Post Office Box 1988 12 South Main - Suite 100Minot, ND (Address of principal executive offices)
58702-1988 (Zip code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date. Applicant is a North Dakota Real Estate Investment Trust. As of November 30, 2001, it had 24,571,349 shares of beneficial interest outstanding.
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PART I
Item 1. Financial Statements - Second Quarter - Fiscal 2002 (unaudited)
10/31/01
04/30/01
OTHER ASSETS
394,240
295,827
$ -538,618
345,603
0
Consolidated Statement of Cash Flows - continued
$ -9,094,076
$ -218,505
$ 109,920,591
Note 1 - Organization Investors Real Estate Trust ("IRET") elected to be taxed as a Real Estate Investment Trust ("REIT") under Sections 856-860 of the Internal Revenue Code of 1986, as amended, commencing with its taxable year ended April 30, 1971. REITs are subject to a number of organization and operational requirements, including a requirement to contribute 90% of ordinary taxable income and, generally, are not subject to Federal income tax on net income. IRET is engaged in the acquisition and ownership of residential apartment communities and commercial properties located mainly in the state of North Dakota and Minnesota but also in the states of Colorado, Idaho, Iowa, Georgia, Kansas, Montana, Nebraska, South Dakota, Texas, and Washington. As of October 31, 2001, IRET owned 59 apartment communities with 8,248 apartments and 62 commercial buildings totaling 2,928,338 square feet. IRET conducts a majority of its business activities through its operating partnership, IRET Properties, a North Dakota Limited Partnership, as well as through a number of other subsidiary entities.
Note 2 – Basis of Presentation and Significant Account Policies
Basis of Presentation The consolidated financial statements include the accounts of IRET and all its subsidiaries in which it maintains a controlling interest. The financial statements have been prepared on the basis of accounting principles that are in effect as of the financial statement date. IRET operates on a fiscal year commencing May 1 and ending April 30.
The accompanying consolidated financial statements include the accounts of IRET and its 74.4% (76.2% at April 30,2001) partnership interest in the operating partnership. Such interest has been calculated as the percentage of outstanding common shares divided by the total outstanding common shares and operating partnership units ("UPREIT Units") outstanding. The remaining 25.6% (23.8% at April 30, 2001) is reflected as minority interest in these consolidated financial statements.
IRET's investment in the NSCM Partnership is a controlling interest and IRET has financial and operating control and accounted for using the equity method. All significant intercompany balances and transactions have been eliminated in these consolidated financial statements.
Unaudited Interim Financial Statements The interim consolidated financial statements of IRET have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the applicable rules and regulations of the Securities and Exchange Commission. Accordingly, certain disclosures accompanying annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America are omitted. The year-end balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. In the opinion of management, all adjustments, consisting solely of normal recurring adjustments, necessary for the fair presentation of the consolidated financial statements for the interim periods have been included.
Note 2 – continued
The current period's results of operations are not necessarily indicative of results which ultimately may be achieved for the year. The interim consolidated financial statements and notes thereto should be read in conjunction with the consolidated financial statements and notes thereto included in the company's form 10-K405 for the year ended April 30, 2001.
Significant Accounting Policies IRET has not made any significant changes in accounting policy and practices since the most recent audited financial statements.
Recent Accounting Pronouncements In June, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 141, Business Combinations. This Statement addresses financial accounting and reporting for business combinations and supersedes APB Opinion No., 16, Business Combinations, and FASB Statement No. 38, Accounting for Preacquisition Contingencies of Purchased Enterprises. The provisions of this Statement provide that all business combinations under the scope of this Statement are to be accounted for using one method – the purchase method. The provisions of this Statement apply to all business combinations initiated after June 30, 2001, and to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001, or later. The Trust has not entered into any business combinations since June 30, 2001, and therefore the provisions of this statement do not yet impact the Trust’s financial position, results of operations and cash flows. The Trust will be adopting this Statement for any future business combinations.
In June, 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 142, Goodwill and Other Intangible Assets. This Statement addresses financial accounting and reporting for acquired goodwill and other intangible assets and supersedes APB Opinion No. 17, Intangible Assets. It addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisitions. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of this Statement are required to be applied starting with fiscal years beginning after December 15, 2001. Although the Statement allows for early adoption by entities with fiscal years beginning after March 15, 2001, provided that the first interim financial statements have not previously been issued, the Trust has no plans to adopt the provisions of SFAS No. 142 prior to the effective date. Therefore, this Statement is will be adopted by the Trust at the beginning of fiscal year May 1, 2002. The provisions of SFAS No. 142 will be applied to all goodwill and other intangible assets reflected on its financial statements at that date.
SFAS No. 142 requires that goodwill and intangible assets that have indefinite useful lives will not be amortized as in the past, but will instead be tested at least annually for impairment. SFAS No. 142 adopts a more aggressive view of goodwill and bases the accounting for goodwill on the units of the combined entity into which an acquired entity is integrated (referred to as reporting units). This statement provides specific guidance for testing goodwill for impairment. The Trust will follow this guidance and goodwill will be tested for impairment at least annually using a two-step process that begins with an estimation of the fair value of a reporting unit.
The first step is a screen for potential impairment, and the second step measures the amount of impairment, if any. If certain criteria are met, the requirement to test goodwill for annual impairment can be satisfied without remeasurement of the fair value of a reporting entity.
Impairment losses for goodwill and indefinite–lived intangible assets that arise due to the initial application of this Statement (resulting from a transitional impairment test) are to be reported as resulting from a change in accounting principle. As of October 31, 2001, the impact of adopting the provisions of SFAS No. 142 on the Trust’s financial position, results of operations and cash flows would not be material since as of this date the Trust’s goodwill and indefinite intangibles are not determined to be impaired. The impact of adopting this Statement on its effective date is not yet estimable since fact and circumstances that could impact the impairment estimation will need to be evaluated as of that date.
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 143, Accounting for Asset Retirement Obligations. The provisions of this statement address the financial accounting and reporting for obligations associated with the retirement of tangible long-lived assets and the associated asset retirement costs. This Statement requires that the fair value of a liability for an asset retirement obligation be recognized in the period in which it is incurred if a reasonable estimate of fair value can be made. The associated asset retirement costs are capitalized as part of the carrying amount of the long-lived asset. The provisions of this Statement become effective for fiscal years beginning after June 15, 2002. Although the Statement allows for early adoption prior to becoming effective, the Trust has no plans for to adopt the provision of SFAS No. 143 prior to the effective date. Therefore, this Statement will be adopted by the Trust at the beginning of fiscal year May 1, 2003. As of October 31, 2001 the impact of adopting the provisions of this Statement on the Trust’s financial position, results of operations and cash flow would not be material as the Trust did not currently retire any tangible long-lived assets. The impact of adopting this Statement on its effective date is not yet estimable since fact and circumstances that could impact retirement costs and obligations will depend on future retirements of long-lived assets.
In August 2001, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or Disposal of Long-Lived Assets. This Statement addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This Statement supersedes FASB No. 121, Accounting for the Impairment of Long-LivedAssets and for Long-Lived Assets to be disposed of, and the accounting and reporting provision of APB Opinion No. 30, Reporting the Results of Operations-Reporting the Effects of Disposal of a Segment of a Business and Extraordinary, Unusual andInfrequently Occurring Events and Transactions, for the disposal of a segment of a business (as previously defined in the Opinion). This Statement also amends ARB No. 51, Consolidated Financial Statements, to eliminate the exception to consolidation for a subsidiary for which control is likely to be temporary. The provisions of this statement become effective for financial statements issued for fiscal years beginning after December 15, 2001 and interim periods within those fiscal years. Although the statement provides for early adoption prior to becoming effective, the Trust has no plans to adopt this Statement prior to the effective date. Therefore, this Statement is will be adopted by the Trust at the beginning of fiscal year May 1, 2002.
This statement does not materially change the measurement of impairment for long-lived assets to “be held or used”. Instead, it provides guidance on measuring impairment of long-lived assets to “be held and used”. As of October 31, 2001, the Trust did have long-lived assets that are being “held and used” (primarily real estate) as part of its normal business operations of a REIT. The Trust has implemented its measuring of impairment for assets “held and used” in accordance with the implementation guidance in SFAS No. 144 which is consistent with SFAS No. 121 and therefore this Statement has no material impact on the Trust’s financial position, results of operations and cash flows.
SFAS No. 144 also has some provisions, primarily guidance, on implementation of the provisions of SFAS No. 122, that apply to long-lived assets to be disposed of “other than by sale” and long-lived assets to be disposed of “by sale”. As of October 31, 2001, the Trust did not have any long-lived assets within these categories and therefore the application as of that date does not have any material impact on the financial position, results of operations, and cash flows. The impact of adopting the provisions of this Statement for long-lived assets to be disposed of “other than by sale” or “by sale” on its effective date is not yet estimable since facts and circumstances have not yet occurred that would cause the Trust to classify properties in either of these categories.
Note 3 - Earnings Per Share Earnings per share ("EPS") is computed as net income available to common shareholders divided by the weighted average number of common shares outstanding for the period. The company has no outstanding warrants, convertible stock, or other contractual obligations requiring issuance of additional common shares that would result in a dilution of earnings.
The exchange of outstanding operation partnership units for common shares will have no effect on EPS as unitholders and shareholders presently share equally in the net income of the operating partnership. Thus, diluted EPS is not shown because there is no potential dilution.
The weighted average shares and operating partnership units outstanding for the three months and six months ended October 31, 2001, and 2000 are as follows:
Note 4 - Mortgage Loan Receivable Mortgage loans receivable consist of eight contracts, which are collateralized 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 loan contracts as of October 31, 2001, are as follows:
There were no significant non-performing mortgage loans receivable as of October 31, 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 period ended October 31, 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 this period. There was not interest income on non-performing loans recognized on a cash basis for the period ended October 31, 2001.
Note 5 – Investment Certificates Issued The trust has placed investment certificates with the public. The interest rates vary from 6% to 9% per annum, depending on the term of the security. Total securities maturing within fiscal years ended April 30, are shown below. Interest is paid annually, semiannually, or quarterly on the anniversary date of the security.
Note 6 - Segment Reporting The following information summarizes IRET's segment reporting for residential and commercial properties along with reconciliations to the consolidated financial statements:
Three Months Ended October 31, 2001
Three Months Ended October 31, 2000
Note 6 -continued
Six Months Ended October 31, 2001
Six Months Ended October 31, 2000
$ 4,857,354
$ 23,320,730
$ 3,575,779
$ 12,187,408
$ 327,766
-368,628
-5,698,346
-759,789
-204,555
$ -210,914
$ 5,272,942
Segment Assets and Accumulated Depreciation
Quarter Ended October 31, 2001
Year Ended April 30, 2001
Note 7 - Pro Forma Condensed Financial Information - Newly Acquired Properties (unaudited)
IRET acquired the following real estate during the six months ended October 31, 2001:
Total Purchase Price (Including all closing costs)
The following unaudited pro forma information was prepared as if the above transactions had occurred on May 1, 2001, the beginning of IRET’s current fiscal year. The pro forma financial information is based upon the rent rolls and expected expenses for each property on the date of its actual acquisition. This pro forma information is not necessarily indicative of the consolidated results which would have occurred if all of the transactions had been consummated on May 1, 2001, nor do they purport to represent the results of operations for future periods.
The pro forma consolidated statement of operations (unaudited) for the six months ended October 31, 2001, is presented as if the real estate acquisition had been completed at the beginning of the period May 1, 2001, rather than on the actual acquisition or closing date.
Note 8 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis should be read in conjunction with the consolidated financial statements included in this report as well as the audited financial statements prepared by Brady Martz & Associates, P.C. of Minot, North Dakota, certified public accountants for the period ended April 30, 2001, which financial statements were attached to the Form 10-K405 on file for Investors Real Estate Trust.
Certain matters included in this discussion are forward looking statements within the meaning of federal securities laws. Although the Company believes that the expectations reflected in such forward looking statements are based on reasonable assumptions, it can give no assurance that the expectations expressed will actually be achieved. Many factors may cause actual results to differ materially from the Company’s current expectations, including general economic conditions, local real estate conditions, the general level of interest rates, and the availability of financing, timely completion and lease-up of properties under construction and various other economic risks inherent in the business of owning and operating investment real estate.
Revenues Total IRET revenues for the second quarter of Fiscal 2002 ended October 31, 2001, were $23,175,041 compared to $18,404,260 received in the second quarter of the prior fiscal year ended October 31, 2000. This is an increase of $4,770,781 or 25.9%.
Total revenues for the first six months of Fiscal 2002 ended October 31, 2001, were $44,955,135 compared to $35,835,904, an increase of 25.4% for the first six months of the prior fiscal year ended October 31, 2000. These increases are primarily attributable to the addition of new properties to IRET’s investment portfolio.
Capital Gain Income IRET realized capital gain income of $16,398 during the second quarter of Fiscal 2002 ended October 31, 2001. This resulted from the sale of the Lester Chiropractic building in Bismarck, North Dakota, at a gain of $85,279, and the sale of marketable securities available for sale at a loss of $68,881.
Total capital gain income for the first six months of Fiscal 2002 ended October 31, 2001, was $324,332. In addition to the two items listed in the previous paragraph, capital gain income for the first six months for Fiscal 2002 included a gain of $296,409 from the sale of the Sunchase Apartments, a 36-unit apartment complex in Fargo, North Dakota, and a gain of $11,525 from the sale of marketable securities held to maturity. Both events occurred in the first quarter of Fiscal 2002. No capital gain income was realized in the first six months of the prior fiscal year ended October 31, 2000.
Expenses and Net Income The following table shows the changes in revenues, operating expenses, interest, and depreciation for the three months and six months ended October 31, 2001, as compared to the three months and six months ended October 31, 2000:
Expenses and Net Income - continued
Six Months Ended
The above described changes result primarily from the addition of new real estate assets to IRET’s portfolio. The increase in insurance costs resulted from an increase in the general level of premiums for property casualty insurance.
Anticipated Increase in Insurance Expense IRET's blanket casualty and liability insurance policy, which covers all of its residential properties and most of its commercial properties, will expire April 30, 2002. Because of the September 11, 2001, terrorist attacks, IRET expects a substantial increase in its insurance premiums beginning with fiscal year 2003 which commences May 1, 2002, but is not able to quantify the amount of the expected increase at this time.
Comparison of Residential and Commercial Properties The following is a comparison of the net operating income from the two types of real estate investments owned by IRET - residential and commercial - - for the three months and six months ended October 31, 2001 and 2000:
Net Real Estate Operating Income
Three Months Ended
Total
The growth in the two operating segments resulted primarily from the acquisition of real estate properties during the prior and current fiscal years.
Occupancy Rates Occupancy rates are calculated as a percentage of the actual rent paid to IRET versus the scheduled rent charged by IRET for the period of time presented. The following tables compare occupancy rates for stabilized properties for the three months and six months ended October 31, 2001 and 2000:
Property Acquisitions and Dispositions During the six months ended October 31, 2001, IRET acquired three commercial properties and two apartment complexes:
The 36-unit Sunchase apartment complex in Fargo, North Dakota, was sold during the first quarter of Fiscal 2001 at a gain of $296,409.
The Lester Chiropractic Building in Bismarck, North Dakota, was sold during the second quarter of Fiscal 2001 at a gain of $85,279.
Funds from Operations IRET considers Funds from Operations (“FFO”) a useful measure of performance for an equity REIT FFO is defined as net income available to shareholders determined in accordance with accounting principles generally accepted in the United States of America ("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 Trusts (“NAREIT”) definition of FFO as amended by NAREIT to be effective January 1, 2000. FFO for any period means the net income of the company for such period, excluding gains or losses from debt restructuring and sales of property, and plus depreciation and amortization of real estate assets in IRET’s investment portfolio, and after adjustment for unconsolidated partnerships and joint ventures, all determined on a consistent basis in accordance with GAAP.
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 as determined in accordance with accounting principles generally accepted in the United States of America 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.
Funds from Operations for IRET for the three months ended October 31, 2001, increased to $7,436,176 compared to $5,749,948 for the three months ended October 31, 2000, an increase of 29.4%.
Funds from Operations for IRET for the six months ended October 31, 2001, increased to $14,335,235 compared to $10,971,288 for the six months ended Fiscal 2000, an increase of 30.7%.
Calculations of Funds from Operations for IRET are as follows:
38.8%
Dividends The following dividends were paid during the first six months ended October 31, of fiscal years 2001 and 2000:
The Board of Trustees of IRET has declared a dividend of $.15 per share payable January 17, 2002, to shareholders of record at the close of business on January 2, 2002. The ex-dividend date will be December 28, 2001.
Liquidity and Capital Resources The important changes in IRET’s balance sheet during the first six months of Fiscal 2002 ended October 31, 2001, were:
As of the date of this report, IRET has entered into contracts to acquire the following real estate investments:
In addition to the above acquisitions, IRET is committed to provide construction financing for an assisted living and Alzheimer care facility in Virginia, MN for $7,000,000, of which $1,713,307 was advanced as of October 31, 2001.
In addition to cash on hand of $19,994,239 on October 31, 2001, IRET has unsecured line of credit agreements with First International Bank & Trust, Bremer Bank, and First Western Bank & Trust, all of Minot, North Dakota, totaling $17,500,000, none of which were in use on October 31, 2001, nor on April 30, 2001.
IRET believes that its existing cash and borrowing capacities are adequate to fund all of its acquisition and development obligations and all of its other short and long-term liquidity requirements. IRET believes that its net cash provided by operations will continue to be adequate to meet both operating requirements and the payment of dividends in accordance with Internal Revenue Code provisions pertaining to real estate investment trusts in both the short and long term. Budgeted expenditures for ongoing maintenance, capital improvements and renovations to its real estate portfolio are expected to be funded from the cash flow generated from the operation of these properties.
Item 3. Quantitative and Qualitative Disclosures about Market Risk
The market risk to which IRET is exposed is a change in the interest rates payable on its indebtedness:
Item 1. Legal Proceedings
None
Item 2. Changes in Securities
Item 3. Defaults upon Senior Securities
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders held on September 25, 2001, the following proposals were adopted by the margins indicated:
1. To elect a Board of Trustees to hold office until the next annual meeting of shareholders and until their successors are elected and qualified.
2. To approve appointment of Brady Martz & Associates, P.C. as independent auditor IRET for the fiscal year ended April 30, 2002.
Item 5. Exhibits and Reports on Form 8-K.
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Date: December 13, 2001