FORM 10-K_________________________
Annual Report Pursuant to Section 13 or 15(d)of the Securities Exchange Act of 1934
For the fiscal year ended April 30, 2002
Commission File Number 000-14851
INVESTORS REAL ESTATE TRUST(Exact name of Registrant as specified in its charter)
12 South Main, Suite 100Minot, North Dakota 58701(Address of principal executive offices)
701-837-4738(Registrant's telephone number, including area code)_______________________
Securities registered pursuant to Section 12(b) of the Act:None
Securities registered pursuant to Section 12(g) of the Act:
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 such filing requirements for the past 90 days. [X] Yes [ ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (Sec. 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]
The aggregate market value of the Registrant's outstanding capital shares of beneficial interest held by non-affiliates was $278,847,079 based on the last reported sale price on the Nasdaq National Market on July 15, 2002.
The number of shares of beneficial interest outstanding as of April 30, 2002, was 27,847,079.
Documents Incorporated by Reference: Portions of IRET's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders are incorporated by reference into Part III (Items 10, 11, 12 and 13) hereof.
INVESTORS REAL ESTATE TRUST(Registrant)
INDEX
PART 1
Certain statements included in this discussion and the documents incorporated into this Form 10K405 by reference are "forward-looking statements" within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements include statements about our intention to invest in properties that we believe will increase in income and value; our belief that the real estate markets in which we invest will continue to perform well; our belief that we have the liquidity and capital resources necessary to meet our known obligations and to make additional real estate acquisitions and capital improvements when appropriate to enhance long term growth; and other statements preceded by, followed by or otherwise including words such as "believe," "expect," "intend," "project," "anticipate," "potential," "may," "will," "designed," "estimate," "should," "continue" and other similar expressions. These statements indicate that we have used assumptions that are subject to a number of risks and uncertainties that could cause our actual results or performance to differ materially from those projected.
Although we believe that the expectations reflected in such forward-looking statements are based on reasonable assumptions, we can give no assurance that these expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the expectations reflected in the forward-looking statements include:
Our objective is to increase shareholder value by employing a disciplined investment strategy. This strategy is focused on growing assets in desired geographical markets, achieving diversification by property type and location, adhering to targeted returns by acquiring properties in an attempt to create value for our investors. We have increased our cash distributions every year since our inception 32 years ago and every quarter since 1988.
We seek to diversify our investments between multi-family residential and commercial properties. As of April 30, 2002, our real estate portfolio consisted of:
We generally use available cash or short-term floating rate debt to acquire real estate. We then replace such cash or short-term floating rate debt with fixed-rate secured debt, typically in an amount equal to 70% of the acquisition cost. In appropriate circumstances, we also may acquire one or more properties in exchange for limited partnership units of IRET Properties, which are convertible into IRET Shares of Beneficial Interest ("Shares") on a one-to-one basis after the expiration of a minimum holding period of one-year or longer. Subject to our continued ability to raise equity capital and exchange limited partnership units, we anticipate acquiring $100 million to $200 million of real estate assets on an annual basis.
We contract with locally based third-party management companies to handle all onsite management duties necessary for the proper operation of our properties. Substantially, all of our management contracts provide for compensation ranging from 2.8% to five percent of gross rent collections and may be terminated by us in 60 days or less by providing written notice of termination. The use of locally-based management companies allows us to enjoy the benefits of local knowledge of the applicable real estate market, while avoiding the cost and difficulty associated with maintaining management personnel in every city in which we operate.
Investments. During the past fiscal year we acquired 10 commercial properties consisting of 1,276,603 leasable square feet for $119,329,418. We also acquired five residential apartment communities containing 517 units for $23,950,924. In order to complete these acquisitions, we used $33,249,171 of our own cash, issued 2,269,642 operating units in our operating partnership with a value of $20,138,748 and borrowed the balance of $89,892,423 from various lenders.
In December 2001, we issued 3,100,000 shares of beneficial interest for a sales price of $8.75 per share, raising net proceeds of $24,955,000.
In April 2002, we issued 3,600,000 shares of beneficial interest for a sales price of $9.50 per share, raising net proceeds of $31,806,000.
In April of 2002, we discontinued the issuance of investment certificates and the outstanding certificates will be redeemed as they mature. The amount of certificates to be redeemed in fiscal 2003 and succeeding years is as follows:
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Other Developments During the Past YearProperty Dispositions. During the past fiscal year, we sold three commercial properties for a total of $2,032,213 and two residential apartment communities for a total $1,395,000 resulting in a total gain of $604,282 for fiscal 2002.
EmployeesAs of April 30, 2002, we had 18 full time employees.
Environmental MattersUnder various federal, state and local laws, ordinances and regulations, owners as well as tenants and operators of real estate may be required to investigate and clean up hazardous substances released at a property, and may be held liable to a governmental entity or to third parties for property damage or personal injuries and for investigation and clean-up costs incurred in connection with any contamination. In addition, some environmental laws create a lien on a contaminated site in favor of the government for damages and costs it incurs in connection with the contamination. We have reviewed some preliminary environmental surveys of the facilities we own. Based upon that review we do not believe that any of these properties are subject to any material environmental contamination. However, no assurances can be given that:
Since our formation, we have operated as a REIT under Sections 856-858 of the Internal Revenue Code, and since February 1, 1997, we have been structured as an UPREIT. Since restructuring as an UPREIT, we have conducted all of our daily business operations through IRET Properties. IRET Properties is organized under the laws of the State of North Dakota pursuant to an Agreement of Limited Partnership dated January 31, 1997. IRET Properties is principally engaged in acquiring, owning, operating and leasing multi-family apartment buildings and commercial real estate. The sole general partner of IRET Properties is IRET, Inc., a North Dakota corporation and our wholly-owned subsidiary. All of our assets (except for qualified
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REIT subsidiaries) and liabilities were contributed to IRET Properties, through IRET, Inc., in exchange for the sole general partnership interest in IRET Properties, which is held by IRET, Inc. As of April 30, 2002, IRET, Inc. owned a 74% interest in IRET Properties. The remaining ownership of IRET Properties is held by individual limited partners, none of whom own more than ten percent of the outstanding limited partnership units.
CompetitionInvesting in and operating real estate is a very competitive business. We compete against other REITs, numerous financial institutions and numerous individuals and public and private companies who are actively engaged in this business. We do not believe we have a dominant position in any of the geographic markets in which we operate but some of our competitors are dominant in selected markets. Many of our competitors have greater financial and management resources than we have. We believe the geographic diversity of our investments, the experience and abilities of our management, the quality of our assets and the financial strength of many of our commercial tenants affords us some competitive advantages which have and will allow us to operate our business successfully despite the competitive nature of our business.
Investment Strategy and PoliciesOur investment strategy is to invest in multi-family apartment communities and certain commercial properties, such as warehouses, retirement homes, manufacturing plants, offices and retail properties, that are leased to single or multiple tenants, usually for five years or longer, and are located throughout the upper Midwest. We operate mainly within the states of North Dakota and Minnesota, although we do have real estate investments in South Dakota, Montana and Nebraska, as well as, Colorado, Georgia, Idaho, Iowa, Kansas, Michigan, Washington and Texas. We generally seek to leverage all of the property that we acquire so that the debt on such property is approximately 70% of the property's value.
In order to implement our investment strategy we have certain investment policies. Our significant investment policies are as follows:
The method of financing the purchase of real estate investments is primarily from borrowed funds and the sale of Shares.We intend to distribute all of the net income generated from rental income and interest income to our shareholders and limited partners in quarterly cash distributions in January, April, July, and October.There is no limitation on the number or amount of mortgages that may be placed on any one piece of property, unless we seek to borrow an amount in excess of 300% of our total net assets, in which case our Second Restated Declaration of Trust requires that such amount be approved by a majority of the independent members of the Board of Trustees and disclosed to the shareholders in the next quarterly report, along with justification for such excess. In addition to the 300% limitation on total indebtedness, it is our policy that we will not exceed a 70% debt level on our real estate assets. As of April 30, 2002, our ratio of total real estate mortgages to total real estate assets was 67%, while our ratio of total indebtedness as compared to our net assets was 223%. This policy may be changed at anytime, or from time to time, without notice to, or approval of, our shareholders.It is not our policy to acquire assets primarily for capital gain through sale in the short term. Rather, it is our policy to acquire assets with an intention to hold such assets for at least a 10-year period. During the holding period, it is our policy to seek current income and capital appreciation through an increase in the price of our Shares as a result of the increase in value of the underlying real estate portfolio, as well as increased revenue as a result of higher rents.Any policy as it relates to investments in real estate or interests in real estate may be changed by the trustees at anytime without notice to or a vote of the shareholders.
We intend to distribute all of the net income generated from rental income and interest income to our shareholders and limited partners in quarterly cash distributions in January, April, July, and October.
There is no limitation on the number or amount of mortgages that may be placed on any one piece of property, unless we seek to borrow an amount in excess of 300% of our total net assets, in which case our Second Restated Declaration of Trust requires that such amount be approved by a majority of the independent members of the Board of Trustees and disclosed to the shareholders in the next quarterly report, along with justification for such excess. In addition to the 300% limitation on total indebtedness, it is our policy that we will not exceed a 70% debt level on our real estate assets. As of April 30, 2002, our ratio of total real estate mortgages to total real estate assets was 67%, while our ratio of total indebtedness as compared to our net assets was 223%. This policy may be changed at anytime, or from time to time, without notice to, or approval of, our shareholders.
It is not our policy to acquire assets primarily for capital gain through sale in the short term. Rather, it is our policy to acquire assets with an intention to hold such assets for at least a 10-year period. During the holding period, it is our policy to seek current income and capital appreciation through an increase in the price of our Shares as a result of the increase in value of the underlying real estate portfolio, as well as increased revenue as a result of higher rents.
Any policy as it relates to investments in real estate or interests in real estate may be changed by the trustees at anytime without notice to or a vote of the shareholders.
Unless otherwise approved by the Board of Trustees, it is our policy that we will not invest in mortgage loans on any one property if in the aggregate the total indebtedness on the property, including our mortgage, exceeds 85% of the property's appraised value.
Our policies relating to mortgage loans, including second mortgages, may be changed by the Board of Trustees at any time, or from time to time, without notice to, or a vote of, the shareholders.
In no event were the purchases of the shares of publicly traded REITs made for the purpose of exercising control over such issuer. No further such investments are currently planned.
We have a number of wholly owned limited partnerships and companies that were organized for the sole purpose of conducting our real estate business activities.
Any policy, as it relates to investments in other securities, may be changed by the members of the Board of Trustees at anytime, or from time to time, without notice to, or a vote of, the shareholders.
Increase of Commercial Property InvestmentsHistorically, the assets in our portfolio consisted predominantly of multi-family residential properties, as compared to commercial properties. More recently, our investment activities have caused this balance to shift so that the percentage of commercial properties held in our portfolio has increased significantly. Specifically, approximately 85% of our property acquisitions made in within the past 24 months have been commercial properties. This change is predominantly due to the greater availability of commercial properties on terms that meet our financial and strategic objectives. If current market conditions continue, we anticipate that the percentage of commercial properties could equal or exceed the percentage of multi-family residential properties during
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fiscal 2003. This may not, however, be a long-term trend as in future periods we may purchase a greater percentage of multi-family residential properties depending on market conditions.
Recent Acquisitions, Dispositions and TenantsDuring the three most recent fiscal years ending April 30, we acquired 15 apartment communities, consisting of 2,401 units, for a total cost of $163 million, and 48 commercial properties, containing 2.8 million square feet of space, for a total cost of $273 million. During the most recent fiscal year ended April 30, 2002, we sold 5 properties, realizing a net gain of $600,000. No single tenant accounted for more than ten percent of revenues during any of the past three fiscal years. As of April 30, 2002, our three largest commercial tenants as a percentage of total commercial rents were: Step II, INc. DBA Edgewood Vista 9%, HealthEast Medical 6% and Great Plains Software, a subsidiary of Microsoft, Inc. 6%.
Economic Occupancy RatesEconomic occupancy rates are shown below for each property group in each of the three most recent fiscal years ending April 30. Economic occupancy rates are calculated by dividing the rent collected by the rent scheduled. In the case of apartment properties, lease arrangements with individual tenants vary from month-to-month to one-year leases, with the normal term being six months. Leases on commercial properties vary from one to 20 years.
Material Lease Terms Residential. Our typical residential lease terms are as follows:
(i) Terms of three to twelve months.
(ii) Month-to-month occupancy is generally not permitted.
(iii) Water, sewer and garbage are included in the monthly rent, and all other utilities and services are the direct responsibility of the tenant.
(iv) Tenants are not required to carry renter's insurance.
Commercial. Our typical commercial least terms are as follows:
(i) Terms from one to 20 years plus guaranteed renewal terms.
(ii) Renewal term rents will be equal to current market rents at time of renewal, and in no event less than the most recent rental rate.
(iii) Tenant pays all expenses associated with taxes, insurance, repairs, daily operations and maintenance.
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(iv) Rent is payable in fixed monthly amounts (less than five percent of rental income is based on our commercial tenant's sales).
(v) Tenants are prohibited from assigning their lease or subleasing without our written approval.
(vi) We may sell the property and assign the lease at any time without the approval of the tenant.
(vii) We do not grant tenants an option to purchase the property.
Certain Lending RequirementsIn certain instances, in connection with the acquisition of investment properties, the lender financing such properties may require, as a condition of the loan, that the properties be owned by a "single asset entity." Accordingly, we have organized two wholly-owned subsidiary corporations, and IRET Properties has organized several limited partnerships, for the purpose of holding title in an entity that complies with such lending conditions. All financial statements of these subsidiaries are consolidated into our financial statements.
Selection, Management and Custody of Our Real Estate AssetsThe day to day management of our real estate assets is handled by third-party professional real estate management companies. Day-to-day management activities include, the negotiation of potential leases, the preparation of proposed operating budgets and the supervision of routine maintenance and capital improvements that have been authorized by us. All activities relating to the purchase, sale, insurance coverage, capital improvements, approval of commercial leases and annual operating budgets and major renovations are made exclusively by our employees and are then implemented by the third-party property management companies.
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As of April 30, 2002, we had property management contracts with the following companies:
All management contracts may be terminated by us without cause or penalty upon no more than 60-days written notice. It is our understanding that each of the property management companies listed above are properly licensed, insured and bonded to the extent required for their particular duties.
With the exception of Hoyt Properties, Inc., none of the firms engaged to provide property management services are affiliated with IRET, its officers or members of its Board of Trustees. Hoyt Properties, Inc. is owned 100% by Steven B. Hoyt, a member of our Board of Trustees, and his wife. Hoyt Properties manages the commercial buildings we acquired from him pursuant to written management contracts.
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With respect to multi-tenant commercial properties, we rely almost exclusively on third-party brokers to locate potential tenants. As compensation, most brokers receive a commission of up to seven percent of the total rent to be paid over the term of the lease. This commission rate is the industry standard and, in our opinion, commercially reasonable.
Policies With Respect to Certain of Our ActivitiesThe following information is a statement of our current policies as they pertain to the described activities.
For the three most recent fiscal years ended April 30, we have borrowed funds on new property acquisitions and developments as follows:
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Our Second Restated Declaration of Trust does not contain any restrictions on our ability to offer IRET Properties limited partnership units in exchange for property. As a result, any decision to do so is vested solely in the Board of Trustees. This policy may be changed at any time, or from time to time, without notice to, or a vote of, our shareholders. For the three most recent fiscal years ending April 30, we have issued the following IRET Properties limited partnership units in exchange for properties:
12Over the past three years, we have repurchased shares under the terms of our distribution reinvestment plan for allocation to those shareholders that elect to reinvest their distributions in additional shares. For the three most recent fiscal years ended April 30, we have repurchased the following number and amount of shares:
Over the past three years, we have repurchased shares under the terms of our distribution reinvestment plan for allocation to those shareholders that elect to reinvest their distributions in additional shares. For the three most recent fiscal years ended April 30, we have repurchased the following number and amount of shares:
IRET Properties Agreement of Limited PartnershipThe material terms of the IRET Properties Agreement of Limited Partnership are as follows:
IRET Properties may not engage in any transaction that would result in a change of control transaction unless, in connection with the transaction, the limited partners receive or have the right to receive cash or other property equal to the product of the number of our shares into which each limited partnership unit is then exchangeable and the greatest amount of cash, securities or other property paid in the transaction to the holder of one of our shares in consideration of one such share. If, in connection with the transaction, a
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purchase, tender or exchange offer has been made to, and accepted by, the holders of more than fifty percent (50%) of our outstanding shares, each holder of limited partnership units will receive, or will have the right to elect to receive, the greatest amount of cash, securities or other property that such holder would have received had he or she exercised his or her right to redemption and received shares in exchange for his or her limited partnership units immediately prior to the expiration of such purchase, tender or exchange offer and had accepted such purchase, tender or exchange offer.Despite the foregoing paragraph, we may merge, or otherwise combine our assets, with another entity if, immediately after such merger or other combination, substantially all of the assets of the surviving entity, other than our ownership in IRET Properties, are contributed to IRET Properties as a capital contribution in exchange for general partnership units of IRET Properties with a fair market value, as reasonable determined by us, equal to the agreed value of the assets so contributed. In connection with any transaction described in this or the preceding paragraph, we are required to use our commercially reasonable efforts to structure such transaction to avoid causing the limited partners to recognize gain for federal income tax purposes by virtue of the occurrence of, or their participation in, such transaction; provided that such efforts are consistent with the exercise of the fiduciary duties of the members of the Board of Trustees under applicable law.
Upon the contribution of the proceeds from offerings of Shares or other capital contributions, we or IRET, Inc., as applicable, will receive additional general partnership units and our or IRET, Inc.'s percentage interest, as applicable, in IRET Properties will be increased on a proportionate basis based upon the amount of such contributions. Conversely, the percentage interests of the limited partners will be decreased on a proportionate basis. In the event that a capital contribution in the form of property is made by us or IRET, Inc., as applicable, to IRET Properties, IRET, Inc. will revalue the property of IRET Properties to its fair market value as determined by IRET, Inc. and the capital accounts of the partners will be adjusted to reflect the manner in which the unrealized gain or loss inherent in such property, which has not been reflected in the capital accounts previously, would be allocated among the partners under the terms of the Agreement of Limited Partnership if there were a taxable disposition of such property at fair market value on the date of the revaluation.
The Agreement of Limited Partnership further provides that if at any time, or from time to time, IRET Properties requires additional funds in excess of funds available to IRET Properties from borrowing or capital contributions, either we or IRET, Inc. may borrow such funds from a financial institution or other lender and lend such funds to IRET Properties on the same terms and conditions as are applicable to us or IRET, Inc., as applicable, in connection with the borrowing of such funds.
Furthermore, IRET, Inc. is authorized to cause IRET Properties to issue partnership units for less than fair market value if we (i) have concluded in good faith that such issuance is in the best interest of us and IRET Properties and (ii) IRET, Inc. makes a capital contribution in an amount equal to the proceeds of such issuance.
(i) result in any person owning, directly or indirectly, shares in excess of the ownership limitation of 50% of the outstanding shares;
(ii) result in our shares being owned by fewer than 100 persons;
(iii) result in us being "closely held" within the meaning of Section 856(h) of the Code;
(iv) cause us to own, actually or constructively, ten percent or more of the ownership interest in on our or IRET Properties' tenants' real estate, within the meaning of Section 856(d)(2)(D) of the Code; or
(v) cause the acquisition of our shares by such redeeming limited partner to be "integrated" with any other distribution of our shares for purposes of complying with the Securities Act of 1933.
The exchange may be exercised by the limited partners at any time after the first anniversary of the date of the acquisition of the limited partnership units; provided, however, that not more than two exchanges may occur during each calendar year, and each limited partner may not exercise the exchange for less than 1,000 units or, if such limited partner holds less than 1,000 units, all of the units held by such limited partner. The number of our shares issuable upon an exchange will be adjusted upon the occurrence of share splits, mergers, consolidations or similar pro rata share transactions, which otherwise would have the effect of diluting the ownership interests of the limited partners or our shareholders.
(i) all expenses relating to the operation and continuity of existence of both us and IRET, Inc.;
(ii) all of our expenses relating to the public offering and registration of our securities;
(iii) all expenses incurred by us that are associated with the preparation and filing of any periodic reports required under federal, state or local laws or regulations;
(iv) all expenses incurred by us or IRET, Inc. that are associated with the compliance with laws, rules and regulations promulgated by any regulatory body; and
(v) all other operating or administrative costs of IRET, Inc. incurred in the ordinary course of its business on behalf of IRET Properties.
(i) the bankruptcy, dissolution or withdrawal of IRET, Inc.;
(ii) the sale or other disposition of all or substantially all of its assets;
(iii) the redemption of all limited partnership interests; or (iv) the election by IRET, Inc.
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Summary of Individual Properties Owned as of April 30, 2002
Commercial Properties
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20
21
22
23
24
n/a = Property held less than 12 months.
Mortgage Loans PayableAs of April 30, 2002, the above properties were encumbered with individual first mortgage liens totaling $459,568,905. The following table shows each mortgage, the interest rate, maturity date, payment terms, original and current balance:
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26
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Summary of Real Estate Investment by State
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Mortgage Loans Receivable
Since April 9, 2002, IRET's shares of beneficial interest have traded on the Nasdaq National Market under the symbol IRETS. Prior to April 9, 2002, and from October of 1997, IRET's shares of beneficial interest traded on the Nasdaq SmallCap Market. The following table reflects the range of high and low prices of IRET's shares of beneficial interest of each full quarterly period within the two most recent years. This information is based on selling prices as report on the Nasdaq National Market and Nasdaq SmallCap Market, as applicable.
HoldersOn April 30, 2002, IRET had 4,235 shareholders of record.
Registered Sale of Shares and Repurchase of SharesDuring fiscal 2002, IRET offered primary shares of beneficial interest for sale to the public under Best Efforts offerings through various brokers registered with the National Association of Securities Dealers. Primary shares were sold at $8.75 per share and at $9.50 per share and IRET also issued shares pursuant to its distribution reinvestment plan. During fiscal 2002, IRET did not sell any unregistered securities. IRET also repurchased its shares during fiscal 2002. Following is a two-year summary, by quarter-year, of the sale of primary shares, issuance of distribution reinvestment shares, and repurchase of shares by IRET:
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DistributionsIRET has paid quarterly cash distributions since July 1, 1971.Cash distributions paid during the past three fiscal years were as follows:
Item 6. Selected Financial Data for Fiscal Years Ended April 30
Set forth below is selected financial data for the periods and dates indicated. This information should be read in conjunction with, and is qualified in its entirety by reference to, the consolidated financial statements and notes included in this report on Form 10-K.
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Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following information is provided in connection with, and should be read in conjunction with, the consolidated financial statements included in this annual report on Form 10-K.
Results from Operations for the Fiscal Years Ended April 30, 2002, 2001, and 2000IRET operates on a fiscal year ending on April 30. The following discussion and analysis is for the fiscal years ended April 2002, 2001, and 2000.
RevenuesTotal revenues of the operating partnership for fiscal 2002 were $93,016,069, compared to $75,767,150 in fiscal 2001 and $55,445,193 in fiscal 2000. The increase in revenues received during fiscal 2002 in excess of the prior year revenues was $17,248,919. This increase resulted from:
The increase in revenues received during fiscal 2001 in excess of that received in fiscal 2000 was $20,321,957. This increase resulted from:
that received in 2000
As shown by the above analysis, the fiscal 2002 and 2001 increases in revenues resulted primarily from the addition of new real estate properties to the operating partnership's portfolio. Rents received on properties owned at the beginning of fiscal 2001 increased by $11,236,492 in
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fiscal 2002 and $12,888,919 in fiscal 2001. Thus, new properties generated most of the new revenues during the past two years.
Straight-Line RentsBeginning with our fiscal year 2000, an accounting rule required us to record as revenue "straight-line rents" on our commercial property leases that contain future rental increases. This rule requires us to calculate the total rents that the tenant has contracted to pay us for the entire term of the lease and to divide that total by the number of months of the lease and to record as revenue each month the resulting average monthly rent. The result is that, in the beginning years of a lease, we must record as revenue an amount that exceeds the actual cash rent we have collected. In the later years of such leases, we, of course, will record as revenue an amount less than the actual cash then being received.
The amount of "straight-line rents" (that is, the amount that the recorded rent is greater than the actual cash rent we have collected) we have recorded in the past three years is:
Our revenues, net income and funds from operations shown in this report are increased by the above described "straight-line rents."
Capital Gain IncomeThe operating partnership realized capital gain income for fiscal 2002 of $546,927. This compares to $601,605 of capital gain income recognized in fiscal 2001 and the $1,754,496 recognized in fiscal 2000. A list of the properties sold during each of these years showing sales price, depreciated cost plus sales costs and net gain (loss) is included in a later section of this discussion.
Expenses and Net IncomeThe operating partnership's operating income for fiscal year 2002 increased to $13,865,934 from $10,187,812 earned in fiscal 2001 and $8,548,558 earned in fiscal 2000. IRET's net income for generally accepted accounting purposes for fiscal 2002 were $10,600,129, compared to $8,694,240 in fiscal 2001 and $8,807,845 in fiscal 2000. On a per share basis, net income was $.42 per share in fiscal 2002 compared to $.38 in fiscal 2001 and $.42 in fiscal 2000.
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These changes in operating income and net income result from the changes in revenues and expenses detailed below:
For fiscal 2002, an increase in net income of $1,905,889, resulting from:
For fiscal 2001, a decrease in net income of $113,605, resulting from:
Telephone Endorsement FeeDuring fiscal 2001, IRET received a payment of $869,505 from a major telecommunications provider for allowing marketing access by that company to residents of apartment communities owned by IRET, totaling 5,863 units. The contract provides that IRET will allow promotional materials to be placed in its apartment communities advertising the availability of tele-communication services over a 12-year period. Of this payment, $110,979 was recognized as income by IRET during fiscal 2001 and $65,959 in fiscal 2002. The balance of $692,567 will be recognized ratably over the remaining portion of the contract period and there is a possibility of a refund of these monies if IRET should violate the contractual terms of the agreement.
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Comparison of Results from Commercial and Residential PropertiesThe following is an analysis of the contribution by each of the two categories of real estate owned by IRET - residential and commercial:
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Commercial Properties - Analysis of Lease Expirations and Credit ExposureThe following table shows the annual lease expiration percentages for the commercial properties owned by IRET as of April 30, 2002, for fiscal years 2003 through 2012 and the leases that will expire during fiscal year 2013 and beyond.
The following table shows the percentage of commercial leases by size of leased space in 10,000 square foot increments as of April 30, 2002:
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Significant Property AcquisitionsThe significant property acquisitions made by IRET during fiscal 2001 and fiscal 2002, including details of such acquisitions and their performance since acquisition are as follows:
Medical Office Buildings
Sioux Falls, SD
Rapid City, SD
* IRET owns a 60% interest in this property. Data shown is the fullincome and expense for this property.
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Significant Property Acquisitions -continued
*IRET owns a 51% interest in this property. Data shown is the full income and expense for this property.
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** Tied to Prime.
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The following table shows the lessees of commercial property that account for five percent or more of the total scheduled rent on May 1, 2002, from all commercial properties owned by IRET:
Results from Stabilized PropertiesIRET defines fully stabilized properties as those both owned at the beginning of the prior fiscal year and having completed the rent-up phase (90% occupancy). "Same-store" results for fiscal 2002 and 2001 for residential and commercial were:
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Funds from OperationsIRET considers funds from operations ("FFO") a useful measure of performance for an equity REIT. FFO herein is defined as net income available to shareholders determined in accordance with generally accepted accounting principles (GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures. IRET uses the National Association of Real Estate Investment Trust's ("NAREIT") definition of FFO as amended by NAREIT to be effective January 1, 2000.
FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition.
FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as a measure of IRET's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of IRET's needs or its ability to service indebtedness or make distributions.
FFO for the operating partnership increased to $29,143,549 for fiscal 2002, compared to $22,440,463 for fiscal 2001, and $18,327,986 for fiscal 2000.
Calculations of funds from operations for the operating partnership are as follows:
(1) Depreciation on office equipment and other assets used by IRET are excluded. Amortization of financing and other expenses are excluded, except for amortization of leasing commissions which are included.(2) Limited partnership units of the operating partnership are exchangeable for shares of beneficial interest of IRET only on a one-for-one basis.(3) Cash distributions are paid equally on shares and units. It is our intent to distribute approximately 70% of FFO to our shareholders and unitholders.
Self-Advised StatusOn July 1, 2000, IRET Properties became self-advised. Prior to that date, Odell-Wentz and Associates, L.L.C., pursuant to an advisory contract with IRET, provided all office space, personnel, office equipment, and other equipment and services necessary to conduct all of the day-to-day operations of IRET. Odell-Wentz and its predecessor firms had acted as advisor to IRET since its inception in 1970. IRET obtained an independent appraisal of the value of the advisory business and assets from certified public accountants not otherwise employed by either IRET or the advisory company. The purchase price for the business and assets was $2,083,350 allocated as follows:
IRET Properties issued 255,000 of its limited partnership units in exchange for the above-described assets. Except for Roger R. Odell, who retired on July 1, 2000, all officers and employees of Odell-Wentz and Associates, L.L.C. were retained by IRET Properties.
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Property AcquisitionsThe operating partnership added $143,280,342 of real estate investments to its portfolio during fiscal 2002, compared to $143,042,292 added in fiscal 2001 and $155,284,745 in fiscal 2000. The fiscal 2002 and 2001 additions are detailed below:
Fiscal 2002 Property Acquisitions -For the Period of May 1, 2001 to April 30, 2002
* Represents costs to complete a project started in year ending April 30, 2001.
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Fiscal 2001 Property Acquisitions -For the Period of May 1, 2000 to April 30, 2001
** Property not placed in service at April 30, 2001. Additional costs are still to be incurred.*** Represents costs to complete a project started in year ending April 30, 2000.
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Property DispositionsReal Estate assets sold by the operating partnership during fiscal 2002 and 2001 were as follows:
Cash DistributionsThe following cash distributions were paid to IRET shareholders and IRET Properties limited partners during fiscal years 2002, 2001, and 2000:
The fiscal 2002 cash distributions increased 8.1% over the cash distributions paid during fiscal year 2001 and 17.0% over fiscal 2000.
Liquidity and Capital ResourcesImportant equity capital and financing events in fiscal 2002 were:
IRET believes that its net cash provided by operations will continue to be adequate to meet both operating requirements and cash distribution to its shareholders in accordance with REIT requirements in both the short and long term. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to its real estate portfolio are expected to be funded from cash flow generated from operations of these properties.
Of the $459,568,905 of mortgage indebtedness on April 30, 2002, $31,003,091 is represented by variable rate mortgages on which the future interest rate will vary based on changes in the interest rate index for each respective loan and the balance of fixed rate mortgages was $428,565,814. The principal payments due on all of the mortgage indebtedness are as follows:
Total
In addition to its cash and marketable securities, IRET Properties has unsecured line of credit agreements with First International Bank & Trust, Bremer Bank, and First Western Bank & Trust, all of Minot, North Dakota, totaling $19,000,000, none of which were in use on April 30, 2002 and 2001. On April 30, 2000, $6,452,420 was in use.
Increased Costs and Economic SlowdownIn fiscal 2001, IRET experienced a sharp increase in the cost of utilities (primarily natural gas) in its apartment communities. Since that time, natural gas prices have retreated, but it is possible that IRET's apartment communities will again experience a sharp increase in utility expenses which may not be recoverable in the form of increased rent. Maintenance and other rental expenses also continue to increase at the general inflationary rate of 2-3%. In most cases, IRET has been able to increase rental income sufficient to cover the normal inflationary increases in rental expenses, but did experience a substantial loss as a result of increased natural gas and snow removal expenses in fiscal 2001. With respect to IRET's commercial properties, in virtually all cases, the tenant is responsible to pay utilities and most other rental expenses. However, commercial leases tend to be of a longer term and IRET is precluded from increasing rent to compensate for inflationary changes in currency values. In the case of residential properties, no leases are longer than one year and the majority are for six months or less and thus IRET may raise rent to cover inflationary changes in expenses and the value of its capital investment, subject to market conditions.
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IRET's insurance costs will increase substantially during the coming year. This increase in insurance costs, prior to September 2001, was not anticipated by management. Given the weakened economic state, it is unlikely IRET will be able to increase rents sufficiently to fully offset its increased costs. As a result, our expectation is that net income and FFO will still increase over the prior year, but at a lower rate than the 10% FFO growth of fiscal 2002.
Increasing Ownership of Commercial PropertiesHistorically, the assets in our investment portfolio consisted predominantly of multi-family residential properties, as compared to commercial properties. More recently, our investment activities have caused this balance to shift so that the percentage of commercial properties held in our portfolio has increased significantly. Within the past two years, approximately 80% of our property acquisitions have been commercial properties due to the greater availability of these properties on terms that meet our financial and strategic objectives. If current market conditions continue, we anticipate that the percentage of commercial properties could equal or exceed the percentage of multi-family residential properties during fiscal 2003. This may not, however, be a long-term trend as in future periods we may purchase a greater percentage of multi-family residential properties depending on market conditions.
Our historical experience in acquiring multi-family residential properties may not be directly applicable to the acquisition of a greater percentage of commercial properties. Commercial properties involve different risks than multi-family residential properties, including: direct exposure to business and economic downturns; exposure to tenant lease terminations or bankruptcies; and competition from real estate investors with greater experience in developing and owning commercial properties.
Current and Future VacanciesIn the twelve months subsequent to April 30, 2002, leases covering approximately 11.80% of our total commercial square footage will expire. At April 30, 2002, approximately 2.1% of our total commercial square footage was vacant. Of that vacancy, approximately 54.04% is represented by the warehouse in Boise, Idaho, which has been vacant for the last 24 months. At April 30, 2002, approximately 6.96% of the units in our multi-family stabilized residential properties were vacant. Due to the overall general economic slowdown, we are expecting that our vacancy rates will increase over the next 12 to 18 months. Additionally, rent rates for commercial property in the Minneapolis area have stagnated at current levels with little possibility for increases in the next 12 to 18 months.
Geographic Concentration in North Dakota and MinnesotaThe majority of our assets are presently invested in real estate properties in North Dakota and Minnesota. For the year ended April 30, 2002, we received 68% of our commercial gross revenue from commercial properties in Minnesota and 20% of our commercial gross revenue from commercial properties in North Dakota. Minnesota accounts for 72% of our commercial real estate portfolio by square footage, while North Dakota accounts for 18%.
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For the year ended April 30, 2002, we received 17% of our apartment gross revenue from multi-family residential properties in Minnesota and 32% of our apartment gross revenue from multi-family properties in North Dakota. As of that same date, we owned 1,309 apartment units, 16% of our total number of apartment units, in Minnesota, and 2,995 apartment units, 36% of our total number of apartment units, in North Dakota. We intend to continue focusing on real estate activities in the state of Minnesota which will result in an increase to our current concentration in the upper Midwest.
Critical Accounting PoliciesRevenue Recognition. Residential rental properties are leased under operating leases with terms generally of one year or less. Commercial properties are leased under operating leases to tenants for various terms exceeding one year. Lease terms often include renewal options. Rental revenue is recognized on the straight-line basis, which averages minimum required rents over the terms of the leases. Rents recognized in advance of collection are reflected as rent receivable, net of allowance for doubtful accounts. IRET evaluates the need for an allowance for doubtful accounts periodically. In performing its evaluation, management assesses the recoverability of individual real estate mortgage loans and rent receivables by a comparison of their carrying amount with their estimated net realizable value.
Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenditures are incurred. IRET receives payments for these reimbursements from substantially all its multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which are immaterial, are recognized in the subsequent year.
A number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. These percentage rents are recorded once the required sales level is achieved and are included in rental income at that time.
Profit on sales of real estate shall be recognized in full when the real estate is sold, provided the collectibility of the sales price is reasonably assured or the amount that will be collectible can be estimated and the seller is not obliged to perform significant activities after the sale to earn the profit. Any gain or loss on a sale or disposition is recognized in accordance with accounting principles generally accepted in the United States of America.
Accounting for Property Owned. Real estate is stated at cost. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Refurbishment type costs such as property-wide painting, carpeting, wallpaper, tiling, replacement of worn out appliances, replacement of worn out bathroom fixtures, replacement of worn out windows, siding, roofs, walkways, parking lots or landscaping, and any other type of refurbishment activity is capitalized. Interest, real estate taxes, and other development costs relating to the acquisition and development of certain qualifying properties are also capitalized. Expenditures for routine maintenance and repairs, such as individual apartment painting, wallpapering, cleaning, and appliance repair, which do not add to the value or extend useful lives, are charged to expense as incurred.
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IRET assesses whether there has been impairment in the value of its real estate by comparing its carrying amount to the aggregate undiscounted future cash flows without interest charges. Such cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such market factors include a lessee's ability to pay rent under the terms of the lease. If a property is leased at a significantly lower rent, IRET may recognize a loss if the income stream is not sufficient to recover its investment. If impairment is determined to be present, the loss is measured as the amount by which the carrying value exceeds the property's fair value.
Item 7a. Quantitative and Qualitative Disclosures About Market Risk
Our exposure to market risk is limited to fluctuations in the general level of interest rates on its current and future fixed and variable rate debt obligations. Even though our philosophy is to maintain a fairly low exposure to interest rate fluctuation risk, we are still vulnerable to significant fluctuations in interest rates on its variable rate debt, on any future repricing or refinancing of its fixed rate debt and on future debt.
We primarily use long-term (more than ten years) and medium-term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our costs of capital. As of April 30, 2001, we had the following amount of future principal payments on mortgages secured by our real estate:
(1)The weighted average interest rate as of April 30, 2001, was 7.56%. Any fluctuations on the variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $31,592,149 of variable rate indebtedness would increase our annual interest expense by $315,921.
Item 8. Financial Statements and Supplementary Data
The financial statements and supplementary data listed in the accompanying Index to Financial Statements and Supplementary Data are filed as a part of this report and incorporated herein by reference.
Item 9. Changes in and Disagreements with Accounting and Financial Disclosure
None.
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PART III
Item 10. Directors and Executive Officers of the Registrant
Information regarding executive officers required by this Item is set forth in Part I, Item 1 of this Annual Report on Form 10-K pursuant to Instruction 3 to Item 401(b) of Regulation S-K. Other information required by this Item will be included in IRET's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders and such information is incorporated herein by reference.
Item 11. Executive Compensation
The information required by this Item will be contained in IRET's definitive Proxy Statement for its 2002 Annual Meeting of Shareholders and such information is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management
Item 13. Certain Relationships and Related Transactions
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On January 2, 2002, IRET filed a Form 8-K announcing that it had purchased seven properties that individually were insignificant, as defined in Regulation S-X, but in the aggregate constituted a significant amount of assets, as defined in Regulation S-X. This Form 8-K/A includes the financial statements relating to the assets that comprise a substantial majority of the individually insignificant assets as measured by cost.
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Signatures
Pursuant to the requirements of Section 13 or 15(d) 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.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the Registrant and in the capacities and on the dates indicated:
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INVESTORS REAL ESTATE TRUSTAND SUBSIDIARIES
CONSOLIDATED FINANCIAL STATEMENTSFOR THE YEARS ENDEDApril 30, 2002, 2001 and 2000andINDEPENDENT AUDITOR'S REPORT
PO Box 198812 South Main Street -Suite 100Minot, ND 58702-1988701-837-4738fax: 701-838-7785email: info@iret.comwww.iret.com
INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES
TABLE OF CONTENTS
INDEPENDENT AUDITOR'S REPORT
Board of TrusteesInvestor Real Estate Trustand SubsidiariesMinot, North Dakota
We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2002, and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 2002, 2001, and 2000. These consolidated financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis of our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Real Estate Trust and Subsidiaries as of April 30, 2002, and 2001, and the consolidated results of its operations and cash flows for the years ended April 30, 2002, 2001, and 2000, in conformity with accounting principles generally accepted in the United States of America.
/S/ Brady Martz and Associates, P.C.BRADY, MARTZ & ASSOCIATES, P.C.Minot, North Dakota, USA
May 22, 2002
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETSApril 30, 2002 and 2001
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESCONSOLIDATED BALANCE SHEETS (continued)April 30, 2002 and 2001
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF OPERATIONSfor the years ended April 30, 2002, 2001, and 2000
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INVESTORS REAL ESTATE TRUSTAND SUBSIDIARIESCONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITYfor the years ended April 30, 2002, 2001, and 2000
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWSfor the years ended April 30, 2002, 2001, and 2000
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESCONSOLIDATED STATEMENTS OF CASH FLOWS (continued)for the years ended April 30, 2002, 2001, and 2000
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESNOTES TO CONSOLIDATED FINANCIAL STATEMENTSApril 30, 2002, 2001, and 2000
NOTE 1 - NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES
NATURE OF OPERATIONS Investors Real Estate Trust ("IRET") qualifies under Section 856 of the Internal Revenue Code as a real estate investment trust. IRET has real estate properties located primarily throughout the upper Midwest, with its principal office located in Minot, North Dakota. IRET invests in commercial and residential real estate, real estate mortgages, governmental backed securities and equity securities in other real estate investment trusts. Gross rental revenues were derived 64% from residential property assets and 36% from commercial property assets.
Effective February 1, 1997, IRET reorganized its structure in order to convert to Umbrella Partnership Real Estate Investment Trust (UPREIT) status. IRET established an operating partnership (IRET Properties, a North Dakota Limited Partnership) with a wholly owned corporate subsidiary acting as its sole general partner (IRET, Inc., a North Dakota corporation). IRET transferred substantially all of its assets and liabilities to the operating partnership in exchange for general partnership units.
The general partner has full and exclusive management responsibility for the real estate investment portfolio owned by the operating partnership. The partnership is operated in a manner that allows IRET to continue its qualification as a real estate investment trust under the Internal Revenue Code.
All limited partners of IRET Properties have certain exchange rights allowing the exchange of limited partnership units for IRET shares on a one-for-one basis. The exchange rights are subject to certain restrictions including no exchanges for at least one year following the acquisition of the limited partnership units. Each limited partnership unit is entitled to receive a cash distribution equal to any distribution paid on a share of IRET stock.
Effective July 1, 2000, IRET became self-administered as a result of the acquisition of its former advisory company, Odell-Wentz & Associates, LLC. Virtually all officers and employees of Odell-Wentz & Associates, LLC were retained by IRET. Please refer to Note 9 for information concerning the impact of this acquisition on the accompanying financial statements.
BASIS OF PRESENTATION The consolidated financial statements include the accounts of IRET and all of its subsidiaries in which it maintains a controlling interest. IRET is the sole shareholder of IRET, Inc., which is the general partner of the operating partnership, IRET Properties. IRET is also the sole shareholder of Miramont IRET Inc. and Pine Cone IRET Inc., both Colorado business corporations.
IRET is the sole shareholder of the following entities: Forest Park - IRET, Inc., Thomasbrook - IRET, Inc., Dakota - IRET, Inc., MedPark - IRET, Inc., Flying Cloud - IRET, Inc., Meadows II - IRET, Inc., IRET - Ridge Oaks, LLC, and Applewood - IRET, Inc. The entities in the preceding sentence are the sole general partners and IRET Properties is the sole limited partner for the following limited partnerships, respectively: Forest Park Properties, a North Dakota limited partnership; Thomasbrook Properties, a Nebraska limited partnership; Dakota Hill Properties, a Texas limited partnership; MedPark Properties, a North Dakota limited partnership; and 7901 Properties, LP, a Minnesota limited partnership, Meadows 2 Properties, LP, a North Dakota limited partnership, Ridge Oaks, LP, an Iowa limited partnership, and Applewood - IRET Properties, a Nebraska limited partnership. IRET Properties is also the sole owner of Health Investors Business Trust, a Delaware business trust and IRET - Oakmont, LLC. These entities are all invested in real estate and are formed and acquired solely so the underlying real estate may be encumbered by mortgage indebtedness.
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NOTE 1 - (continued)
The consolidated financial statements also include the ownership by IRET Properties of a 60.31% in Minnesota Medical Investors LLC, SMB Operating Company LLC, and SMB MM LLC, collectively known as Southdale Medical Center and a 51% ownership interest in Mendota Properties, LLC, a Minnesota limited liability company. Mendota Properties, LLC, is the holder of all of the issued and outstanding membership interests in Mendota Office Holding LLC, a Minnesota limited liability company and Mendota Office Three and Four, LLC, a Minnesota limited liability company. The three Mendota LLCs are the owner of five multi-tenant commercial real estate properties in Dakota County, Minnesota. These companies are consolidated into the IRET's other operations with minority interests reflecting the minority partners' share of ownership and income and expenses.
All material inter-company transactions and balances have been eliminated in the consolidated financial statements.
ACCOUNTING POLICIES
NEW ACCOUNTING PRONOUNCEMENTS Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Certain provisions of SFAS 133 were amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" an amendment of Statement 133. The impact of SFAS 133 is not significant.
In 2001 the FASB issued SFAS No. 141 "Business Combinations" ("SFAS 141") which requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method, SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which provides new guidance in accounting for goodwill and intangible assets and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS 141 had no effect of IRET's financial position or results of operations. IRET is required to adopt SFAS 142 and SFAS 144 on May 1, 2002. The impact of the adoption of SFAS 142 and SFAS 144 is not expected to have a significant impact.
USE OF ESTIMATES The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
PROPERTY OWNED Real estate is stated at cost. Expenditures for renewals and improvements that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Refurbishment type costs such as property-wide painting, carpeting, wallpaper, tiling, replacement of worn out appliances, replacement of worn out bathroom fixtures, replacement of worn out windows, siding, roofs, walkways, parking lots or landscaping, and any other type of refurbishment activity is capitalized. Interest, real estate taxes, and other development costs relating to the acquisition and development of certain qualifying properties are also capitalized. Expenditures for routine maintenance and repairs, such as individual apartment painting, wallpapering, cleaning, and appliance repair, which do not add to the value or extend useful lives are charged to expense as incurred.
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The fair value of the property is the amount which would be recoverable upon the disposition of the property. Techniques used to establish fair value include: present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, the appraised value, and recent sales of comparable assets in close proximity to IRET's property.
IRET's acquisitions for the fiscal year 2002 in order of size:
REAL ESTATE HELD FOR SALE is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale.
In the normal course of business IRET will receive offers for sale of its properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually acquire a due diligence period before completion of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. As a result, real estate is not classified
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as "held-for-sale" until it is likely, in the opinion of management, that a property will be disposed of in the near term, even if sale negotiations for such property are currently under way.
FURNITURE AND FIXTURES consists of office furniture, fixtures, and equipment located at IRET's operational headquarters and is stated at cost net of accumulated depreciation. Accumulated depreciation was $289,089 and $215,757 as of April 30, 2002, and 2001, respectively.
DEPRECIATIONis provided to amortize the cost of individual assets over their estimated useful lives using principally the straight-line method. Useful lives range from 5 - 12 years for furniture and fixtures and 20 - 40 years for buildings and improvements.
MORTGAGE LOANS RECEIVABLE are shown at cost. Interest income is accrued and reflected in the related balance.
MARKETABLE SECURITIES IRET's investments in securities are classified as securities "held-to-maturity" and securities "available-for-sale." The securities classified as "available-for-sale" as of April 30, 2002, represents an investment in a Merrill Lynch money market mutual fund and is stated at fair value. As of April 30, 2001, the "available-for-sale" investments consisted of equity shares in other real estate investment trusts which were also stated at fair value. Unrealized gains and losses on securities "available-for-sale" are recognized as direct increases or decreases in shareholders' equity. The securities classified as "held-to-maturity" consist of Government National Mortgage Association securities. In June 2001, IRET sold these GNMA securities. They are reported at cost, adjusted by amortization of premiums and accretion of discounts which are recognized in interest income using the straight-line method over the period to maturity which approximates the effective interest method. Cost of securities sold is recognized on the basis of specific identification.
TAX, INSURANCE, AND OTHER ESCROW includes reserve for replacement funds to be used for replacement of structural elements and mechanical equipment of certain projects. The funds are under the control of the lender. Disbursements are made after supplying written documentation to the lender.
REAL ESTATE DEPOSITS consist of funds held by an escrow agent to be applied toward the purchase of real estate qualifying for gain deferral as a like-kind exchange of property under Section 1031 of the Internal Revenue Code. It also consists of earnest money, or "good faith deposits," to be used by IRET toward the purchase of property or the payment of loan costs associated with loan placement or refinancing.
GOODWILLhas been amortized on a straight-line basis over a period of 15 years. IRET periodically reviews goodwill for impairment and if a permanent decline in value has occurred, IRET will reduce its goodwill balance to fair value. Accumulated amortization of goodwill was $200,620 and $91,191 as of April 30, 2002, and 2001, respectively. See previous note for the impact of the new accounting pronouncement SFAS No. 142 "Goodwill and Other Intangible Assets."
DEFERRED LEASING AND LOAN ACQUISITION COSTS Costs and commissions incurred in obtaining tenant leases are amortized on the straight-line method over the terms of the related leases. Costs incurred in obtaining long-term financing are amortized over the life of the loan and charged to amortization expense over the terms of the related debt agreements.
MINORITY INTEREST Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnerships' income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to minority interests in accordance with the terms of the operating partnership agreement.
IRET reflects minority interests in the Southdale Medical Center and Mendota Heights Office Complex on the balance sheet for the portion of properties consolidated by IRET that are not wholly
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NOTE 1- (continued)
owned by IRET. The earnings or losses from these properties attributable to the minority interests are reflected as limited partner minority interests in the consolidated statements of operations.
NET INCOME PER SHARE IRET adopted Statement of Financial Accounting Standard No. 128 - Earnings Per Share. Basic net income per share is computed using the weighted average number of shares outstanding over the earnings period. There is potential for dilution of net income per share due to the conversion option of operating partnership units. However, basic and diluted net income per share are the same. The computation of basic and diluted net income per share can be found in Note 12.
INCOME TAXES IRET intends to continue to qualify as a real estate investment trust as defined by the Internal Revenue Code and, as such, will not be taxed on the portion of the income that is distributed to the shareholders, provided at least 90% of its real estate investment trust taxable income is distributed and other requirements are met. IRET intends to distribute all of its taxable income and realized capital gains from property dispositions within the prescribed time limits and, accordingly, there is no provision or liability for income taxes shown on the financial statements.
IRET conducts all of its business activity as an umbrella real estate investment trust through its operating partnership, IRET Properties. This UPREIT status allows IRET to accept the contribution of real estate in exchange for limited partnership units. Generally, such a contribution to a limited partnership allows for the non-recognition of gain by an owner of appreciated real estate. The UPREIT concept is based on the combination of the non-recognition provisions of Section 721 of the Internal Revenue Code and the limited partnership conversion rights which allow the contributing partner to exchange the limited partnership interest received in exchange for the appreciated real estate for IRET's stock. Upon conversion of the partnership units to IRET shares, a taxable event occurs for that limited partner.
Income or loss of the operating partnership shall be allocated among its partners in compliance with the provisions of the Internal Revenue Code Section 701(b) and 704(c).
REVENUE RECOGNITION Residential rental properties are leased under operating leases with terms generally of one year or less. Commercial properties are leased under operating leases to tenants for various terms exceeding one year. Lease terms often include renewal options. Rental revenue is recognized on the straight-line basis, which averages minimum required rents over the terms of the leases. Rents recognized in advance of collection is reflected as rent receivable, net of allowance for doubtful accounts. IRET evaluates the need for an allowance for doubtful accounts periodically. In performing its evaluation, management assesses the recoverability of individual real estate mortgage loans and rent receivables by a comparison of their carrying amount with their estimated net realizable value. A summary of the changes in the allowance for doubtful accounts for the years ended April 30, 2002, and 2001, are as follows:
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Interest on mortgage loans receivable is recognized in income as it accrues during the period the loan is outstanding. In the case of non-performing loans, income is recognized as discussed in Note 4.
RECLASSIFICATIONS Certain previously reported amounts have been reclassified to conform with the current financial statement presentation.
THE DISTRIBUTION REINVESTMENT PLAN is available to all shareholders of IRET and all limited partners of IRET Properties. Under the Distribution Reinvestment Plan, shareholders or limited partners may elect to have all or a portion of their distribution used to purchase additional IRET shares.
NOTE 2 - OFF-BALANCE-SHEET RISK
IRET had deposits at First Western Bank, Bremer Bank, First International Bank, Associated Bank and Washington County Bank which exceeded Federal Deposit Insurance Corporation limits by $8,517,162, $454,088, $2,748,210, $934,773 and $150,383, respectively, as of April 30, 2002.
As of April 30, 2002, IRET has agreements whereby First Western Bank provides additional coverage through repurchase agreements totaling $15,075,000. First Western Bank has pledged U.S. Government Securities or U.S. Government Agency Securities under the repurchase agreements. The repurchase agreements have no impact on the fair market value of the underlying bank account balances since IRET is entitled to recover only up to the par value of their accounts, subject to the above maximum threshold.
NOTE 3 - PROPERTY OWNED UNDER LEASE
Property consisting principally of real estate owned under lease is stated at cost less accumulated depreciation and is summarized as follows:
There were no repossessions during the years ended April 30, 2002, and 2001.
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NOTE 3- (continued)
The above cost of residential real estate owned included construction in progress of $0 and $6,307,018 as of April 30, 2002, and 2001, respectively. As of April 30, 2002, IRET had no plans to fund any construction projects other than an expansion of the Southdale Medical Center in Edina, Minnesota, at an estimated cost of $13,000,000 and to finance a $5,000,000 addition to the existing facility of Edgewood Vista, in Hermantown, Minnesota. As of year-end April 30, 2002, IRET committed to purchase the Three Paramont office building in Bloomington, Minnesota, for $7,350,000. In addition, as of April 30, 2002, IRET has outstanding offers to purchase selected properties as part of their normal operations.IRET committed to sell Oak Manor Apartments in Dickinson, North Dakota for $420,000 (book value of $306,856), Oak Park Apartments in Dickinson, North Dakota for $275,000 (book value of $257,715), and Eastwood Apartments in Dickinson, North Dakota for $620,000 (book value of $406,512).Construction period interest of $99,668, $316,644, and $404,089 has been capitalized for the year ended April 30, 2002, 2001, and 2000, respectively.Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $59,052,950, $55,806,712, and $42,379,855 for the year ended April 30, 2002, 2001, and 2000, respectively.Gross revenues from commercial property rentals totaled $32,685,652, $18,994,010 and $11,878,026 for the year ended April 30, 2002, 2001, and 2000, respectively. Commercial properties are leased to tenants under terms expiring at various dates through 2024. Lease terms often include renewal options and, in limited instances, buyout options. In addition, a number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. Rents based on a percentage of sales totaled $116,239, $124,092, and $102,659 for the years ended April 30, 2002, 2001, and 2000, respectively.The future minimum lease payments to be received under leases for commercial properties as of April 30, 2002, assuming that no options to renew or buy out the lease are exercised, are as follows:
IRET committed to sell Oak Manor Apartments in Dickinson, North Dakota for $420,000 (book value of $306,856), Oak Park Apartments in Dickinson, North Dakota for $275,000 (book value of $257,715), and Eastwood Apartments in Dickinson, North Dakota for $620,000 (book value of $406,512).
Construction period interest of $99,668, $316,644, and $404,089 has been capitalized for the year ended April 30, 2002, 2001, and 2000, respectively.
Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $59,052,950, $55,806,712, and $42,379,855 for the year ended April 30, 2002, 2001, and 2000, respectively.
Gross revenues from commercial property rentals totaled $32,685,652, $18,994,010 and $11,878,026 for the year ended April 30, 2002, 2001, and 2000, respectively. Commercial properties are leased to tenants under terms expiring at various dates through 2024. Lease terms often include renewal options and, in limited instances, buyout options. In addition, a number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. Rents based on a percentage of sales totaled $116,239, $124,092, and $102,659 for the years ended April 30, 2002, 2001, and 2000, respectively.
The future minimum lease payments to be received under leases for commercial properties as of April 30, 2002, assuming that no options to renew or buy out the lease are exercised, are as follows:
Loss on impairment of two commercial properties totaled $1,319,316 for the year ended April 30, 2000. Impairment losses were determined based on present value of estimated expected future cash flows from each property. The carrying value of the First Avenue Building, located in Minot, North Dakota, was reduced by $311,202. The carrying value of a commercial building located in Boise, Idaho was reduced by $1,008,114. There were no losses on impairment of properties for the years ended April 30, 2002, and 2001.
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NOTE 4 - MORTGAGE LOANS RECEIVABLE
Mortgage loans receivable consists of five separate loans which are secured by real estate. Contract terms call for monthly payments of principals and interest. Interest rates range from 7% to 11%. Mortgage loans receivable have been evaluated for possible losses considering repayment history, market value of underlying collateral, and economic conditions.
Future principal payments due under the mortgage loans contracts as of April 30, 2002, are as follows:
There were no significant non-performing mortgage loans receivable as of April 30, 2002, or 2001. Non-performing loans are recognized as impaired in conformity with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. The average balance of impaired loans for the years ended April 30, 2002, and 2001, was not significant. For impairment recognized in conformity with FASB Statement No. 114, the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported.
Additional interest income that would have been earned on loans if they had not been non-performing was not significant in fiscal 2002, 2001, or 2000. There was no interest income on non-performing loans recognized on a cash basis for fiscal 2002, 2001, and 2000.
NOTE 5 - MARKETABLE SECURITIES
The amortized cost and estimated market values of marketable securities held-to-maturity at April 30, 2001, are as follows:
Marketable securities held-to-maturity consists of Governmental National Mortgage Association (GNMA) securities. During the first quarter ended July 31, 2001, IRET sold its GNMA securities to use these proceeds to acquire real estate properties. IRET held no marketable securities as of April 30, 2002, that were classified as held-to-maturity.
NOTE 5- (continued)
The amortized cost and estimated market values of marketable securities available-for-sale at April 30, 2002, and 2001, are as follows:
There was a $68,881 realized loss on sales of securities available-for-sale for the year ended April 30, 2002. There were no realized gains or losses for the years ended April 30, 2001, and 2000.
NOTE 6 - NOTES PAYABLE
As of April 30, 2002, IRET had lines of credit available from three financial institutions. The first unsecured line of credit is with First Western Bank & Trust in the amount of $5,000,000 carrying a variable interest rate equal to prime and maturing August 15, 2002. The weighted average interest rate for the year ended April 30, 2002, was 6.46%. The second unsecured line of credit is with First International Bank & Trust in the amount of $4,000,000 with a variable interest rate equal to prime and maturing October 15, 2002. The weighted average interest rate for year ended April 30, 2002, was 6.46%. The third unsecured line of credit is with Bremer Bank in the amount of $10,000,000 with a variable interest rate equal to Bremer's reference rate and maturing September 30, 2002. The weighted average interest rate for the year ended April 30, 2002, was 6.50%. Interest payments are due monthly on all three notes. As of April 30, 2002, and April 30, 2001, IRET had no unpaid balances on any of their lines of credit.
NOTE 7 - MORTGAGES PAYABLE
Mortgages payable as of April 30, 2002, included mortgages on properties owned totaling $459,568,905. The carrying value of the related real estate owned was $716,964,492.
Mortgages payable as of April 30, 2001, included mortgages on properties owned totaling $368,956,930. The carrying value of the related real estate owned was $577,045,712.
Monthly installments are due on the mortgages with interest rates ranging from 5.80% to 9.8854% and with varying maturity dates through November 30, 2036.
Of the mortgages payable, the balances of fixed rate mortgages totaled $428,565,814 and $337,364,781, and the balances of variable rate mortgages totaled $31,003,091 and $31,592,149 as of April 30, 2002, and 2001, respectively.
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NOTE 7- (continued)
Most of the fixed rate mortgages have substantial pre-payment penalties. As of April 30, 2002, IRET did not plan to prepay any of its mortgage obligations. The aggregate amount of required future principal payments on mortgages payable as of April 30, 2002, is as follows:
NOTE 8 - INVESTMENT CERTIFICATES ISSUED
IRET has sold investment certificates to the public. The interest rates vary from 6% to 9% per annum, depending on the term of the security. Interest is paid annually, semiannually, or quarterly on the anniversary date of issuance. In April of 2002, IRET discontinued the sale of investment certificates and the outstanding certificates will be redeemed at maturity as follows:
NOTE 9 - TRANSACTIONS WITH RELATED PARTIES
Acquisition of Odell-Wentz & Associates, L.L.C.On July 1, 2000, IRET Properties acquired assets from Odell-Wentz & Associates, L.L.C. in exchange for limited partnership units having a value of $2.1 million. The acquired assets included real estate, furniture, fixtures, equipment and other assets valued at $675,000, goodwill of approximately $1.6 million, and the assumption of mortgages and other liabilities of approximately $236,000. Included in such transactions was the assumption of a note receivable from Timothy Mihalick, an executive officer, in the amount of $101,002. The proceeds of such note were used to purchase shares. The note bears interest at New York Prime less 1% and is payable upon demand. The note is current. With the exception of Roger R. Odell, who retired, all officers and employees of Odell-Wentz and Associates, L.L.C. were retained by IRET.
Odell-Wentz & Associates, L.L.C. was owned equally by Thomas A. Wentz, Sr., IRET's current President and Chief Executive Officer, and Roger R. Odell, who, as of the acquisition date of July 1, 2000, was the President. Mr. Odell retired in July 2000, and he did not seek re-election to the Board of Trustees in August 2000. Currently, Mr. Odell has no relationship with the company as an employee, officer or trustee.
Prior to the acquisition, Odell-Wentz & Associates, L.L.C. acted as the sole advisor to IRET. Pursuant to an advisory contract, IRET paid an advisor's fee based on its net assets and a percentage fee for investigating and negotiating the acquisition of new investments. No fees were paid for fiscal year ended April 30, 2002. For the fiscal year ended April 30, 2001, IRET paid $265,573 to Odell-Wentz & Associates L.L.C. under such contract. For the fiscal year ended April 30, 2000, IRET paid $1,400,973 under such contract.
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NOTE 9- (continued)
PROPERTY MANAGEMENT SERVICES Investors Management and Marketing, Inc. ("IMM") provides property management services to IRET Properties and IRET. Roger R. Odell is a shareholder in IMM. From May 1, 2000, through June 30, 2000, (the last full month in which Mr. Odell served as President and as a member of the Board of Trustees), IRET paid $114,421 to IMM for services rendered. For the fiscal year ended April 30, 2000, IRET paid $649,729 to IMM for management services.
With the exception of Hoyt Properties, Inc., none of the firms engaged to provide property management services are affiliated with IRET, its officers, or members of its Board of Trustees. Hoyt Properties, Inc. is owned 100% by Steven B. Hoyt, a member of the Board of Trustees, and by his wife, Michelle E. Hoyt. As of April 30, 2002, Hoyt Properties, Inc. managed the following commercial buildings pursuant to written management contracts:
As compensation for its services, Hoyt Properties, Inc. receives a monthly fee of 5% of the gross rental income, provided that such management fee is reimbursable by the building's tenants pursuant to the tenant's lease agreement. In the event IRET is not reimbursed for such fee by a tenant and must pay such fee from rent proceeds, the management fee declines to 3.5% of the gross rental proceeds.
The acquisition of the Bloomington Business Plaza was approved by the Board of Trustees, based on an independent appraisal of the property and the determination that such acquisition was fair and reasonable to IRET. The acquisition of Thresher Square was approved by the Board, other than Mr. Hoyt, who abstained from such vote, based on the determination by such members of the Board that the acquisition was fair and reasonable to IRET. Such members of the Board further determined, based on an internal current appraisal of such property, that substantial justification existed to pay a value greater than the cost of the property.
On April 1, 2002, IRET acquired Wirth Corporate Center, an 89,384 square foot, four-story office building from Mr. Hoyt. The Board of Trustees, other than Mr. Hoyt who abstained from the vote, approved the transaction as being fair and reasonable to IRET. The purchase price was based on an appraisal from an independent third-party who determined the value of the property to be $8.6 million.
In addition to these acquisitions, on April 1, 2001, prior to the time that Mr. Hoyt was elected to the Board of Trustees, IRET acquired a group of six commercial properties from Mr. Hoyt, or affiliates of Mr. Hoyt. Such properties included 2030 Cliff Road, a 13,374 square foot, multi-tenant office building located in Eagan, Minnesota; Burnsville Bluffs, a 26,186 square foot, multi-tenant office building located in Burnsville, Minnesota; Cold Spring Center, a 77,533 square foot, multi-tenant office building located in St. Cloud, Minnesota; Nicollet VII, a 118,400 square foot, multi-tenant office building located in Burnsville, Minnesota; Pillsbury Business Center, a 42,220 square foot, multi-tenant office building located in Bloomington, Minnesota; and Plymouth IV and V, two multi-tenant office buildings having an aggregate of 126,809 square feet and located in Plymouth, Minnesota. The aggregate purchase price for these commercial properties was $34.4 million. The acquisition of these commercial properties was approved by the Board of Trustees.
UPREIT UNIT LOAN PROGRAM On January 16, 2002, the Board of Trustees authorized an UPREIT unit loan program that is available to persons that hold $1.0 million or more of IRET Properties limited partnership units. Under such loan program, IRET may lend up to 50% of the value of the borrower's limited partnership units, with such value to be based on the closing price of IRET shares on the NASDAQ National Market on the date of the loan. Such loans will be for terms of two years or less, they will be secured by the borrower's limited partnership units in IRET Properties and they will be at a variable interest rate of 1.5% over the interest rate charged to us by a participating lender. The interest rate will adjust on the first of each month. In connection with such loans, IRET will charge a .5% loan fee.
On January 30, 2002, a loan in the amount of $3.5 million was made to Steven B. Hoyt, a member of the Board of Trustees. The Board of Trustees approved such loan. The terms of the loan require Mr. Hoyt to make quarterly interest payments beginning April 1, 2002, with the full balance of the principal sum due on or before January 31, 2004. The initial interest rate is equal to the Wall Street Journal Prime Rate as of January 31, 2002, plus 1.5%, which is equal to 6.25%. Mr. Hoyt paid a $17,500 loan fee on the date of the loan.
UPREIT CONTRIBUTION On April 30, 2002, Edgeview Estate I, Ltd., a North Dakota limited partnership contributed the proceeds from the sale of real estate pursuant to IRET Properties UPREIT Contribution Program. The total amount contributed to IRET Properties by Edgeview in exchange for limited partnership units was $386,168.17. A total of 38,908.632 units were allocated to the partnership at a price of $9.925 per unit. The unit price of $9.925 was determined using the average NASDAQ closing price for the 14 trading days prior to April 30, 2002, excluding the highest close and the lowest close during the 14-day period. No commissions, fees or other costs were paid or incurred by IRET Properties.
NOTE 9 - (continued)
Edgeview Estates I, Ltd is owned by current officers as well as current trustees and past trustees of IRET as follows: Thomas A. Wentz Sr., 6.67% - President, Investors Real Estate Trust; Thomas A. Wentz Jr., 26.67% - - Vice President and Trustee of Investors Real Estate Trust; Roger R. Odell, 33.33%, Past President and former Trustee of Investors Real Estate Trust until July 1, 2000, and Mike F. Dolan, 33.33%, former Trustee of Investors Real Estate Trust until August, 1999.
SECURITY SALES AND SERVICE Inland National Securities is a corporation that provides underwriting services in connection with the sale of IRET shares. Roger R. Odell is a shareholder in Inland National Securities. From May 1, 2000, through June 30, 2000, (the last full month in which Mr. Odell served as President and as a member of the Board of Trustees), IRET paid $6,861 in fees to Inland National Securities for security sales services. For the fiscal year ended April 30, 2000, IRET paid $100,081 for such services.
D.A. Davidson & Co. is a corporation that has, and may in the future, on a best-efforts basis, participate in offerings of IRET securities. John F. Decker, a member of the Board of Trustees, is an employee of D.A. Davidson. D.A. Davidson participated in IRET's share offering and sold a total of 700,000 shares. During the year ended April 30, 2002, IRET paid D.A. Davidson commissions in the amount of $490,000, and reimbursed them for legal and travel expenses in the amount of $4,814. Of this amount, Mr. Decker personally received $26,117 in compensation from D.A. Davidson in connection with such offerings. During the fiscal year ended April 30, 2001, IRET paid D.A. Davidson $50,000 for certain investment banking services. For IRET's most recent offering on April 25, 2002, D.A. Davidson sold 600,000 shares and received $402,000 in commission and $13,761 for legal and travel expenses paid in May, 2002.
LEGAL SERVICES In the past, IRET paid fees and expense reimbursements to Pringle & Herigstad, P.C., the law firm in which Thomas A. Wentz, Jr., IRET's Vice President and General Counsel, was a partner until December 31, 1999. For the year ended, April 30, 2000, such fees and expense reimbursements totaled $89,497. Thomas A. Wentz, Jr. has been a member of the Board of Trustees since 1996 and Vice President and General Counsel since June 2000.
NOTE 10 - MARKET PRICE RANGE OF SHARES
For the year ended April 30, 2002, a total of 7,644,522 shares were traded on the NASDAQ in 12,798 separate trades. The high was $10.49, low $8.25 and closing price on April 30, 2002, was $10.03. For the year ended April 30, 2001, a total of 3,668,819 shares were traded in 4,692 separate trades. The high trade price during the period was $8.980, the low was $7.375, and the closing price on April 30, 2001, was $8.770. For the year ended April 30, 2000, a total of 4,058,018 shares were traded in 3,414 separate trades. The high trade price during the period was $17.875, the low was $7.681, and the closing price on April 30, 2000, was $7.875.
NOTE 11 - OPERATING SEGMENTS
Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated by the chief decision makers in deciding how to allocate resources and in assessing performance. Operating segments of IRET are determined to be commercial and residential rental operations. All properties falling into these categories have similar economic characteristics, as well as similar production processes, type of customers, distribution methods, and regulatory environments. Although information is available on a property-by-property basis, including rental income and operating expenses, most analysis and decisions are primarily made based on residential and commercial segments. Generally, segmental information follows the same accounting policies utilized for consolidated reporting except certain expenses such as depreciation are not allocated to segments for reporting purposes.
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NOTE 11- (continued)
The following information summarizes IRET's segment reporting for residential and commercial properties along with reconciliations to the consolidated financial statements:
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NOTE 11 - (continued)
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NOTE 12 - EARNINGS PER SHARE
Basic earnings per share are computed by dividing the earnings available to stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if potential dilutive securities had been converted to shares. Operating partnership units can be exchanged for shares on a one-for-one basis after a holding period of one to two years. The following table reconciles amounts reported in the consolidated financial statements for the years ended April 30, 2002, 2001, and 2000:
NOTE 13 - RETIREMENT PLAN
As part of the acquisition on July 1, 2000, of Odell-Wentz & Associates, LLC, IRET assumed a defined contribution profit sharing retirement plan and a defined contribution 401K retirement plan. Employees over the age of 21 and after completion of one year of service are eligible to participate in the profit sharing plan. Contributions to the profit sharing plan are at the discretion of the management. All employees are immediately eligible to participate in the 401K plan and may contribute up to 15% of their compensation subject to maximum levels. IRET matches up to 3% of participating employees' wages. Plan expenses to IRET for the years ended April 30, 2002, and 2001, were $90,455 and $45,301, respectively.
NOTE 14 - COMMITMENTS AND CONTINGENCIES
INSURANCEIRET's portfolio-wide general liability and property insurance policies expired on April 30, 2002. IRET renewed these policies at similar coverage levels, but at a price of $495,268 or 44.29% higher than the prior fiscal year's cost due to the addition of more property to IRET's portfolio as well as the general price increases for insurance coverage implemented by the insurance industry. A portion of IRET's insurance costs are passed through to certain commercial tenants pursuant to the terms of the applicable lease agreement. Of IRET's total insurance costs of $1,613,552, $281,737 or 17.46% will be billed back to IRET's commercial tenants. For fiscal 2002, all of IRET's real estate properties are insured against the customary casualty and liability claims except for acts of terrorism, which are excluded under IRET's new insurance policy. Management believes that IRET is in compliance with all insurance provisions of its debt agreements with the exception of one loan pertaining to an apartment complex in Rochester, Minnesota, held by Jefferson Pilot Financial in the
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NOTE 14 - (continued)
amount of $3,807,590 as of April 30, 2002. IRET has requested a waiver from the terror insurance requirement. This waiver request is pending with the lender. If the waiver is not granted, the increased cost to IRET for terrorism coverage on the apartment complex is expected to be $100,000.
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 property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to properly remediate any property containing such substances, may adversely affect the owner's or operator's ability to sell or rent the affected property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal of, or remediation of, such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for the release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos-containing materials, as well as other hazardous or toxic substances. The operation and subsequent removal of certain underground storage tanks are also regulated by federal and state laws. In connection with the current or former ownership (direct or indirect), operation, management, development and/or control of real properties, IRET may be considered to be an owner or operator of such properties, or to have arranged for the disposal or treatment of hazardous or toxic substances. As such, IRET may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and claims for injuries to persons and property.
It is currently IRET's policy to obtain a Phase I environmental study on each property that IRET seeks to acquire. If the Phase I indicated any possible environmental problems, IRET's policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances. No assurance can be given that the Phase I or Phase II environmental studies, or any other environmental studies undertaken with respect to any of IRET's current or future properties, will reveal the full extent of potential environmental liabilities, that any prior owner or operator of a property did not create any material environmental condition unknown to IRET, that a material environmental condition does not otherwise exist as to any one or more of such properties or that environmental matters will not have a material adverse effect on IRET, IRET's ability to make distributions to shareholders and IRET's ability to pay amounts due on debt. IRET currently does not carry insurance for environmental liabilities.
Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period. A transfer of the property does not relieve an owner of such liability. As a result, in addition to any liability that IRET may have with respect to current properties, IRET may also have liability with respect to properties previously sold by IRET's predecessors or by IRET. To management's knowledge, as of April 30, 2002, IRET does not own and has not sold any properties that contain known material environmental liabilities.
NOTE 15 - FAIR VALUE OF FINANCIAL INSTRUMENTS
The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value:
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.
Cash - - The carrying amount approximates fair value because of the short maturity.
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NOTE 15 - (continued)
Marketable securities - The fair values of these instruments are estimated based on quoted market prices for the security.
Notes payable - The carrying amount approximates fair value because of the short maturity of such notes.
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.
Investment certificates issued - The fair value is estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits with similar remaining maturities.
Accrued interest payable - The carrying amount approximates fair value because of the short-term.
The estimated fair values of the company's financial instruments are as follows:
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ADDITIONAL INFORMATION
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INDEPENDENT AUDITOR'S REPORT ON ADDITIONAL INFORMATION
Our report on our audit of the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2002, and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 2002, 2001, and 2000, appears on page 1. Those audits were made for the purpose of forming an opinion on such consolidated financial statements taken as a whole. The information on pages 29 through 46 related to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2002, and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 2002, 2001, and 2000 is presented for purposes of additional analysis and is not a required part of the basic consolidated financial statements. Such information, except for information on page 47 that is marked "unaudited" on which we express no opinion, has been subjected to the auditing procedures applied in the audits of the basic consolidated financial statements, and, in our opinion, the information is fairly stated in all material respects in relation to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2002, and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 2002, 2001, and 2000 taken as a whole.
We also have previously audited, in accordance with auditing standards generally accepted in the United States of America, the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2000, 1999, and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years ended April 30, 1999, and 1998, none of which is presented herein, and we expressed unqualified opinions on those consolidated financial statements. In our opinion, the information on page 41 relating to the consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2000, 1999, and 1998, and the related consolidated statements of operations, shareholders' equity, and cash flows for each of the two years ended April 30, 1999, and 1998, is fairly stated in all material respects in relation to the basic consolidated financial statements from which it has been derived.
/S/ Brady, Martz & Associates, P.C.BRADY, MARTZ & ASSOCIATES, P.C.Minot, North Dakota, USA
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESApril 30, 2002 and 2001
Schedule IMARKETABLE SECURITIES
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESfor the years ended April 30, 2002, 2001 and 2000
Schedule XSUPPLEMENTAL INCOME STATEMENT INFORMATION
*Less than 1 percent of total revenues
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESApril 30, 2002
Schedule XIREAL ESTATE AND ACCUMULATED DEPRECIATION
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Schedule XIREAL ESTATE AND ACCUMULATED DEPRECIATION(continued)
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Reconciliations of total real estate carrying value for the three years ending April 30, 2002, 2001, and 2000 are as follows:
Reconciliations of accumulated depreciation for the three years ended April 30, 2002, 2001, and 2000, are as follows:
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Schedule XIIINVESTMENTS IN MORTGAGE LOANS ON REAL ESTATE
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SELECTED FINANCIAL DATA
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INVESTORS REAL ESTATE TRUST AND AFFILIATED PARTNERSHIPSApril 30, 2002, 2001 and 2000
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PROPERTY ACQUISITIONSAcquisitions for cash, assumptions of mortgages, and issuance of units in the operating partnership.
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INVESTORS REAL ESTATE TRUST AND SUBSIDIARIESQUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited)
The above financial information is unaudited. In the opinion of management, all adjustments (which are of a normal recurring nature) have been included for a fair presentation.
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Exhibit 3(ii)
GOVERNING PROVISIONS
(BYLAWS)
OF
IRET, INC.(As Adopted on January 15, 1997)
ARTICLE I. STATUTORY PROVISIONS
Section A. The provisions of the North Dakota Business Corporations Act (NDCC Sections 10-19. 1 - I0 and 26) govern this corporation as If set forth in full herein.
Section B. The power to adopt, amend, or repeal governing provisions (bylaws) is vested in the board as provided herein.
Section C. The affirmative vote of a majority of directors present is required for an action of the board.
Section D. A written action by the board taken without a meeting must be signed by all directors.
Section E. The affirmative vote of the holders of a majority of the voting power of the shares present and entitled to vote at a duly held meeting Is required for an action of the shareholders, except where the affirmative vote of a majority of the voting power of all shares entitled to vote Is required by law, the articles of Incorporation, or these governing provisions.
Section F. A director may call a board meeting, and the notice of the meeting shall state the purpose of the meeting.
Section H. Regular meetings of shareholders need not be held, unless demanded by a shareholder under certain conditions as provided in Article IV D.2.
Section G. A majority of the board is a quorum for a board meeting.
Section I. The number of shares required for a quorum at a shareholders' meeting is a majority of the voting power of the shares entitled to vote at the meeting.
Section J. The corporation may, but need not, have a corporate seal. The use or nonuse of a corporate seal does not affect the validity of a document or act.
Ex 3(ii)-1
If the corporation has a corporate seal, the use of the seal by the corporation on a document is not necessary.
ARTICLE II. BOARD OF DIRECTORS
Section A. The Board.
1. The business and affairs of the corporation must be managed by or under the direction of the board, subject to subsection 2. The members of the first board may be elected by the Incorporators or by the shareholders.
2. The holders of the shares entitled to vote for directors of the corporation may, by unanimous affirmative vote, take any action that law, the articles of incorporation or other governing provisions require or permit the board to take or the shareholders to take after action or approval of the board. As to an action taken by the shareholders in that manner:
a. The directors have no duties, liabilities, or responsibilities as directors with respect to or arising from the action.
b. The shareholders collectively and individually have all of the duties, liabilities, and responsibilities of directors with respect to and arising from the action.
c. If the action relates to a matter required or permitted to be approved or adopted by the board, either with or without approval or adoption by the shareholders, the action is deemed to have been approved or adopted by the board.
Section B. Number. The board must consist of I0 directors. The number of directors may be increased or, subject to Section H, decreased at any time by amendment in the manner provided in Article VIII.
Section C. Qualifications. Directors must be individuals.
Section D. Terms. A director serves for an indefinite term that expires at the next regular meeting of the shareholders. A fixed term of a director may not exceed five years. A director holds office until a successor is elected and has qualified, or until the earlier death, resignation, removal, or disqualification of the director.
Section E. Compensation. The board may fix the compensation of the directors.
Section F. (Intentionally Omitted)
Section G. Resignation. A director may resign at any time by giving written notice to the corporation. The resignation is effective without acceptance when the notice is given to the corporation, unless a later effective time is specified in the notice.
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Section H. Removal of directors.
1. A director may be removed at any time, with or without cause, if:
a. The director was named by the board to fill a vacancy;
b. The shareholders have not elected directors in the interval between the time of the appointment to fill a vacancy and the time of the removal; and
c. A majority of the remaining directors present affirmatively vote to remove the director.
2. Any one or all of the directors may be removed at any time, with or without cause, by the affirmative vote of the holders of the proportion or number of the voting power of the shares of the classes or series the director represents sufficient to elect them. If less than the entire board is to be removed, no one of the directors may be removed if the votes of a sufficient number of shares are cast against the director's removal which, if then cumulatively voted at an election of the entire board of directors, would be sufficient to elect the director.
3. New directors may be elected at a meeting at which directors are removed.
Section 1. Vacancies.
1. Vacancies on the board resulting from the death, resignation, removal, or disqualification of a director may be filled by the affirmative vote of a majority of the remaining directors, even though the remaining directors constitute less than a quorum; and
2. Vacancies on the board resulting from newly created directorships may be filled by the affirmative vote of a majority of the directors serving at the time of the increase.
3. Each director elected under this section to fill a vacancy holds office until a qualified successor is elected by the shareholders at the next regular or special meeting of the shareholders.
Section J. Board Meetings.
1. Meetings of the board may be held from time to time as provided by board resolution at any place within or without the state that the board may select or by any means described in subsection 2. If the board fails to select a place for a meeting, the meeting must be held at the principal executive office.
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2. A board meeting may be conducted by:
a. A conference among directors using any means of communication through which the directors may simultaneously hear each other during the conference constitutes a board meeting, if the same notice is given of the conference as would be required by subsection 3 for a meeting, and if the number of directors participating in the conference would be sufficient to constitute a quorum at a meeting. Participation in a meeting by that means constitutes presence in person at the meeting; or
b. Any means of communication through which the director, other directors so participating, and all directors physically present at the meeting may simultaneously hear each other during the meeting. Participation in a meeting by that means constitutes presence in person at the meeting.
3. A director may call a board meeting by giving ten days' notice to all directors of the date, time, and place of the meeting. The notice shall state the purpose of the meeting unless the director calling the meeting is chairman of the board or president of the corporation.
4. If the day or date, time, and place of a board meeting have been announced at a previous meeting of the board, no notice is required. Notice of an adjourned meeting need not be given other than by announcement at the meeting at which adjournment is taken.
5. A director may waive notice of a meeting of the board. A waiver of notice by a director entitled to notice is effective whether given before, at, or after a meeting, and whether given in writing or by attendance. Attendance by a director at a meeting is a waiver of notice of that meeting, except where the director objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened and does not participate thereafter in the meeting.
Section K. Absent Directors. A director may give advance written consent or opposition to a proposal to be acted on at a board meeting. If the director is not present at the meeting, consent or opposition to a proposal does not constitute presence for purposes of determining the existence of a quorum, but consent or opposition must be counted as a vote in favor of or against the proposal and must be entered in the minutes or other record of action at the meeting, if the proposal acted on at the meeting is substantially the same or has substantially the same effect as the proposal to which the director has consented or objected.
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Section L. Act of the Board. The board shall take action by the affirmative vote of a majority of the directors present at a duly held meeting, except where law or the articles of Incorporation require the affirmative vote of a larger proportion or number. If the articles of incorporation require a larger proportion or number than is required by law for a particular action, the articles control.
Section M. Action without meeting.
1. An action required or permitted to be taken at a board meeting may be taken by written action signed by all of the directors.
2. The written action is effective when signed by the required number of directors, unless a different effective time is provided in the written action.
ARTICLE Ill. OFFICERS
Section A. Officers. The officers of the corporation must consist of a president and a secretary, each of which must be elected by the board at such time and in such manner as may be provided in the bylaws. Any other officers, assistant officers, and agents, as necessary, may be elected or appointed by the board or chosen in such other manner as may be prescribed by the board.
Section B. Duties of Officers and Agents.All officers and agents of the corporation, as between themselves and the corporation, have such authority and must perform such duties in the management of the corporation as may be provided in the bylaws, or as may be determined by resolution of the board not inconsistent with the bylaws.
Section C. Multiple offices. Any number of offices or functions of those offices may be held or exercised by the same person. If a document must be signed by persons holding different offices or functions and a person holds or exercises more than one of those offices or functions, that person may sign the document in more than one capacity, but only if the document indicates each capacity in which the person signs.
Section D. Contract rights. The election or appointment of a person as an officer or agent does not, of itself, create contract rights. However, a corporation may enter into a contract with an officer or agent. The resignation or removal of an officer or agent is without prejudice to any contractual rights or obligations.
Section E. Resignation, Removal, and Vacancies.
1. An officer may resign at any time by giving written notice to the corporation. The resignation is effective without acceptance when the notice is given to the corporation, unless a later effective date is specified in the notice.
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2. An officer may be removed at any time, with or without cause, by a resolution approved by the affirmative vote of a majority of the entire board of directors, subject to the provisions of a shareholder control agreement.
3. A vacancy in an office because of death, resignation, removal, disqualification, or other cause may be filled for the unexpired portion of the term in the manner determined by the board.
Section F. Delegation. Unless prohibited by a resolution approved by the affirmative vote of a majority of the entire board of directors, an officer elected or appointed by the board may, without the approval of the board, delegate some or all of the duties and powers of an office to other persons. An officer who delegates the duties or powers of an office remains subject to the standard of conduct for an officer with respect to the discharge of all duties and powers so delegated.
ARTICLE IV. SHARES AND SHAREHOLDERS
Section A. Share certificates. The shares of the corporation must be represented by certificates signed by the president or by a vice president, and by the secretary or by an assistant secretary of the corporation. A certificate signed as provided herein is prima facie evidence of the ownership of the shares referred to in the certificate.
A new share certificate may be issued pursuant to NDCC section 41-08-41 in place of one that is alleged to have been lost, stolen or destroyed.
Section B. Regular meetings of shareholders. A regular meeting of shareholders will be held on the third Wednesday in August of each year beginning in 1997.
Section C. Election of directors. At each regular meeting of shareholders there must be an election of qualified successors for directors who serve for an indefinite term or whose terms have expired or are due to expire within six months after the date of the meeting. No other particular business is required to be transacted at a regular meeting. Any business appropriate for action by the shareholders may be transacted at a regular meeting.
Section D. Notice.
1. Notice of all meetings of shareholders must be given to every holder of shares entitled to vote, except where the meeting is an adjourned meeting and the date, time, and place of the meeting were announced at the time of adjournment.
2. The notice must be given at least ten days before the date of the meeting, and not more than fifty days before the date of the meeting.
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3. The notice must contain the date, time, and place of the meeting, and any other Information required by law. In the case of a special meeting, the notice must contain a statement of the purposes of the meeting. The notice may also contain any other Information required by the bylaws or deemed necessary or desirable by the board or by any other person or persons calling the meeting.
4. A shareholder may waive notice of a meeting of shareholders. A waiver of notice by a shareholder entitled to notice is effective whether given before, at, or after the meeting, and whether given in writing, or by attendance. Attendance by a shareholder at a meeting is a waiver of notice of that meeting, except where the shareholder objects at the beginning of the meeting to the transaction of business because the meeting is not lawfully called or convened, or objects before a vote on an item of business because the item may not lawfully be considered at that meeting and does not participate in the consideration of the item at that meeting.
Section E. Act of the shareholders. The shareholders shall take action by the affirmative vote of the holders of a majority of the voting power of the shares present and entitled to vote, except where law or the articles of incorporation require a larger proportion or number. If the articles of incorporation require a larger proportion or number than is required by law for a particular action, the articles control.
Section F. Action without a meeting. An action required or permitted to be taken at a meeting of the shareholders may be taken without a meeting by written action signed by all of the shareholders entitled to vote on that action. The written action is effective when it has been signed by all of those shareholders, unless a different effective time is provided in the written action.
ARTICLE V. OFFICE
The corporation's principal office shall be in the City of Minot, North Dakota.
ARTICLE VI. AMENDMENTS
The power to amend or repeal any of the foregoing governing provisions or to adopt additional governing provisions is vested in the board, provided that any board action to amend, repeal or adopt governing provisions shall be reported to the Shareholders and may be countermanded by the vote of the holders of a majority of the voting power of the shares entitled to vote, and provided that provisions affecting quorum requirements for shareholder meetings and shareholder voting rights may be amended only by the vote of the holders of a majority of the voting power of the shares entitled to vote.
These Bylaws were duly adopted by the Board of Directors of IRET, INC., at its organizational meeting held on January 15, 1997.
/S/ Timothy P. Mihalick Timothy P. Mihalick, Secretary
ATTEST:
/S/ Thomas A. Wentz, Sr.Thomas A. Wentz, Sr., Director
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IRET, INC.
First Amendment to Bylaws (Adopted on July 15, 1998)
Pursuant to Article VI of the Bylaws of IRET, Inc., a North Dakota corporation, which Bylaws were adopted on January 15, 1997, the following Amendment is adopted by the Board of Directors at its regular meeting, a quorum being present, by majority of Directors present:
Article II, Section C, is hereby amended to read:
"Section C. Qualifications. Effective with the 1999 annual shareholder meeting, Directors must be individuals at least 18 years of age and less than 72 years of age upon the date of the annual shareholder meeting at which such individual is elected as a director."
Dated this 15th day of July, 1998.
By /S/ Roger R. Odell Roger R. Odell, President
/S/ Diane K. BryanttDiane K. Bryantt, Secretary
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Second Amendment to BylawsAdopted on June 20, 2001
Article II , Section C, is hereby amended to read:
"Section C. Qualifications. Effective with the September 2001 annual shareholder meeting, Directors must be individuals at least 18 years of age and less than 74 years of age upon the date of the annual shareholder meeting at which such individual is elected as a director."
Dated this 20th day of June, 2001
By /S/ Thomas A. Wentz, Sr. Thomas A. Wentz, Sr., President
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Exhibit 21Subsidiaries of Investors Real Estate Trust
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