 
24,041 
Net income attributable to noncontrolling interests - Operating Partnership
(351)
(2,793)
(723)
(4,485)
Net (income) loss attributable to noncontrolling interests - consolidated real estate entities
(43)
38 
(29)
82 
Net income attributable to Investors Real Estate Trust
2,127 
11,833 
4,833 
19,638 
Dividends to preferred shareholders
(593)
(593)
(1,779)
(1,779)
NET INCOME AVAILABLE TO COMMON SHAREHOLDERS
$ 1,534 
$ 11,240 
$ 3,054 
$ 17,859 
Earnings per common share from continuing operations - Investors Real Estate Trust - basic and diluted
$ 0.02 
$ 0.00 
$ 0.03 
$ 0.03 
Earnings per common share from discontinued operations - Investors Real Estate Trust - basic and diluted
$ 0.00 
$ 0.14 
$ 0.01 
$ 0.20 
NET INCOME PER COMMON SHARE - BASIC AND DILUTED
$ 0.02 
$ 0.14 
$ 0.04 
$ 0.23 
DIVIDENDS PER COMMON SHARE
$ 0.1300 
$ 0.1715 
$ 0.4315 
$ 0.5145 
CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (unaudited) (USD $)
In Thousands, except Share data
PREFERRED STOCK
COMMON STOCK
ACCUMULATED DISTRIBUTIONS IN EXCESS OF NET INCOME
NONCONTROLLING INTERESTS
Total
Balance at Apr. 30, 2010
$ 27,317 
$ 583,618 
$ (201,412)
$ 145,592 
$ 555,115 
Balance, shares (in shares) at Apr. 30, 2010
1,150 
75,805 
 
 
 
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
 
 
19,638 
4,408 
24,046 
Distributions - common shares and units
 
 
(40,131)
(10,365)
(50,496)
Distributions - preferred shares
 
 
(1,779)
 
(1,779)
Distribution reinvestment plan
 
10,130 
 
 
10,130 
Distribution reinvestment plan, shares (in shares)
 
1,212 
 
 
 
Shares issued
 
16,637 
 
 
16,637 
Shares issued, shares (in shares)
 
1,999 
 
 
 
Partnership units issued
 
 
 
3,252 
3,252 
Redemption of units for common shares
 
6,007 
 
(6,007)
0 
Redemption of units for common shares, shares (in shares)
 
831 
 
 
 
Adjustments to redeemable noncontrolling interests
 
570 
 
 
570 
Other
 
(261)
 
(1,164)
(1,425)
Other, shares
 
(1)
 
 
 
Balance at Jan. 31, 2011
27,317 
616,701 
(223,684)
135,716 
556,050 
Balance, shares (in shares) at Jan. 31, 2011
1,150 
79,846 
 
 
 
Balance at Apr. 30, 2011
27,317 
621,936 
(237,563)
132,600 
544,290 
Balance, shares (in shares) at Apr. 30, 2011
1,150 
80,523 
 
 
 
Net income attributable to Investors Real Estate Trust and nonredeemable noncontrolling interests
 
 
4,833 
740 
5,573 
Distributions - common shares and units
 
 
(35,433)
(8,513)
(43,946)
Distributions - preferred shares
 
 
(1,779)
 
(1,779)
Distribution reinvestment plan
 
28,831 
 
 
28,831 
Distribution reinvestment plan, shares (in shares)
 
3,992 
 
 
 
Shares issued
 
3,413 
 
 
3,413 
Shares issued, shares (in shares)
 
471 
 
 
 
Partnership units issued
 
 
 
2,469 
2,469 
Redemption of units for common shares
 
3,454 
 
(3,454)
0 
Redemption of units for common shares, shares (in shares)
 
759 
 
 
 
Other
 
(330)
 
1,641 
1,311 
Other, shares
 
(2)
 
 
 
Balance at Jan. 31, 2012
$ 27,317 
$ 657,304 
$ (269,942)
$ 125,483 
$ 540,162 
Balance, shares (in shares) at Jan. 31, 2012
1,150 
85,743 
 
 
 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Jan. 31, 2012
Jan. 31, 2011
CASH FLOWS FROM OPERATING ACTIVITIES
 
 
Net Income
$ 5,585 
$ 24,041 
Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
46,328 
45,951 
Gain on sale of real estate, land and other investments
(589)
(19,365)
Impairment of real estate investments
135 
0 
Bad debt expense
771 
487 
Changes in other assets and liabilities:
 
 
Increase in receivable arising from straight-lining of rents
(3,370)
(1,441)
Decrease (increase) in accounts receivable
946 
(4,033)
Increase in prepaid and other assets
(1,756)
(1,663)
(Increase) decrease in tax, insurance and other escrow
(901)
630 
Increase in deferred charges and leasing costs
(5,480)
(5,015)
Increase (decrease) in accounts payable, accrued expenses, and other liabilities
2,759 
(1,208)
Net cash provided by operating activities
44,428 
38,384 
CASH FLOWS FROM INVESTING ACTIVITIES
 
 
Proceeds from real estate deposits
1,640 
2,297 
Payments for real estate deposits
(1,889)
(2,035)
Principal proceeds on mortgage loans receivable
159 
1 
(Increase) decrease in other investments
(8)
95 
Decrease in lender holdbacks for improvements
5,056 
968 
Increase in lender holdbacks for improvements
(315)
(10,764)
Proceeds from sale of real estate - discontinued operations
2,088 
81,539 
Proceeds from sale of real estate and other investments
438 
0 
Insurance proceeds received
5,644 
329 
Payments for acquisitions and improvements of real estate investments
(101,791)
(55,437)
Net cash (used) provided by investing activities
(88,978)
16,993 
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Proceeds from mortgages payable
84,195 
97,654 
Principal payments on mortgages payable
(53,661)
(160,632)
Principal payments on revolving line of credit and other debt
(60)
(25,650)
Proceeds from revolving line of credit and other debt
24,227 
36,300 
Proceeds from sale of common shares, net of issue costs
2,970 
16,384 
Proceeds from sale of common shares under distribution reinvestment and share purchase program
20,778 
1,774 
Repurchase of fractional shares and partnership units
(13)
(10)
Payments for acquisition of noncontrolling interests - consolidated real estate entities
(1,289)
(425)
Distributions paid to common shareholders, net of reinvestment of $7,548 and $7,831, respectively
(27,885)
(32,300)
Distributions paid to preferred shareholders
(1,779)
(1,779)
Distributions paid to noncontrolling interests - Unitholders of the Operating Partnership, net of reinvestment of $504 and $525, respectively
(8,009)
(9,840)
Distributions paid to noncontrolling interests - consolidated real estate entities
(586)
(737)
Distributions paid to redeemable noncontrolling interests - consolidated real estate entities
(27)
0 
Net cash provided (used) by financing activities
38,861 
(79,261)
NET DECREASE IN CASH AND CASH EQUIVALENTS
(5,689)
(23,884)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD
41,191 
54,791 
CASH AND CASH EQUIVALENTS AT END OF PERIOD
35,502 
30,907 
SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING
 
 
Distribution reinvestment plan
7,548 
7,831 
Operating partnership distribution reinvestment plan
504 
525 
Real estate investment acquired through the issuance of operating partnership units
2,469 
3,252 
Operating partnership units converted to shares
3,454 
6,007 
Real estate investment acquired through assumption of indebtedness and accrued costs
7,190 
4,288 
Adjustments to accounts payable included within real estate investments
(3,244)
(1,421)
Noncontrolling partnership interest
2,227 
0 
Fair value adjustments to redeemable noncontrolling interests
35 
(570)
Involuntary conversion of assets due to flood damage
2,638 
0 
Construction debt reclassified to mortgages payable
7,190 
0 
Cash paid during the year for:
 
 
Interest on mortgages
45,321 
48,340 
Interest other
2,098 
892 
Cash paid during the period, total
$ 47,419 
$ 49,232 
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) (Parenthetical) (USD $)
In Thousands, unless otherwise specified
9 Months Ended
Jan. 31, 2012
Jan. 31, 2011
CASH FLOWS FROM FINANCING ACTIVITIES
 
 
Distributions paid to common shareholders, net of reinvestment
$ 7,548 
$ 7,831 
Distributions paid to noncontrolling interests - Unitholders of the Operating Partnership, net reinvestment
$ 504 
$ 525 
ORGANIZATION
ORGANIZATION
NOTE 1 . ORGANIZATION
 
Investors Real Estate Trust ("IRET" or the "Company") is a self-advised real estate investment trust engaged in acquiring, owning and leasing multi-family and commercial real estate. IRET has elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as amended. As a REIT, we are subject to a number of organizational and operational requirements, including a requirement to distribute 90% of ordinary taxable income to shareholders, and, generally, are not subject to federal income tax on net income, except for taxes on undistributed REIT taxable income. IRET's multi-family residential properties and commercial properties are located mainly in the states of North Dakota and Minnesota, but also in the states of Colorado, Idaho, Iowa, Kansas, Michigan, Missouri, Montana, Nebraska, South Dakota, Wisconsin and Wyoming. As of January 31, 2012, IRET owned 81 multi-family residential properties with 8,921 apartment units and 184 commercial properties, consisting of office, medical, industrial and retail properties, totaling 12.3 million net rentable square feet. IRET conducts a majority of its business activities through its consolidated operating partnership, IRET Properties, a North Dakota Limited Partnership (the "Operating Partnership"), as well as through a number of other consolidated subsidiary entities.
 
All references to IRET or the Company refer to Investors Real Estate Trust and its consolidated subsidiaries.
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
NOTE 2 . BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING POLICIES
 
BASIS OF PRESENTATION
 
The accompanying condensed consolidated financial statements include the accounts of IRET and all subsidiaries in which it maintains a controlling interest. All intercompany balances and transactions are eliminated in consolidation. The Company's fiscal year ends April 30th.
 
The accompanying condensed consolidated financial statements include the accounts of IRET and its interest in the Operating Partnership. The Company's interest in the Operating Partnership was 81.4% and 80.1%, respectively, as of January 31, 2012 and April 30, 2011. The limited partners in the Operating Partnership have a redemption option that they may exercise. Upon exercise of the redemption option by the limited partners, IRET has the choice of redeeming the limited partners' interests ("Units") for IRET common shares of beneficial interest, on a one-for-one basis, or making a cash payment to the unitholder. The redemption generally may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the Units (provided, however, that in general not more than two redemptions by a limited partner may occur during each calendar year, and each limited partner may not exercise the redemption for less than 1,000 Units, or, if such limited partner holds less than 1,000 Units, for all of the Units held by such limited partner). The Operating Partnership and some limited partners have contractually agreed to a holding period of greater than one year and/or a greater number of redemptions during a calendar year.
 
The condensed consolidated financial statements also reflect the ownership by the Operating Partnership of certain joint venture entities in which the Operating Partnership has a general partner or controlling interest. These entities are consolidated into IRET's other operations, with noncontrolling interests reflecting the noncontrolling partners' share of ownership and income and expenses.
 
UNAUDITED INTERIM FINANCIAL STATEMENTS
 
The interim condensed consolidated financial statements of IRET have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission ("SEC"). Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP") are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of the Company's financial position, results of operations and cash flows for the interim periods have been included.
 


The current period's results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim condensed consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the Company's Annual Report on Form 10-K for the fiscal year ended April 30, 2011, as filed with the SEC on July 14, 2011, as amended by the Current Report on Form 8-K filed with the SEC on December 12, 2011.
 
RECENT ACCOUNTING PRONOUNCEMENTS
 
In May 2011, the Financial Accounting Standard Board ("FASB") issued Accounting Standards Update ("ASU") 2011-04, Fair Value Measurement (Topic 820): Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRS. ASU 2011-04 amended Accounting Standards Codification ("ASC") 820, Fair Value Measurements and Disclosures, to converge the fair value measurement guidance in  U.S. GAAP and International Financial Reporting Standards ("IFRS"), and in some limited cases, changes some principles to achieve convergence between U.S. GAAP and IFRS. ASU 2011-04 results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between U.S. GAAP and IFRS. ASU 2011-04 also expands the disclosures for fair value measurements that are estimated using significant unobservable (Level 3) inputs. The amendments are to be applied prospectively for annual periods beginning after December 15, 2011.  The Company is evaluating the effect ASU 2011-04 will have on the Company's consolidated financial statements, but does not expect  the adoption of ASU 2011-04 will have a material effect on the Company's operating results or financial position. To date, the Company has not had any transfers in and out of Level 1, Level 2 and Level 3 fair value measurements.
 
In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which requires an entity to present the total of comprehensive income, the components of net income, and the components of other comprehensive income either in a single continuous statement of comprehensive income, or in two separate but consecutive statements. ASU 2011-05 eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 will be effective for annual and interim periods beginning after December 15, 2011. The Company does not expect the adoption of ASU 2011-05 to have a material effect on its operating results or financial position.
 
In September 2011, the FASB issued ASU 2011-08, Testing Goodwill for Impairment. This standard gives entities testing goodwill for impairment the option of performing a qualitative assessment before calculating the fair value of the reporting unit (step I of the goodwill impairment test). If entities determine, on the basis of qualitative factors, that the fair value of the reporting unit is more likely than not less than its carrying amount, the two-step impairment test would be required. Otherwise, no further testing is required. The ASU does not change how goodwill is calculated or assigned to reporting units, nor does it revise the requirement to test goodwill annually for impairment. The ASU is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011, with early adoption permitted.
 
IMPAIRMENT OF LONG-LIVED ASSETS
 
The Company periodically evaluates its long-lived assets, including its investments in real estate, for impairment indicators. The judgments regarding the existence of impairment indicators are based on factors such as operational performance, market conditions, expected holding period of each asset and legal and environmental concerns. If indicators exist, the Company compares the expected future undiscounted cash flows for the long-lived asset against the carrying amount of that asset. If the sum of the estimated undiscounted cash flows is less than the carrying amount of the asset, an impairment loss is recorded for the difference between the estimated fair value and the carrying amount of the asset. If our anticipated holding period for properties, the estimated fair value of properties or other factors change based on market conditions or otherwise, our evaluation of impairment charges may be different and such differences could be material to our consolidated financial statements. The evaluation of anticipated cash flows is subjective and is based, in part, on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual results. Plans to hold properties over longer periods decrease the likelihood of recording impairment losses. During the nine months ended January 31, 2012, the Company incurred a loss of approximately $128,000 due to impairment of a retail property located in Kentwood, Michigan. The impairment was based on receipt of a market offer to purchase and the Company's intention to dispose of the property (a purchase agreement was signed by the Company in the fourth quarter of fiscal year 2012). A related impairment of $7,000 was recorded to write-off goodwill assigned to the Kentwood property. During the nine months ended January 31, 2011, the Company incurred no losses due to impairment.
 


COMPENSATING BALANCES AND OTHER INVESTMENTS; LENDER HOLDBACKS
 
The Company maintains compensating balances, not restricted as to withdrawal, with several financial institutions in connection with financing received from those institutions and/or to ensure future credit availability. At January 31, 2012, the Company's compensating balances consisted of the following: Dacotah Bank, Minot, North Dakota, deposit of $350,000; United Community Bank, Minot, North Dakota, deposit of $275,000; Commerce Bank, A Minnesota Banking Corporation, deposit of $250,000; First International Bank, Watford City, North Dakota, deposit of $6.1 million; Peoples State Bank of Velva, North Dakota, deposit of $225,000; Equity Bank, Minnetonka, Minnesota, deposit of $300,000; Associated Bank, Green Bay, Wisconsin, deposit of $500,000; Venture Bank, Eagan, Minnesota, deposit of $500,000, and American National Bank, Omaha, Nebraska, deposit of $400,000. The deposits at United Community Bank and Equity Bank and a portion of the deposit at Dacotah Bank are held as certificates of deposit and comprise the $633,000 in Other investments on the Condensed Consolidated Balance Sheets. The certificates of deposit have remaining terms of less than three years and the Company intends to hold them to maturity.
 
The Company has a number of mortgage loans under which the lender retains a portion of the loan proceeds for the payment of constructions costs or tenant improvements, and additionally has two construction loans (for the Company's Trinity build-to-suit project and Jamestown Theater expansion project) under which the lender held back a portion of the loan proceeds for release against specified construction milestones. The decrease of $5.1 million in lender holdbacks for improvements reflected in the Condensed Consolidated Statements of Cash Flows for the nine months ended January 31, 2012 is due primarily to the release of loan proceeds to the Company upon completion of these construction milestones and tenant improvement projects.
 
IDENTIFIED INTANGIBLE ASSETS AND INTANGIBLE LIABILITIES AND GOODWILL
 
Upon acquisition of real estate, the Company records the intangible assets and liabilities acquired (for example, if the leases in place for the real estate property acquired carry rents above the market rent, the difference is classified as an intangible asset) at their estimated fair value separate and apart from goodwill. The Company amortizes identified intangible assets and liabilities that are determined to have finite lives based on the period over which the assets and liabilities are expected to affect, directly or indirectly, the future cash flows of the real estate property acquired (generally the life of the lease). In the nine months ended January 31, 2012 and 2011, respectively, the Company added approximately $3.7 million and $6.5 million of new intangible assets. The Company added no new intangible liabilities in the nine months ended January 31, 2012 and $32,000 of new intangible liabilities in the nine months ended January 31, 2011. The weighted average lives of the intangible assets and intangible liabilities acquired in the nine months ended January 31, 2012 and 2011 are 10.0 years and  9.5 years, respectively. The estimated fair values of intangible assets acquired in the nine months ended January 31, 2012 are provisional and are based on the information that was available as of the filing of the Company's Form 10-Q. The Company will continue to evaluate the purchase price allocation as better information becomes available. The Company expects to finalize the valuation and complete the purchase price allocation as soon as practicable, but no later than one year from the respective acquisition dates. Amortization of intangibles related to above or below-market leases is recorded in Real estate rentals in the Condensed Consolidated Statements of Operations. Amortization of other intangibles is recorded in Depreciation/amortization related to real estate investments in the Condensed Consolidated Statements of Operations. Intangible assets subject to amortization are reviewed for impairment whenever events or changes in circumstances indicate that their carrying amount may not be recoverable. An impairment loss is recognized if the carrying amount of an intangible asset is not recoverable and its carrying amount exceeds its estimated fair value.
 
The Company's identified intangible assets and intangible liabilities at January 31, 2012 and April 30, 2011 were as follows:
 
   
(in thousands)
 
 
 
January 31, 2012
  
April 30, 2011
 
Identified intangible assets (included in intangible assets):
      
Gross carrying amount
 $95,729  $91,986 
Accumulated amortization
  (46,674)  (42,154)
Net carrying amount
 $49,055  $49,832 
          
Indentified intangible liabilities (included in other liabilities):
        
Gross carrying amount
 $1,104  $1,104 
Accumulated amortization
  (954)  (900)
Net carrying amount
 $150  $204 
 

 


 
The effect of amortization of acquired below-market leases and acquired above-market leases on rental income was approximately $(8,000) and $(19,000) for the three months ended January, 31 2012 and 2011, respectively, and $(40,000) and $(36,000) for the nine months ended January 31, 2012 and 2011. The estimated annual amortization of acquired below-market leases, net of acquired above-market leases for each of the five succeeding fiscal years is as follows:
 
Year Ended April 30,
 
(in thousands)
 
2013
 $32 
2014
  35 
2015
  18 
2016
  14 
2017
  6 
 
Amortization of all other identified intangible assets (a component of depreciation and amortization expense) was $1.2 million and $1.7 million for the three months ended January 31, 2012 and 2011, respectively, and $4.4 million and $5.5 million for the nine months ended January 31, 2012 and 2011. The estimated annual amortization of all other identified intangible assets for each of the five succeeding fiscal years is as follows:
 
Year Ended April 30,
 
(in thousands)
 
2013
 $4,921 
2014
  4,515 
2015
  4,158 
2016
  3,940 
2017
  3,471 
 
The excess of the cost of an acquired business over the net of the amounts assigned to assets acquired (including identified intangible assets) and liabilities assumed is recorded as goodwill.  The Company's goodwill has an indeterminate life and is not amortized, but is tested for impairment on an annual basis, or more frequently if events or changes in circumstances indicate that the asset might be impaired. Goodwill book value as of January 31, 2012 and April 30, 2011 was $1.1 million. The annual review at April 30, 2011 indicated no impairment to goodwill. At January 31, 2012, the impairment of a Kentwood, Michigan, retail property indicated that goodwill assigned to the property was also impaired. Accordingly, an approximately $7,000 impairment to goodwill was recognized.
 
USE OF ESTIMATES
 
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
 
RECLASSIFICATIONS
 
Certain previously reported amounts have been reclassified to conform to the current financial statement presentation. The Company reports, in discontinued operations, the results of operations of a property that has either been disposed of or is classified as held for sale and the related gains or losses, and as a result of discontinued operations, retroactive reclassifications that change prior period numbers have been made. See Note 7 for additional information.  During the first and third quarters of fiscal year 2012 the Company had no real estate dispositions. During the second quarter of fiscal year 2012, the Company sold a small retail property in Livingston, Montana. During fiscal year 2011, the Company sold four apartment complexes, one industrial property, one retail property and a patio home. The results of operations for these properties are included in discontinued operations in the condensed consolidated statements of operations.
 
TAXABLE REIT SUBSIDIARY
 
During the third quarter of fiscal year 2012, the Company sold its wholly-owned taxable REIT subsidiary, LSREF Golden Ops 14 (WY), LLC ("LSREF Golden Ops"), to the owner of Edgewood Vista Senior Living Inc., the manager of the Company's portfolio of Edgewood assisted living facilities and of the Company's Wyoming assisted living facilities. LSREF Golden Ops is the tenant in the Company's Wyoming assisted living facilities. The Company sold this entity to restructure its assisted living portfolio following its acquisition of a portfolio of seven senior housing projects in Idaho and an assisted living facility in Minot, North Dakota. Following the sale of this entity, the Company's revenue from its Wyoming assisted living portfolio will be
 



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

 
EQUITY
Equity
 
NOTE 4 . EQUITY
 
The Company has a currently-effective shelf registration statement under which it has registered common and preferred shares of beneficial interest with an aggregate public offering price of up to $150.0 million. On January 20, 2012, the Company entered into a continuous equity offering program under this shelf registration statement with BMO Capital Markets Corp. ("BMO") as sales agent, pursuant to which the Company may from time to time offer and sell its common shares of beneficial interest having an aggregate gross sales price of up to $100.0 million. Sales of common shares, if any, under the program will depend upon market conditions and other factors to be determined by IRET. During the third quarter of fiscal year 2012, IRET issued approximately 366,000 common shares under this program for total proceeds (before offering expenses but after underwriting discounts and commissions) of $2.7 million. During the third quarter of fiscal year 2011, IRET sold no shares under its previous continuous equity offering program with Robert W. Baird & Co., Incorporated as sales agent. The shelf registration statement under which the Company had reserved shares for issuance under this previous continuous equity offering program expired at the end of its three-year life during the second quarter of fiscal year 2012.
 
During the nine months ended January 31, 2012 and 2011, respectively, approximately 759,000 Units and 831,000 Units were converted to common shares, with a total value of approximately $3.5 million and $6.0 million included in equity. Approximately 52,000 common shares and 15,000 shares were issued under the Company's 401(k) plan during the nine months ended January 31, 2012 and 2011, respectively, with a total value of approximately $372,000 and $125,000 included in equity. Under the Company's Distribution Reinvestment and Share Purchase Plan, approximately 4.0 million common shares and 1.2 million common shares were issued during the nine months ended January 31, 2012 and 2011, respectively, with a total value of $28.8 million and $10.1 million included in equity.
 
SEGMENT REPORTING
OPERATING SEGMENTS
NOTE 5 . SEGMENT REPORTING
 
IRET reports its results in five reportable segments: multi-family residential properties, commercial office, commercial medical (including senior housing), commercial industrial and commercial retail properties. The Company's reportable segments are aggregations of similar properties. The accounting policies of each of these segments are the same as those described in Note 2.
 
IRET measures the performance of its segments based on net operating income ("NOI"), which the Company defines as total real estate revenues less real estate expenses (which consist of utilities, maintenance, real estate taxes, insurance and property management expenses). IRET believes that NOI is an important supplemental measure of operating performance for a REIT's operating real estate because it provides a measure of core operations that is unaffected by depreciation, amortization, financing and general and administrative expense. NOI should not be considered an alternative to net income, net income available for common shareholders or cash flow from operating activities as a measure of financial performance.
 
The revenues and net operating income for these reportable segments are summarized as follows for the three and nine month periods ended January 31, 2012 and 2011, along with reconciliations to the condensed consolidated financial statements. Segment assets are also reconciled to Total Assets as reported in the condensed consolidated financial statements.
 
 
(in thousands)
 
Three Months Ended January 31, 2012
Multi-Family
Residential
  
Commercial-
Office
  
Commercial-
Medical
  
Commercial-
Industrial
  
Commercial-
Retail
  
Total
 
                    
Real estate revenue
 $18,836  $18,541  $16,609  $3,596  $3,441  $61,023 
Real estate expenses
  8,668   8,695   5,220   1,078   1,188   24,849 
Net operating income
 $10,168  $9,846  $11,389  $2,518  $2,253   36,174 
Depreciation/amortization
                      (15,262)
Administrative, advisory and trustee services
                      (1,659)
Other expenses
                   (359)
Impairment of real estate investments
                      (135)
Interest expense
                      (16,533)
Interest and other income
                      295 
Income from continuing operations
   2,521 
Income from discontinued operations
   0 
Net income
  $2,521 




 
(in thousands)
 
Three Months Ended January 31, 2011
Multi-Family
Residential
  
Commercial-
Office
  
Commercial-
Medical
  
Commercial-
Industrial
  
Commercial-
Retail
  
Total
 
                    
Real estate revenue
 $16,884  $19,343  $16,993  $3,349  $3,577  $60,146 
Real estate expenses
  8,903   9,507   5,894   1,203   1,526   27,033 
Net operating income
 $7,981  $9,836  $11,099  $2,146  $2,051   33,113 
Depreciation/amortization
                      (14,581)
Administrative, advisory and trustee services
                   (1,850)
Other expenses
                      (441)
Interest expense
                      (15,868)
Interest and other income
                      107 
Income from continuing operations
                      480 
Income from discontinued operations
                      14,108 
Net income
  $14,588 

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

 
(in thousands)
 
Nine Months Ended January 31, 2011
Multi-Family
Residential
  
Commercial-
Office
  
Commercial-
Medical
  
Commercial-
Industrial
  
Commercial-
Retail
  
Total
 
                    
Real estate revenue
 $49,596  $58,839  $49,547  $9,890  $10,246  $178,118 
Real estate expenses
  25,247   27,082   16,563   3,123   3,629   75,644 
Net operating income
 $24,349  $31,757  $32,984  $6,767  $6,617   102,474 
Depreciation/amortization
                      (43,551)
Administrative, advisory and trustee services
                   (5,537)
Other expenses
                      (1,357)
Interest expense
                      (48,335)
Interest and other income
                      411 
Income from continuing operations
                      4,105 
Income from discontinued operations
                      19,936 
Net income
  $24,041 
 

 


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

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

COMMITMENTS AND CONTINGENCIES
COMMITMENTS AND CONTINGENCIES
NOTE 6 . COMMITMENTS AND CONTINGENCIES
 
Litigation. The Company is not a party to any legal proceedings which are expected to have a material effect on the Company's liquidity, financial position, cash flows or results of operations. The Company is subject to a variety of legal actions for personal injury or property damage arising in the ordinary course of its business, most of which are covered by liability insurance. Various claims of resident discrimination are also periodically brought, most of which also are covered by insurance. While the resolution of these matters cannot be predicted with certainty, management believes that the final outcome of such legal proceedings and claims will not have a material effect on the Company's liquidity, financial position, cash flows or results of operations.
 
Insurance. IRET carries insurance coverage on its properties in amounts and types that the Company believes are customarily obtained by owners of similar properties and are sufficient to achieve IRET's risk management objectives.
 
Purchase Options. The Company has granted options to purchase certain IRET properties to tenants in these properties, under lease agreements. In general, the options grant the tenant the right to purchase the property at the greater of such property's appraised value or an annual compounded increase of a specified percentage of the initial cost of the property to IRET. As of January 31, 2012, the total property cost of the 36 properties subject to purchase options was approximately $244.3 million, and the total gross rental revenue from these properties was approximately $14.7 million for the nine months ended January 31, 2012.
 
Environmental Matters. Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on,
 



around or under the property. While IRET currently has no knowledge of any material violation of environmental laws, ordinances or regulations at any of its properties, there can be no assurance that areas of contamination will not be identified at any of the Company's properties, or that changes in environmental laws, regulations or cleanup requirements would not result in material costs to the Company.
 
Restrictions on Taxable Dispositions. Approximately 110 of IRET's properties, consisting of approximately 6.1 million square feet of the Company's combined commercial segments' properties and 4,017 apartment units, are subject to restrictions on taxable dispositions under agreements entered into with some of the sellers or contributors of the properties. The real estate investment amount of these properties (net of accumulated depreciation) was approximately $787.2 million at January 31, 2012. The restrictions on taxable dispositions are effective for varying periods. The terms of these agreements generally prevent the Company from selling the properties in taxable transactions. The Company does not believe that the agreements materially affect the conduct of the Company's business or decisions whether to dispose of restricted properties during the restriction period because the Company generally holds these and the Company's other properties for investment purposes, rather than for sale. Historically, however, where IRET has deemed it to be in the shareholders' best interests to dispose of restricted properties, it has done so through transactions structured as tax-deferred transactions under Section 1031 of the Internal Revenue Code.
 
Redemption Value of UPREIT Units.  The limited partnership units ("UPREIT Units") of the Company's operating partnership, IRET Properties, are redeemable at the option of the holder for cash, or, at our option, for the Company's common shares of beneficial interest on a one-for-one basis, after a minimum one-year holding period.  All UPREIT Units receive the same cash distributions as those paid on common shares.  UPREIT Units are redeemable for an amount of cash per Unit equal to the average of the daily market price of an IRET common share for the ten consecutive trading days immediately preceding the date of valuation of the Unit.  As of January 31, 2012 and 2011, the aggregate redemption value of the then-outstanding UPREIT Units of the operating partnership owned by limited partners was approximately $144.7 million and $179.2 million, respectively.
 
Joint Venture Buy/Sell Options. Certain of IRET's joint venture agreements contain buy/sell options in which each party under certain circumstances has the option to acquire the interest of the other party, but do not generally require that the Company buy its partners' interests. During the third quarter of fiscal year 2012, IRET acquired, in an equity transaction for $1.3 million, its joint venture partner's interest in the Company's only joint venture which allowed IRET's unaffiliated partner, at its election, to require that IRET buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. The entity will continue to be consolidated in IRET's financial statements. The Company currently has no joint ventures in which its joint venture partner can require the Company to buy the partner's interest.
 
Tenant Improvements. In entering into leases with tenants, IRET may commit itself to fund improvements or build-outs of the rented space to suit tenant requirements. These tenant improvements are typically funded at the beginning of the lease term, and IRET is accordingly exposed to some risk of loss if a tenant defaults prior to the expiration of the lease term, and the rental income that was expected to cover the cost of the tenant improvements is not received. As of January 31, 2012, the Company is committed to fund approximately $10.1 million in tenant improvements, within approximately the next 12 months.
 
Development, Expansion and Renovation Projects. As of January 31, 2012, the Company had several development, expansion and renovation projects underway or recently completed, the costs for which have been capitalized, as follows:
 
Multi-Family Conversion, Minot, North Dakota:  The Company is converting an existing approximately 15,000 square foot commercial office building in Minot, North Dakota to a 20-unit multi-family residential property, for an estimated total cost of $2.9 million and a projected completion date in the second quarter of fiscal year 2013. As of January 31, 2012, the Company had incurred approximately $330,000 of these project costs. Work on this project had been temporarily postponed as Company employees and other resources were directed to the supervision of repairs at Company properties damaged by the extensive summer 2011 flooding in Minot, North Dakota, but planning for this conversion project has now resumed.
 
Senior Housing Memory Care and Assisted Living Units, Casper, Wyoming:  During the third quarter of fiscal year 2012, the Company substantially completed construction of an additional approximately 28 assisted living units and 16 memory care units at its existing Meadow Wind senior housing facility in Casper, Wyoming. The Company estimates that construction costs for this expansion project will total approximately $4.7 million. As of January 31, 2012, the Company had incurred approximately $3.8 million of these project costs.
 
Quarry Ridge Apartment Homes, Rochester, Minnesota: In June 2011, the Company commenced construction on an approximately 159-unit apartment project in Rochester, Minnesota, located adjacent to its existing Quarry Ridge Apartment Homes. The Company currently estimates that construction costs (excluding the value of the land) will total approximately $17.3
 



million, and that the project will be completed approximately 14 months from the start of construction. As of January 31, 2012, the Company had incurred approximately $8.1 million of the estimated construction costs.
 
Williston Apartments, Williston, North Dakota:  During the second quarter of fiscal year 2012, the Company formed a joint venture to construct a 144-unit multi-family residential property in Williston, North Dakota.  Construction commenced in August 2011, and the Company currently estimates that the project will be completed by July 2012 at a total cost to the joint venture entity of approximately $19.5 million, including the value of the land. The Company is the majority member of the joint venture, with a 60% interest; the remaining 40% interest is held by the Company's joint venture partner, a Minnesota limited liability company formed by a developer and a construction company based in St. Cloud, Minnesota. The Company's cash contribution to the project is approximately $3.3 million; the Company's joint venture partner contributed project planning and development services and the land for the project, which together were valued at $2.2 million. The remainder of the project cost is being financed with a construction loan from First International Bank & Trust. As of January 31, 2012, the joint venture entity had incurred approximately $8.6 million of the estimated project costs.
 
Senior Housing Memory Care and Assisted Living Units, Laramie, Wyoming:  During the second quarter of fiscal year 2012, the Company entered into a contract for the construction of an additional 29 assisted living units at its existing 48-unit Spring Wind senior housing facility in Laramie, Wyoming, and for the conversion of an existing 16 units at the facility to memory care units, for a total, following project completion, of 61 assisted living units and 16 memory care units.  The Company estimates that the construction costs for this expansion project will total approximately $3.8 million and that the project will be completed in the first quarter of fiscal year 2013.  As of January 31, 2012, the Company had incurred approximately $1.4 million of these project costs.
 
Industrial-Office Build-to-Suit, Minot, North Dakota:  During the second quarter of fiscal year 2012, the Company entered into a 10-year, fully net lease with a provider of production enhancement services to the oil and gas industry, to construct and then lease an approximately 28,000 square foot industrial building to be located in Minot, North Dakota on an approximately 9.6-acre parcel of vacant land. Construction began in October 2011, with completion estimated in the summer of 2012.  Total construction costs are currently estimated at $5.8 million (including the cost of the land), subject to tenant requested changes. As of January 31, 2012, the Company had incurred approximately $1.0 million of these estimated construction costs.
 
Construction interest capitalized for the three month periods ended January 31, 2012 and 2011, respectively, was approximately $116,000 and $26,000 for development projects completed and in progress. Construction interest capitalized for the nine month periods ended January 31, 2012 and 2011, respectively, was approximately $230,000 and $58,000 for development projects completed and in progress.
DISCONTINUED OPERATIONS
DISCONTINUED OPERATIONS
NOTE 7 . DISCONTINUED OPERATIONS
 
The Company reports in discontinued operations the results of operations of a property that has either been disposed of or is classified as held for sale. The Company also reports any gains or losses from the sale of a property in discontinued operations. During the first and third quarters of fiscal year 2012 the Company had no real estate dispositions. During the second quarter of fiscal year 2012, the Company sold a small retail property in Livingston, Montana. During fiscal year 2011, the Company sold four apartment complexes, one industrial property, one retail property and a patio home. See Note 8 for additional information on the properties sold during the nine months ended January 31, 2012 and 2011. There were no properties held for sale as of January 31, 2012 or 2011. The following information shows the effect on net income and the gains or losses from the sale of properties classified as discontinued operations for the three months ended January 31, 2011 and the nine months ended January 31, 2012 and 2011:
 



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


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


Nine Months Ended January 31, 2011
 
    
(in thousands)
 
Acquisitions and Development Projects Placed in Service
Date Acquired
 
Land
  
Building
  
Intangible Assets
  
Acquisition Cost
 
                
Commercial Office
              
58,574 sq. ft. Omaha 10802 Farnam Dr - Omaha, NE
12/16/10
 $2,462  $4,374  $1,459  $8,295 
                    
Commercial Medical
                  
14,705 sq. ft. Billings 2300 Grant Road - Billings, MT
7/15/10
  649   1,216   657   2,522 
14,640 sq. ft. Missoula 3050 Great Northern - Missoula, MT
7/15/10
  640   1,331   752   2,723 
108,503 sq. ft. Edgewood Vista Minot - Minot, ND
11/10/10
  1,046   11,590   2,545   15,181 
23,965 sq. ft. Edgewood Vista Spearfish Expansion - Spearfish, SD1
1/10/11
  0   2,280   0   2,280 
      2,335   16,417   3,954   22,706 
                    
Commercial Industrial
                  
42,244 sq. ft. Fargo 1320 45th St N - Fargo, ND2
6/22/10
  0   1,634   0   1,634 
                    
Commercial Retail
                  
47,709 sq. ft. Minot 1400 31st Ave - Minot, ND
12/10/10
  1,026   6,143   1,081   8,250 
                    
Total Property Acquisitions
   $5,823  $28,568  $6,494  $40,885 
 
(1)  
Expansion project placed in service January 10, 2011.
(2)  
Development property placed in service June 22, 2010.  Additional costs incurred in fiscal year 2010 totaled $2.3 million, for a total project cost at January 31, 2011 of $3.9 million.
 
PROPERTY DISPOSITIONS
 
The Company had no real estate dispositions in the third quarter of fiscal year 2012. The following table details the Company's dispositions during the nine months ended January 31, 2012 and 2011:
 
Nine Months Ended January 31, 2012
 
   
(in thousands)
 
Dispositions
 
Sales Price
  
Book Value
and Sales Cost
  
Gain/(Loss)
 
           
Commercial Retail
         
41,200 sq ft. Livingstone Pamida - Livingston, MT
 $2,175  $1,586  $589 
              
Total Property Dispositions
 $2,175  $1,586  $589 
 

 


 
Nine Months Ended January 31, 2011
 
  
(in thousands)
 
Dispositions
 
Sales Price
  
Book Value
and Sales Cost
  
Gain/(Loss)
 
           
Multi-Family Residential
         
504 unit - Dakota Hill at Valley Ranch - Irving, TX
 $36,100  $30,909  $5,191 
192 unit - Neighborhood Apartments - Colorado Springs, CO
  11,200   9,664   1,536 
195 unit - Pinecone Apartments - Fort Collins, CO
  15,875   10,422   5,453 
210 unit - Miramont Apartments - Fort Collins, CO
  17,200   10,732   6,468 
    80,375   61,727   18,648 
              
Commercial Medical
            
1,410 sq. ft. Edgewood Vista Patio Home 4330 - Fargo, ND
  205   220   (15)
              
Commercial Industrial
            
29,440 sq. ft. Waconia Industrial Building - Waconia, MN
  2,300   1,561   739 
              
Commercial Retail
            
41,000 sq. ft. Ladysmith Pamida - Ladysmith, WI
  450   457   (7)
              
Total Property Dispositions
 $83,330  $63,965  $19,365 
MORTGAGES PAYABLE AND LINE OF CREDIT
MORTGAGES PAYABLE AND LINE OF CREDIT
NOTE 9 . MORTGAGES PAYABLE AND LINE OF CREDIT
 
The Company's mortgages payable and revolving line of credit are collateralized by substantially all of its properties owned. The majority of the Company's mortgages payable are secured by individual properties or groups of properties, and are non-recourse to the Company, other than for standard carve-out obligations such as fraud, waste, failure to insure, environmental conditions and failure to pay real estate taxes. Interest rates on mortgages payable range from 2.71% to 8.25%, and the mortgages have varying maturity dates from the current fiscal year through July 1, 2036.
 
Of the mortgages payable, the balances of fixed rate mortgages totaled $1.0 billion at January 31, 2012 and $992.3 million at April 30, 2011. The balances of variable rate mortgages totaled $10.5 million and $1.5 million as of January 31, 2012 and April 30, 2011, respectively. The Company does not utilize derivative financial instruments to mitigate its exposure to changes in market interest rates. Most of the fixed rate mortgages have substantial pre-payment penalties. As of January 31, 2012, the weighted average rate of interest on the Company's mortgage debt was 5.84%, compared to 5.92% on April 30, 2011. The aggregate amount of required future principal payments on mortgages payable as of January 31, 2012, is as follows:
 
Year Ended April 30,
 
(in thousands)
 
2012 (remainder)
 $13,417 
2013
  51,724 
2014
  66,024 
2015
  106,207 
2016
  86,182 
Thereafter
  715,163 
Total payments
 $1,038,717 
 
The Company's revolving, multi-bank line of credit with First International Bank and Trust, Watford City, North Dakota, as lead bank, had, as of January 31, 2012, lending commitments of $60.0 million.  As of January 31, 2012, the line of credit was secured by mortgages on 23 properties; under the terms of the line of credit, properties may be added and removed from the collateral pool with the agreement of the lenders. Participants in this credit facility as of January 31, 2012 included, in addition to First International Bank, the following financial institutions:  The Bank of North Dakota; First Western Bank and Trust; Dacotah Bank; United Community Bank; American State Bank & Trust Company and Town & Country Credit Union. The line of credit has a current interest rate of 5.65% and a minimum outstanding principal balance requirement of $10.0 million, and as of January 31, 2012, the Company had borrowed $49.0 million. The facility includes customary loan covenants including restrictions regarding minimum debt-service ratios to be maintained in the aggregate and individually on properties in the collateral pool, and the Company is also required to maintain minimum depository account(s) totaling $6.0 million with First International, of which
 


 

$1.5 million is to be held in a non-interest bearing account. As of January 31, 2012, the Company believes it is in compliance with the facility covenants.
FAIR VALUE OF FINANCIAL INSTRUMENTS
FAIR VALUE OF FINANCIAL INSTRUMENTS
NOTE 10 . FAIR VALUE OF FINANCIAL INSTRUMENTS
 
The following methods and assumptions were used to estimate the fair value of each class of financial instruments.
 
Mortgage Loans Receivable. Fair values are based on the discounted value of future cash flows expected to be received for a loan using current rates at which similar loans would be made to borrowers with similar credit risk and the same remaining maturities. Terms are short term in nature and carrying value approximates the estimated fair value.
 
Cash and Cash Equivalents. The carrying amount approximates fair value because of the short maturity.
 
Other Investments.  The carrying amount, or cost plus accrued interest, of the certificates of deposit approximates fair value.
 
Other Debt. The fair value of other debt is estimated based on the discounted cash flows of the loan using current market rates.
 
Line of Credit.  The carrying amount approximates fair value because the variable rate debt re-prices frequently.
 
Mortgages Payable. For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using current market rates.
 
The estimated fair values of the Company's financial instruments as of January 31, 2012 and April 30, 2011, are as follows:
 
   
(in thousands)
 
   
January 31, 2012
  
April 30, 2011
 
   
Carrying Amount
  
Fair Value
  
Carrying Amount
  
Fair Value
 
FINANCIAL ASSETS
            
Mortgage loans receivable
 $0  $0  $156  $156 
Cash and cash equivalents
  35,502   35,502   41,191   41,191 
Other investments
  633   633   625   625 
FINANCIAL LIABILITIES
                
Other debt
  6,176   6,255   8,200   7,279 
Line of credit
  49,000   49,000   30,000   30,000 
Mortgages payable
  1,038,717   1,086,940   993,803   1,013,713 
REDEEMABLE NONCONTROLLING INTERESTS
REDEEMABLE NONCONTROLLING INTERESTS
NOTE 11 . REDEEMABLE NONCONTROLLING INTERESTS
 
Redeemable noncontrolling interests on our Condensed Consolidated Balance Sheets represent the noncontrolling interest in a joint venture of the Company in which the Company's unaffiliated partner, at its election, could require the Company to buy its interest at a purchase price to be determined by an appraisal conducted in accordance with the terms of the agreement, or at a negotiated price. Redeemable noncontrolling interests are presented at the greater of their carrying amount or redemption value at the end of each reporting period. Changes in the value from period to period are charged to common shares of beneficial interest on our consolidated balance sheets. The Company acquired this interest from its joint venture partner in the third quarter of fiscal year 2012, and, following this acquisition, currently has no redeemable noncontrolling interests in consolidated real estate entities. As of January 31, 2012 and April 30, 2011, the estimated redemption value of the redeemable noncontrolling interests was $0 and $987,000, respectively. Below is a table reflecting the activity of the redeemable noncontrolling interests.
 
   
(in thousands)
 
Balance at April 30, 2010
 $1,812 
Net loss
  (5)
Distributions
  0 
Mark-to-market adjustments
  (570)
Balance at January 31, 2011
 $1,237 




   
(in thousands)
 
Balance at April 30, 2011
 $987 
Net income
  12 
Distributions
  (27)
Mark-to-market adjustments
  35 
Acquisition of joint venture partner's interest
  (1,007)
Balance at January 31, 2012
 $0 
SUBSEQUENT EVENTS
SUBSEQUENT EVENTS
NOTE 12 . SUBSEQUENT EVENTS
 
Common and Preferred Share Distributions.  On March 7, 2012, the Company's Board of Trustees declared a regular quarterly distribution of 13.00 cents per share and unit on the Company's common shares of beneficial interest and the limited partnership units of IRET Properties, payable April 2, 2012 to common shareholders and unitholders of record on March 19, 2012.  Also on March 7, 2012, the Company's Board of Trustees declared a distribution of 51.56 cents per share on the Company's preferred shares of beneficial interest, payable April 2, 2012 to preferred shareholders of record on March 19, 2012.
 
Completed Acquisition.  Subsequent to the end of the third quarter of fiscal year 2012, on February 16, 2012, the Company closed on its acquisition of the Grand Gateway Apartments, a 116-unit multi-family residential property located in St. Cloud, Minnesota, for a purchase price of $7.9 million, of which approximately $3.4 million was paid in cash and the remainder in limited partnership units of the Operating Partnership valued at approximately $4.5 million. A limited partnership of which Stephen Stenehjem, a trustee of the Company, is the general partner, was one of six investors in this property prior to its acquisition by the Company, and the Company's purchase of the property resulted in the issuance to this limited partnership of UPREIT units of the Operating Partnership valued at approximately $1.0 million. As required under the Company's Related Party Transactions policy and Declaration of Trust, the transaction was approved by the Company's Audit Committee and by the independent trustees of the Company, without the participation of Mr. Stenehjem. As a result of this transaction with the Company, the Board of Trustees has determined that Mr. Stenehjem is no longer eligible to be considered an independent trustee under the listing standards of the NASDAQ stock exchange.  Mr. Stenehjem remains on the Company's Board as a trustee but has resigned as a member of the Company's Audit Committee.  The Company continues to have a majority of independent trustees on its Board, and three independent trustees on its Audit Committee, and accordingly remains in compliance with these requirements of the listing standards of the NASDAQ stock exchange.
 
Pending Acquisitions.  The Company has signed purchase agreements for the acquisition of the following properties (these pending acquisitions are subject to various closing conditions, and accordingly no assurances can be given that these transactions will be completed): two multi-family residential projects in Grand Forks, North Dakota, with a total of 84 units, for a purchase price totaling approximately $8.3 million, of which approximately $1.1 million would be paid through the issuance of limited partnership units of the Operating Partnership, with the remainder paid in cash; and a 44 building, 308-unit multi-family residential complex in Topeka, Kansas, for a price totaling approximately $17.7 million, of which $5.2 million would be paid in cash, with the remainder consisting of the assumption of existing mortgage debt on the property.
 
Jamestown, North Dakota Joint Venture.  Subsequent to the end of the third quarter of fiscal year 2012, on February 10, 2012, the Company formed a joint venture entity to develop an approximately 45,000 square foot medical office building in Jamestown, North Dakota on approximately 4.98 acres of land to be leased under a prepaid ground lease with an initial term of 79 years. The medical office building would be connected to the recently-built Jamestown Regional Medical Center.  The Company's joint venture partner in this development project will be an investment group based in Minneapolis, Minnesota. The estimated total project cost for construction of the medical office building is approximately $9.2 million (including the prepaid ground lease), with IRET expected to invest approximately $1.5 million for a 51.0% share in the joint venture. Construction is currently expected to commence in the fourth quarter of fiscal year 2012, and conclude in the third quarter of fiscal year 2013. Construction financing of approximately $6.2 million is being offered by Wells Fargo Bank, NA and this loan is expected to close in the fourth quarter of fiscal year 2012.  IRET will provide management services for this development. This joint venture development project is subject to continued negotiation and various closing conditions, and accordingly no assurances can be given that the project will be completed on the terms summarized above, or at all.

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



rebuild the destroyed building but have no firm estimates at this time for the cost or expected completion date of such rebuilding. The property is insured and we currently expect our losses to be covered under our insurance policy, subject to a deductible of $200,000. The remaining units in the other building of our Chateau Apartments property are expected to be available for leasing in the first quarter of fiscal year 2013.
Document Information
9 Months Ended
Jan. 31, 2012
Document Type
10-Q 
Amendment Flag
false 
Document Period End Date
Jan. 31, 2012 
Entity Information (USD $)
9 Months Ended
Jan. 31, 2012
Entity Registrant Name
INVESTORS REAL ESTATE TRUST 
Entity Central Index Key
0000798359 
Current Fiscal Year End Date
--04-30 
Entity Well Known Seasoned Issuer
No 
Entity Voluntary Filers
No 
Entity Current Reporting Status
Yes 
Entity Filer Category
Accelerated Filer 
Entity Public Float
$ 679,638,043 
Entity Common Stock Shares Outstanding
86,169,534 
Document Fiscal Year Focus
2012 
Document Fiscal Period Focus
Q3