Investors Real Estate Trust
Annual Report 2001

Plain-text annual report

. . . an expression of APPRECIATION to our Founder C O N T E N T S FISCAL2001 FINANCIALHIGHLIGHTS 1 THE COMPANY 2 PRESIDENT’S REPORT 3 6 INVESTMENTPORTFOLIO 13 MANAGEMENT’S DISCUSSION 23 23 24 25 29 & ANALYSIS DIVIDEND HISTORY PERFORMANCE HISTORY INDEPENDENTAUDITOR’S REPORT CONSOLIDATED FINANCIALSTATEMENTS NOTES TO CONSOLIDATED FINANCIALSTATEMENTS 36 QUARTERLYRESULTS OF CONSOLIDATED OPERATIONS Building A Foundation . . . IRET’s mission statement reflects man- agement’s commitment to its shareholders and best expresses Roger’s vision for IRET. The following paragraph from that statement epitomizes Roger’s dedication to IRET. “Creating value for our shareholders requires a Roger R. Odell commitment to excellence in every aspect of our operations - from choosing the real estate investments to purchase and managing those investments in a professional manner, to communicating with and servicing each shareholder account.” Roger wholeheartedly believed in these words and, through his guidance, IRET flourished to where it is today. Few in the United States rival Roger’s foresight and intelligence in the real estate business. Roger helped build IRET from the ground up and he has laid a foundation which will allow continued success for many years to come. While Roger has retired, we at IRET take solace in knowing that his office is only a block away and his phone line and door are always open. As for the past and to the present, we want to say “Thank you, Roger! ” Shareholder Information Trustees Executive Officers Investors Real Estate Trust and Subsidiaries Thomas A. Wentz, Sr. President & CEO Timothy P. Mihalick Senior Vice President & COO Thomas A. Wentz, Jr. Vice President & General Counsel Diane K. Bryantt Secretary & CFO CORPORATE HEADQUARTERS Investors Real Estate Trust 12 South Main Street, Suite 100 PO Box 1988 Minot, North Dakota 58702-1988 Telephone: (701) 837-4738 Fax: (701) 838-7785 email: info@iret.com website: www.iret.com GENERAL COUNSEL Pringle & Herigstad, P.C. 2nd Floor, Bremer Bank Building Minot, North Dakota 58701 Telephone: (701) 852-0381 AUDITORS Brady Martz & Associates, P.C. Certified Public Accountants 24 West Central Minot, North Dakota 58701 Jeffrey L. Miller Chairman & Trustee C. Morris Anderson Vice Chairman & Trustee Daniel L. Feist Vice Chairman & Trustee John F. Decker Trustee Patrick G. Jones Trustee Stephen L. Stenehjem Trustee Timothy P. Mihalick Trustee Thomas A. Wentz, Jr. Trustee Steven B. Hoyt Trustee SEC FORM 10-K Copies of Investors Real Estate Trust’s Annual Report on Form 10-K filed with the Securities and Exchange Commission will be furnished without charge upon written request to Darla J. Strilcov at Investors Real Estate Trust. ANNUAL MEETING Investors Real Estate Trust will hold its 31st Annual Meeting of Shareholders in the Executive Room, International Inn, 1505 North Broadway, Minot, North Dakota, at 7:00 P.M. on Tuesday, September 25, 2001. STOCK TRADING INFORMATION Investors Real Estate Trust shares trade on the NASDAQ Small Cap Market under the symbol IRETS. DIVIDEND REINVESTMENT PLAN Investors Real Estate Trust offers to its shareholders the option to automatically reinvest their dividends through the Dividend Reinvestment Plan. For additional information, please contact Darla J. Strilcov, Shareholder Relations, at Investors Real Estate Trust. COMMON SHAREHOLDERS OR RECORD/SHARES OUTSTANDING As of July 20, 2001, Investors Real Estate Trust had approximately 5,614 shareholders of record and 24,261,256 shares outstanding. F I N A N C I A L H I G H L I G H T S Years Ended April 30, Rental Revenue Other Revenue Total Revenue Net Operating Income* Net Income Funds From Operations** Per Share Net Income Available to Shareholders Funds From Operations Dividends (Fiscal Year) At Year End Total Assets Depreciation Reserve Shares Outstanding Shareholders’ Equity (Book) Number of Apartment Units Owned Square Feet of Commercial Property $ $ $ $ $ 2001 74,800,722 966,428 75,767,150 48,146,930 8,694,240 22,440,463 0.38 0.79 0.55 570,322,124 44,093,145 24,068,346 118,945,160 7,869 2,513,518 $ $ $ $ $ 2000 54,257,881 1,187,312 55,445,193 35,558,253 8,807,845 18,327,986 0.42 0.75 0.51 432,978,299 33,232,952 22,452,069 109,920,591 7,319 1,607,209 $ $ $ $ $ 1999 38,785,287 1,141,975 39,927,262 24,625,208 7,604,135 12,368,550 0.44 0.65 0.47 291,493,311 26,112,399 19,066,954 85,783,294 5,528 1,228,714 $ $ $ $ $ 1998 31,694,586 712,959 32,407,545 20,068,317 5,014,909 9,483,105 0.32 0.60 0.42 224,718,514 21,516,129 16,391,412 68,152,626 4,729 915,541 * Net operating income is defined as total revenue less operating expenses before depreciation, amortization, interest and impairment. ** Industry analysts generally consider funds from operations to be an appropriate measure of the performance of an equity REIT. Funds from operation is defined as taxable income increased by non-cash deductions of real estate asset depreciation, and amortization, and reduced by capital gain income and other extraordinary income items. Net Operating Income in millions of dollars Funds From Operations in millions of dollars Dividends per share Total Assets in millions of dollars 48.15 22.44 35.56 18.33 .42 .55 .51 .47 570.32 432.98 24.63 20.07 12.37 9.48 291.49 291.49 224.72 98 99 00 01 98 99 00 01 98 99 00 01 98 99 00 01 This annual report is prepared for the general information of the shareholders and investment certificate holders of IRET and is not intended to induce or to be used in connection with the sale or purchase of any securities of the Trust except when accompanied by a prospectus. 1 INVESTMENT STRATEGY IRET's investment strategy commits approximately two-third's of its equity capital to apartment communities located in cities offering above average growth potential and the remaining one-third to commercial properties - most of which will be leased to a single tenant on long-term leases. In order to meet yield objectives, IRET borrows 65-70% of the property purchase price with the free and clear percentage return of each property exceeding the interest rate payable on borrowed funds by two percent or more. RETURN TO SHAREHOLDERS From its inception in 1970, IRET has sought to: Pay a cash dividend equal to or better than a bank one-year Certificate of Deposit; Increase the dividend at a rate in excess of the inflation rate; Increase the share price by a percentage equal to the dividend rate for a total return to the shareholder at least twice the return of a one-year Certificate of Deposit. T H E C O M P A N Y F INVESTORS REAL ESTATE TRUST ounded in 1970, IRET is a Real Estate Investment Trust through which individual investors may benefit from the advantages of group investment in a professionally managed and diversified portfolio of income producing real estate. As of April 30, 2001, IRET owned 7,869 apartment units and 2,513,518 square feet of commercial properties located in North Dakota and twelve other states. IRET is structured as an Umbrella Partnership Real Estate Investment Trust (UPREIT). IRET operates through an operating partnership (IRET Properties, a North Dakota Limited Partnership), which has as its sole General Partner a wholly owned corporate subsidiary of IRET (IRET, Inc., a North Dakota Corporation). UPREIT status allows the owner of appreciated real estate to contribute that real estate to the operating partnership in exchange for a Limited Partnership interest generally without the recognition of gain. Cold Spring Center - St. Cloud, Minnesota 2 P R E S I D E N T ’ S R E P O R T TO OUR FELLOW SHAREHOLDERS We have much to report about IRET's 31st year. It was another year of significant progress for our company. CONSISTENT FINANCIAL RESULTS We are proud of IRET's 31-year history of consistent growth in earnings, dividends, and share price. For many investors, the past year has been one of disappointment as previously high performing companies experienced sharp drops in earnings and share prices. In some cases, the previous significant gains in share value, as well as much of the investor's original investment, was lost with some companies going out of business altogether. While many other companies experienced falling share prices and extreme volatility in the stock market, IRET continued to deliver solid value to its shareholders by increasing its Funds from Operations, dividends, and share price. Dividends increased to 55¢ per share from 50.8¢, an increase of 4.2¢ (8.3%). Funds from Operations of the Operating Partnership increased to $22,440,463 from $18,327,986, an increase of $4,112,477 (22%). On a per share basis, FFO increased from 75¢ per share to 79¢ per share, an increase of 5%. FFO per share would have been approximately 3% higher except for the sharp increase in natural gas prices for our apartment communities experienced during the latter portion of Fiscal 2001. Revenues of the Operating Partnership increased to $75,767,150 from $55,445,193, an increase of 37%. Real Estate Owned increased to $591,636,468 from $449,919,890, an increase of $141,716,578 (31%). As a result of the sale of additional Shares of Beneficial Interest, shareholder equity increased by $9,024,569 and, in addition, the equity capital of the Operating Partnership was increased by $23,885,524 as a result of contributions of real estate in exchange for Operating Units, resulting in a total increase in equity capital for the Operating Partnership of $32,910,093. PORTFOLIO EXPANSION We were able to significantly expand IRET's real estate portfolio. The Operating Partnership invested $143,042,292 to acquire 22 commercial buildings (1,047,321 square feet) and build 4 and buy 3 apartment communities (658 apartment units). The detailed list of the individual investments made during Fiscal 2001 are set forth in the Management's Discussion and Analysis which appears later in this report. The Operating Partnership also sold three properties during Fiscal 2001 realizing a net gain of $601,605. At the end of the fiscal year, IRET's real estate portfolio consists of 7,869 apartment units and 2,513,518 square feet of commercial properties. We will continue to seek attractive real estate properties to add to our portfolio and anticipate a similar level of acquisitions during Fiscal 2002. 31 YEARS OF INCREASED DIVIDENDS IRET increased the dividend paid on its Shares of Beneficial Interest during each quarter of Fiscal Year 2001. IRET paid its first dividend on June 30, 1971, and has paid a dividend every quarter since that time. During every year of its existence, IRET has increased its dividend and, since 1988, has increased its dividend every quarter. The dividend of 14.5¢ per share paid on July 2, 2001, was the 121st consecutive quarterly dividend paid by IRET. INCREASED SHARE PRICE The last trade of IRET shares on the NASDAQ Small Cap Market in Fiscal 2000 was at a price of $7.875 per share. The last trade on April 30, 2001, was at a price of $8.77, an increase of 11.4%. This is in excess of our goal of increasing our share price an average of 6% per year which gain in value, together with a dividend of 6% or greater, will produce a total annual return to our shareholders of 12%. This goal has been achieved on average over our 31-year history. Of course, not every year will produce an exact total return of 12% - some years will be higher such as this year and some years will be lower, but we believe that over time IRET's real estate portfolio will continue to produce this approximate rate of return to our shareholders. As shown later in this report an investment of $10,000 in IRET shares on June 30, 1971, assuming the reinvestment of all dividends in additional IRET shares, would have resulted in the ownership of IRET shares worth nearly $650,000 on April 30, 2001. 3 P R E S I D E N T ’ S R E P O R T IRET ADDED TO RUSSELL 2000® INDEX As of June 30, 2001, IRET was added to the Russell 2000® Index which measures the performance of the 2000 smallest companies in the Russell 3000® Index (the 3,000 largest U.S. companies by total market capitalization). This has been a very positive development for IRET which we believe is responsible for the recent increase in volume and share price on the NASDAQ Market for IRET shares. A number of mutual funds purchase the shares of companies on this list. While this initial increase in volume and price may lessen as the mutual fund purchases are completed, being on the Russell Index will be of significant benefit to IRET over the long term. SELF-ADVISED STATUS - RETIREMENT OF ROGER R. ODELL On July 1, 2000, IRET became self-advised. When IRET was formed, the Internal Revenue Code which governed real estate investment trusts required that IRET employ a separate advisory company. Roger R. Odell served as the advisor to IRET from its inception until July 1, 2000. Pursuant to an advisory contract between IRET and Odell-Wentz and Associates, L.L.C., the advisory company provided all office space, personnel, office equipment, and other equipment and services necessary to conduct all of the day-to-day operations of IRET. With the decision of Roger to retire as the advisor and as President of IRET, the company 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. On July 1, 2000, the IRET Operating Partnership acquired the advisory company assets and business in exchange for Operating Partnership Units with a value of $2,083,350, the appraised value of those assets and business. Roger retired on that date and all other officers and employees of the advisory company were employed by IRET Properties. STEVEN B. HOYT - NEW TRUSTEE We are pleased to report the addition of Steven B. Hoyt to our Board of Trustees. Mr. Hoyt is a successful real estate developer in the Minneapolis area and contributed a number of commercial buildings to the portfolio of the Operating Partnership in exchange for Operating Partnership Units. We welcome Steve to our Board and look forward to the ben- efits of his advice and counsel in the years ahead. A BRIGHT FUTURE We will continue to build on the firm foundation that Roger Odell established for IRET. The policies and values that Roger put in place will guide our efforts in the years ahead. Our 31-year history of creating value for our shareholders - due in large part to Roger's vision and hard work - is our greatest asset. This record of achievement continues to open doors for us and we will do our best to build and expand on Roger's legacy. Thomas A. Wentz, Sr. President & CEO Legacy Apartments - Grand Forks, North Dakota 4 O F F I C E R S & S T A F F Daniel J. Leidholt Assistant Vice President Financial Reporting Michael J. Hale Assistant Vice President Security Sales Ross D. Johnson Assistant Vice President Property Management Donald V. Peterson Assistant Vice President Asset Management Thomas A. Wentz, Sr. President & Chief Executive Officer Timothy P. Mihalick Senior Vice President & Chief Operating Officer Eric M. Schaeffer Assistant Vice President Asset Management Darla J. Strilcov Assistant Vice President Shareholder Relations Thomas A. Wentz, Jr. Vice President & General Counsel Diane K. Bryantt Secretary & Chief Financial Officer Stacy A. Humphreys Assistant Vice President Financial Reporting Michelle R. Saari Assistant Vice President Information Specialist Michael T. Mueller Assistant Financial Officer Sheila R. Evanoff Property Management Accounting Kim A. Ohlhauser Shareholder Relations Julie A. Ebert Administrative Assistant Linda D. Feldner Secretary/Receptionist 5 I N V E S T M E N T P O R T F O L I O Conseco - Rapid City, South Dakota WASHINGTON • 304 MONTANA • 749 • 70,598 IDAHO • 60 • 69,599 COLORADO • 597 MINNESOTA • 1,236 • 1,430,460 IOWA • 132 NORTH DAKOTA • 3,085 • 682,893 SOUTH DAKOTA • 418 • 87,786 NEBRASKA • 264 • 126,774 KANSAS • 520 MICHIGAN • 16,000 TEXAS • 504 GEORGIA • 29,408 Apartment Units Commercial Property Square Footage REAL ESTATE PORTFOLIO MIX PROPERTY INVESTMENTS percentage by state 6 I N V E S T M E N T P O R T F O L I O Apartment Communities by IRET Units Investment Fiscal 2001 Occupancy Colorado Colorado Springs Neighborhood Ft. Collins MiraMont Pine Cone Colorado Total Idaho Boise Clearwater Idaho Total Iowa Sioux City Ridge Oaks Iowa Total Kansas Topeka Crown Colony Sherwood Kansas Total Minnesota Moorhead Eastgate Rochester Heritage Manor Woodridge Sunset Trail I Sunset Trail II & III St. Cloud Lancaster Place Park Meadows West Stonehill Minnesota Total Montana Billings Castle Rock Country Meadows I Country Meadows II Olympic Village Rimrock West Rocky Meadows Montana Total Nebraska Lincoln Thomasbrook Nebraska Total 192 210 195 597 60 60 132 132 220 300 520 116 182 108 73 n/a 84 360 313 1,236 165 67 67 274 78 98 749 264 264 $ 11,422,781 14,363,539 13,263,860 39,050,180 3,853,638 3,853,638 4,281,967 4,281,967 10,817,090 16,001,205 26,818,295 $ $ $ $ $ $ $ $ 2,425,737 7,697,780 6,775,134 7,908,091 4,006,932 3,226,626 11,673,583 11,771,140 55,485,023 5,742,534 4,361,135 4,359,718 11,782,852 3,899,680 6,737,109 36,883,028 9,956,873 9,956,873 $ $ $ $ $ 96.27% 97.10% 96.71% 96.88% 92.14% 92.14% n/a% n/a% 83.88% 86.97% 86.98% 90.25% 99.41% 98.46% n/a% n/a% 95.87% 97.72% 99.64% 97.10% 92.49% 97.34% 97.50% n/a% 97.12% 96.93% 96.30% 95.91% 95.91% n/a - non-stabilized property acquired in Fiscal 2001. 7 I N V E S T M E N T P O R T F O L I O Apartment Communities by IRET - continued Units Investment Fiscal 2001 Occupancy North Dakota Bismarck Cottonwood Lake I & II Cottonwood III Crestview Kirkwood Manor North Pointe Pebble Creek Westwood Park Dickinson Century Eastwood Oak Manor Fargo Candlelight Park East Prairiewood Meadows Sunchase Grand Forks Forest Park Estates Jenner Properties Legacy Legacy IV Southwinds Valley Park Manor Minot Chateau Colton Heights Dakota Arms Magic City South Pointe Southview Williston Century Other Communities 134 67 152 108 49 18 64 120 38 27 44 122 85 36 270 121 183 67 164 168 64 18 18 232 196 24 192 26 Beulah Condominiums - Beulah 36 Parkway Apartments - Beulah Bison Properties - Carrington & Cooperstown 35 Sweetwater Properties - Devils Lake & Grafton 114 12 Lonetree Manor - Harvey 27 The Meadows I - Jamestown 27 The Meadows II - Jamestown 27 The Meadows III - Jamestown 3,085 North Dakota Total South Dakota Rapid City Pointe West Sioux Falls Oakwood Estates Oxbow Prairie Winds South Dakota Total 90 160 120 48 418 8 $ 9,197,265 4,535,371 4,961,835 3,731,401 2,446,675 784,962 2,205,488 2,321,814 472,395 374,730 977,083 5,136,953 2,839,271 1,042,210 7,482,837 2,231,184 10,997,398 7,031,125 5,972,073 4,713,692 2,468,984 967,733 625,487 5,257,208 10,345,036 728,676 4,125,747 483,155 150,912 614,541 1,626,298 228,846 1,878,636 1,878,636 2,046,455 $ 112,882,112 $ 4,061,061 5,664,991 5,030,689 2,013,055 16,769,796 $ 88.36% n/a% 94.30% 93.86% 97.99% 98.04% 99.25% 88.09% 79.00% 97.23% 97.21% 98.75% n/a% 99.10% 94.70% 94.10% 95.42% 90.86% 90.77% 95.44% 96.86% 93.85% 97.12% 96.62% 97.01% 93.24% 71.35% 55.44% 56.99% 94.36% 76.79% 74.82% 98.40% 97.54% n/a% 91.99% 94.59% 96.47% 99.53% 99.32% 97.35% n/a - non-stabilized property acquired in Fiscal 2001. I N V E S T M E N T P O R T F O L I O Apartment Communities by IRET - continued Texas Irving Dakota Hill at Valley Ranch Texas Total Washington Vancouver Ivy Club Van Mall Woods Washington Total Units Investment 504 504 204 100 304 $ $ $ $ 37,617,106 37,617,106 11,827,863 6,151,761 17,979,624 Total Apartment Communities 7,869 $ 361,577,622 Fiscal 2001 Occupancy 92.84% 92.94% 94.19% 96.31% 94.98% 93.96% Edgewood Vista - Duluth, Minnesota 9 I N V E S T M E N T P O R T F O L I O Commercial Properties by IRET Sq. Ft. Investment Fiscal 2001 Occupancy Georgia Lithia Springs Wedgewood Retirement Center Georgia Total Idaho Boise America's Best Furniture Idaho Total Michigan Kentwood Comp USA Michigan Total Minnesota Bloomington Pillsbury Business Center Burnsville Burnsville Bluffs Nicollet VII Duluth Edgewood Vista Edgewood Vista II Eagan 2030 Cliff Road Lexington Commerce S.E. Tech Center East Grand Forks East Grand Station Edgewood Vista Edgewood Vista II Eden Prairie Flying Cloud Drive Lindberg Building ViroMed Edina Dewey Hill Business Center Southdale Medical Center Maple Grove Northgate II Maplewood & Woodbury HealthEast I & II Minnetonka Hospitality Associates Moorhead Pioneer Seed Company Plymouth Plymouth Tech IV Plymouth Tech V Rochester Maplewood Square St. Cloud Cold Spring Center Waconia Stone Container 29,408 29,408 69,599 69,599 16,000 16,000 42,220 26,186 118,400 57,187 26,412 13,374 89,840 58,300 14,490 10,778 5,100 61,217 40,941 48,700 73,338 195,983 25,999 114,216 4,000 13,600 53,309 73,500 118,397 77,533 29,440 $ $ $ $ $ $ 3,971,878 3,971,878 4,788,294 4,788,294 2,121,474 2,121,474 $ 1,842,970 2,456,646 7,360,670 4,241,450 1,439,737 980,866 5,489,723 6,115,517 1,392,251 899,821 516,700 5,074,810 1,608,535 4,863,634 4,492,381 32,421,070 2,348,979 21,600,999 400,898 653,876 5,891,898 8,136,431 11,898,946 8,395,539 1,666,518 100.00% 100.00% 32.50% 32.50% 100.00% 100.00% n/a% n/a% n/a% 100.00% 100.00% n/a% 100.00% 100.00% 100.00% 100.00% n/a 99.18% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% n/a% 100.00% n/a% n/a% 98.31% n/a% 100.00% n/a - non-stabilized property acquired in Fiscal 2001. 10 Commercial Properties by IRET - continued Sq. Ft. Investment Fiscal 2001 Occupancy I N V E S T M E N T P O R T F O L I O Minnesota - continued Winsted Sterner Lighting Minnesota Total Montana Belgrade Edgewood Vista Billings Creekside Office Park Edgewood Vista Kalispell Edgewood Vista Missoula Edgewood Vista Montana Total Nebraska Columbus Edgewood Vista Freemont Edgewood Vista Grand Island Edgewood Vista Hastings Edgewood Vista Omaha Ameritrade Headquarters Barnes & Noble Edgewood Vista Nebraska Total North Dakota Bismarck Lester Chiropractic Clinic Fargo Barnes & Noble Great Plains Campus Facility Petco Stone Container Grand Forks Carmike Theatre MedPark Mall Minot 1st Avenue Building 12 South Main 17 South Main 114 South Main Street 401 South Main Arrowhead Shopping Center Corner Express C-Store Edgewood Vista Minot Plaza North Dakota Total 38,000 1,430,460 1,000,789 $ 143,191,654 5,100 37,318 11,971 5,895 10,314 70,598 5,100 5,100 5,100 5,100 73,774 27,500 5,100 126,774 5,400 30,000 121,600 18,000 193,350 28,300 45,328 15,900 11,300 6,500 3,500 11,200 80,000 4,674 97,821 10,020 682,893 $ 453,494 1,868,570 980,218 568,150 962,428 4,832,860 455,626 546,410 455,626 565,777 8,306,535 3,699,197 611,370 14,640,541 268,917 3,259,893 15,375,154 1,278,934 7,000,364 2,545,737 5,642,950 533,765 389,205 90,000 111,996 659,914 2,973,786 1,581,260 6,270,707 509,954 48,492,536 $ $ $ $ $ n/a - non-stabilized property acquired in Fiscal 2001. 11 n/a% 99.73% 100.00% 81.39% 100.00% 100.00% 100.00% 90.38% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 97.31% 58.82% 93.25% 100.00% 0.00% 90.41% 98.74% 100.00% 100.00% 100.00% 98.52% I N V E S T M E N T P O R T F O L I O Commercial Properties by IRET - continued South Dakota Rapid City Conseco Sioux Falls Edgewood Vista South Dakota Total Sq. Ft. Investment 75,815 11,971 87,786 $ $ 7,044,870 974,739 8,019,609 Total Commercial Property 2,513,518 $ 230,058,846 Mortgage Loans Receivable Mortgages $100,000 to $500,000 $50,000 to $99,999 $20,000 to $49,999 Less than $20,000 Total 04/30/01 Balance $ $ 992,828 0 43,313 954 1,037,095 Fiscal 2001 Occupancy 100.00% 100.00% 100.00% 98.59% Rate 8-11% n/a 8% 7% HealthEast I - Woodbury, Minnesota Summary of Investment Portfolio Real Estate Investments Property owned Less accumulated depreciation Mortgage loans receivable Total real estate investments Other Assets Cash Marketable securities - held-to-maturity Marketable securities - available-for-sale Rent receivable Prepaid and other assets Real estate deposits Tax and insurance escrow Furniture and fixtures Goodwill Deferred charges Total Assets 12 $ 591,636,468 (44,093,145) 547,543,323 1,037,095 $ 548,580,418 $ 6,356,063 2,351,248 660,865 1,925,429 799,973 522,500 4,323,960 187,313 1,550,246 3,064,109 $ 570,322,124 Investors Real Estate Trust and Subsidiaries Management’s Discussion and Analysis of Financial Condition and Results of Operations IRET has operated as a "real estate investment trust" under Sections 856-858 of the Internal Revenue Code since its formation in 1970 and is in the business of owning income-producing real estate investments, both residential and commercial. On February 1, 1997, IRET re-structured itself as an Umbrella Partnership Real Estate Investment Trust (UPREIT). IRET, through its wholly owned subsidiary, IRET, Inc., is the general partner of IRET Properties, a North Dakota limited partnership (the "Operating Partnership"). On July 1, 2000, IRET became "self-advised" as a result of the acquisition of the advisory business and assets of Odell-Wentz and Associates, L.L.C. Prior to that date, Odell-Wentz had been the advisor to the Trust and had furnished office space, employees, and equipment to conduct all of the day-to-day operations of IRET. The Operating Partnership issued 255,000 of its limited partnership units with an agree value of $8.17 per unit to Odell-Wentz and Associates, L.L.C. in exchange for the advisory business and assets. The per unit price was set at 95% of the offering price for new IRET shares which was $8.60 per share as of July, 2000. The valuation of the advisory business and assets of $2,083,350 was determined by an independent appraisal of the business and assets by a certified public accounting firm not otherwise employed by either IRET or the advisory company. All employees of the advisory company became employees of IRET Properties on July 1, 2000, with the exception of Roger R. Odell who retired. No other material change in IRET's business is contemplated at this time. The following discussion and analysis should be read in conjunction with the attached audited financial statements prepared by Brady, Martz & Associates, P.C. of Minot, North Dakota, certified public accountants, which firm and its predecessors have served as the auditor for IRET since its inception in 1970. Certain matters included in this discussion are forward-looking statements within the meaning of federal securities laws. Although IRET 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 IRET'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. RESULTS OF OPERATIONS - Fiscal Years Ended April 30, 2001, 2000, and 1999 IRET operates on a fiscal year ending on April 30. The following discussion and analysis is for the fiscal years ended April 30, 2001, 2000, and 1999. REVENUES Total revenues of the Operating Partnership for Fiscal 2001 were $75,767,150, compared to $55,445,193 in Fiscal 2000 and $39,927,262 in Fiscal 1999. The increase in revenues received during Fiscal 2001 in excess of the prior year revenues was $20,321,957. This increase resulted from: Rent from 28 properties acquired/completed in Fiscal 2001 Rent from 27 properties acquired in Fiscal 2000 in excess of that received in 2000 Increase in rental income on existing properties A decrease in Boise Warehouse rent (bankruptcy of tenant) A decrease in rent - properties sold in 2001 A decrease in interest income An increase in straight-line rents An increase in ancillary income $ 6,890,585 12,888,919 93,420 (36,301) (32,404) (371,585) 383,015 506,308 $ 20,321,957 13 Investors Real Estate Trust and Subsidiaries The increase in revenues received during Fiscal 2000 in excess of that received in Fiscal 1999 was $15,517,931. This increase resulted from: Rent from 27 properties acquired/completed in Fiscal 2000 Rent from 12 properties acquired in Fiscal 1999 in excess of that received in 1999 An increase in rental income on existing properties A decrease in rent on the Boise, Idaho Furniture Store (bankruptcy of tenant) A decrease in rent - properties sold during 1999 An increase in interest income An increase in rent (straight-line calculations) $ 10,206,154 4,419,227 579,151 (38,622) (524,680) 45,337 831,364 $ 15,517,931 As shown by the above analysis, the Fiscal 2001 and 2000 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 2000 increased by $579,151 in Fiscal 2000 and only $93,420 in Fiscal 2001. Thus, new properties generated most of the new revenues during the past two years. The following is an analysis of the contribution by each of the two categories of real estate owned by IRET - residential and commercial - to IRET revenues as compared to the year-end depreciated cost of each: Fiscal Years Ended 4/30 Property Cost (less depreciation) 2001 2000 1999 Commercial Residential Total Revenues Commercial Residential Total $ 218,261,880 329,281,443 $ 547,543,323 40% $ 112,511,467 304,175,471 60% 100% $ 416,686,938 27% $ 60,141,248 209,572,192 73% 100% $ 269,713,440 22% 78% 100% $ $ 18,994,010 55,806,712 74,800,722 25% $ 75% 100% $ 11,878,026 42,379,855 54,257,881 22% $ 78% 5,775,161 33,010,126 100% $ 38,785,287 15% 85% 100% Expenses (before depreciation - see Note 11 to Financial Statement for detail) Commercial Residential Total $ $ 10,649,488 39,500,071 50,149,559 21% $ 79% 100% $ 6,417,909 29,288,023 35,705,932 18% $ 82% 2,814,299 22,440,129 100% $ 25,254,428 11% 89% 100% Segment Gross Profit (before depreciation) Commercial Residential Total $ $ 8,344,522 16,306,641 24,651,163 34% $ 66% 100% $ 5,460,117 13,091,832 18,551,949 29% $ 71% 2,960,862 10,569,997 100% $ 13,530,859 22% 78% 100% CAPITAL GAIN INCOME The Operating Partnership realized capital gain income for Fiscal 2001 of $601,605. This compares to $1,754,496 of capital gain income recognized in Fiscal 2000 and the $1,947,184 recognized in Fiscal 1999. 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 INCOME The Operating Partnership's operating income for Fiscal Year 2001 increased to $10,187,812 from $8,548,558 earned in Fiscal 2000 and $6,401,676 earned in Fiscal 1999. IRET's Net Income for generally accepted accounting purposes for Fiscal 2001 was $8,694,240, compared to $8,807,845 in Fiscal 2000 and $7,604,135 in Fiscal 1999. On a per share basis, net income was $.38 per share in Fiscal 2001 compared to $.42 in Fiscal 2000 and $.44 in Fiscal 1999. 14 Investors Real Estate Trust and Subsidiaries These changes in operating income and net income result from the changes in revenues and expenses detailed below: For Fiscal 2001, a decrease in net income of $113,605, resulting from: A decrease in gain on sale of investments An increase in net rental income A decrease in interest income An increase in ancilliary income An increase in interest expense An increase in depreciation expense An increase in operating expenses, administrative, advisory & trustee services An increase in amortization expense An increase in minority interest of operating partnership A decrease in loss on impairment $ (1,152,891) 12,572,228 (371,585) 506,308 (8,217,228) (3,839,420) (119,274) (212,091) (598,968) 1,319,316 (113,605) $ The $1,203,710 increase in net taxable income for Fiscal 2000 over the net income earned in the prior fiscal year resulted from: A decrease in gain from sale of investments An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management) An increase in interest income An increase in interest expense An increase in depreciation expense An increase in operating expenses and advisory trustee services An increase in amortization expense An increase in minority interest of operating partnership income An increase in loss on impairment of properties $ (192,688) 11,432,978 45,337 (4,912,189) (2,493,238) (545,270) (61,420) (750,484) (1,319,316) 1,203,710 $ TELEPHONE ENDORSEMENT FEE During 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 telecommunication services over a 12-year period. Of this payment, $110,979 was recognized as income by IRET during Fiscal 2001. The balance of $758,526 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. RESULTS FROM STABILIZED PROPERTIES IRET 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 2001 and 2000 for residential and commercial were: Same Store - Residential Scheduled Rent Total Receipts Utilities & Maintenance Management YTD Taxes & Insurance Mortgage Interest Total Expenses Net Operating Income $ $ $ Fiscal 2001 38,228,938 37,957,512 8,020,633 3,770,137 4,104,636 9,250,331 25,145,737 12,811,775 15 Fiscal 2000 37,471,897 36,615,535 6,757,467 3,615,178 4,021,124 10,259,450 24,653,219 11,962,316 $ $ $ % Increase 2.0% 3.7% 18.7% 4.3% 2.1% -10.9% 2.0% 7.1% Investors Real Estate Trust and Subsidiaries Same Store - Commercial Scheduled Rent Fiscal 2001 $ 6,439,820 Fiscal 2000 $ 6,298,261 % Increase 2.2% Total Receipts Utilities & Maintenance Management YTD Taxes & Insurance Mortgage Interest Total Expenses Net Operating Income FUNDS FROM OPERATIONS 6,318,864 336,672 73,638 210,145 2,799,274 $ 3,419,729 $ 2,899,135 6,146,533 285,478 58,356 200,784 2,831,082 $ 3,375,700 $ 2,770,833 2.8% 17.9% 26.2% 7.7% -11.2% 1.3% 4.6% 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 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 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 (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. Funds From Operations for the Operating Partnership increased to $22,440,463 for Fiscal 2001, compared to $18,327,986 for Fiscal 2000 and $12,368,550 for Fiscal 1999. Calculations of Funds From Operations for the Operating Partnership are as follows: Item Fiscal 2001 Fiscal 2000 Fiscal 1999 Net Income available to IRET shareholders and unitholders from operations and capital gains Less gain from property sales Operating income Plus real estate depreciation and amortization (1) Funds From Operations $ 10,789,417 (601,605) $ 10,187,812 12,252,651 $ 22,440,463 $ 11,622,370 (1,754,496) 9,867,874 8,460,112 $ 18,327,986 $ $ $ 8,348,860 (1,947,184) 6,401,676 5,966,874 $ 12,368,550 Weighted average shares and units outstanding - basic and diluted (2) 28,577,700 24,476,984 19,104,465 Distributions paid to Shareholders/Unitholders (3) $ 15,732,399 $ 12,492,067 $ 8,984,996 (1) Depreciation on office equipment and other assets used by the Company 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) Distributions made equally on shares and units. 16 Investors Real Estate Trust and Subsidiaries SELF-ADVISED STATUS On 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 the Trust since its inception in 1970. IRET obtained an independent appraisal of the value of the advisory business and assets from certified public accounts 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: Real Estate Furniture, Fixtures & Other Assets Goodwill Less Real Estate Mortgages Assumed Purchase Price $ $ 475,000 193,350 1,645,000 (230,000) 2,083,350 IRET Properties issued 255,000 of its limited partnership units at a value of $8.17 per unit which represented 95% of the price of shares offered by IRET in July, 2000, 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. PROPERTY ACQUISITIONS The Operating Partnership added $143,042,292 of real estate investments to its portfolio during Fiscal 2001, compared to $155,284,745 added in Fiscal 2000 and $62,455,508 in Fiscal 1999. The Fiscal 2001 and 2000 additions are detailed below: FISCAL 2001 PROPERTY ACQUISITIONS - For the Period of 05-01-2000 to 04-30-2001 Commercial 12 South Main 17 South Main 2030 Cliff Road Burnsville Bluffs Cold Springs Center Conseco Financial Building Dewey Hill Business Center Edgewood Vista Addition Edgewood Vista Addition Edgewood Vista Edgewood Vista Edgewood Vista Edgewood Vista HealthEast I & II Hospitality Associates Nicollet VII Pillsbury Business Center Plymouth IV & V Sterner Lighting Stone Container Addition Stone Container Southdale Medical Center Office Minot, ND Office/Apartments Minot, ND Office Eagan, MN Office Burnsville, MN Office St. Cloud, MN Office Rapid City, SD Office Edina, MN Assisted Living Duluth, MN Assisted Living East Grand Forks, MN Assisted Living Fremont, NE Assisted Living Hastings, NE Assisted Living Kalispell, MT Omaha, NE Assisted Living Woodbury & Maplewood, MN Medical Office Minnetonka, MN Burnsville, MN Bloomington, MN Plymouth, MN Winsted, MN Fargo, ND Waconia, MN Edina, MN (60.31% part int.) Medical Office Office Office Office Office Manufacturing Manufacturing Warehouse Net Rentable Square Feet 11,300 6,500 13,374 26,186 77,533 75,815 73,338 26,412 5,100 5,100 5,100 5,895 5,100 114,216 4,000 118,400 42,220 126,809 38,000 41,500 29,440 195,983 1,047,321 Purchase Price 385,000 $ 90,000 950,000 2,400,000 8,250,000 6,850,000 4,472,895 2,200,000 516,700 535,550 550,800 560,000 610,800 21,588,498 400,000 7,200,000 1,800,000 13,750,000 1,000,000 2,001,879 1,666,500 32,421,070 $ 110,199,692 17 Investors Real Estate Trust and Subsidiaries FISCAL 2001 PROPERTY ACQUISITIONS - For the Period of 05-01-2000 to 04-30-2001- continued Residential Location Olympic Village Prairiewood Meadows Sunset Trail, Phase I Cottonwood Phase III Ridge Oaks Meadows, Phase III Sunset Trail, Phase II TOTAL Billings, MT Fargo, ND Rochester, MN Bismarck, ND*** Sioux City, IA Jamestown, ND*** Rochester, MN** Units 274 85 73 67 132 27 n/a 658 Purchase Price $ 11,616,500 2,811,000 6,493,150 1,854,800 4,195,036 1,865,182 4,006,932 32,842,600 $ 143,042,292 Property not placed in service at April 30, 1999. Additional costs were to be incurred in Fiscal 2000. ** *** Represents costs to complete a project started in year ending April 30, 2000. FISCAL 2000 PROPERTY ACQUISITIONS - For The Period of 05-01-1999 to 04-30-2000 Commercial Location Property Type Net Rentable Square Feet Purchase Price Maplewood Square Great Plains Edgewood Vista Edgewood Vista Edgewood Vista Corner C-Store Flying Cloud Drive Lexington Commerce Center Northgate II Southeast Tech Ctr. MedPark Mall Edgewood Vista Rochester, MN Fargo, ND Grand Island, NE Columbus, NE Belgrade, MT East Grand Forks, MN Eden Prairie, MN Eagan, MN Maple Grove, MN Eagan, MN Grand Forks, ND Duluth, MN Retail Software Mfg. Assisted Living Assisted Living Assisted Living Convenience Store Office Building Office Warehouse Office Warehouse Office Warehouse Retail Assisted Living 118,397 121,600 5,100 5,100 5,100 14,490 61,217 89,440 25,999 58,300 45,328 57,187 607,258 Apartments Rimrock West Valley Park Manor The Meadows I*** Thomasbrook Pebble Creek Country Meadows II*** Crown Colony Sherwood Sunset Trail** Legacy IV Dakota Hill The Meadows II Lancaster Place The Meadows III** Cottonwood Lake III** TOTAL Billings, MT Grand Forks, ND Jamestown, ND Lincoln, NE Bismarck, ND Billings, MT Topeka, KS Topeka, KS Rochester, MN Grand Forks, ND Irving, TX Jamestown, ND St. Cloud, MN Jamestown, ND Bismarck, ND 18 Units 78 168 27 264 18 67 220 300 n/a 67 504 27 84 n/a n/a 1,824 $ 11,800,000 15,000,000 446,000 446,000 446,000 1,385,000 4,900,000 4,800,000 2,300,000 6,050,000 5,300,000 4,800,000 $ 57,673,000 $ 3,750,000 4,400,000 247,700 9,188,470 720,000 3,010,325 10,500,000 15,750,000 1,500,000 4,301,250 36,500,000 1,845,000 3,200,000 68,000 2,631,000 $ 97,611,745 $ 155,284,745 Investors Real Estate Trust and Subsidiaries PROPERTY DISPOSITIONS Real estate assets sold by the Operating Partnership during Fiscal 2000 and 1999 were as follows: Property Sold Fiscal 2001 Sales Price Book Value & Sales Costs Gain Evergreen Shopping Center - Evergreen, CO Chalet Apartments - Minot, ND Hill Park/aka Garden Grove - Bismarck, ND Total Fiscal 2001 Gain $ 1,450,000 390,000 2,400,000 Fiscal 2000 Superpumper - Grand Forks, ND Superpumper - Crookston, MN Superpumper - Langdon, ND Superpumper - Sydney, MT Mandan Apartments - Mandan, ND Sweetwater Apartments - Devils Lake, ND Hutchinson Technology - Hutchinson, MN Jenner 18-Plex - Devils Lake, ND Virginia Apartments - Minot, ND Installment Sales Total Fiscal 2000 Gain $ 485,000 428,000 239,000 120,000 325,000 480,000 5,200,000 340,000 165,000 $ $ 1,448,310 366,566 1,823,518 398,521 338,097 174,648 102,839 249,388 144,697 4,090,997 354,009 175,308 DIVIDENDS The following dividends were paid during Fiscal Years 2001, 2000 and 1999: $ $ 1,689 23,434 576,482 601,605 $ 86,479 89,903 64,352 17,161 75,612 335,303 1,109,003 (14,009) (10,308) 1,000 $ 1,754,496 Date July 1, October 1, January 15 April 1, 2000 2001 $ $ .1325 .1350 .1400 .1425 .5500 2000 .124 .126 .128 .130 .508 $ $ 1999 .1100 .1150 .1200 .1225 .4675 $ $ HealthEast II - Maplewood, Minnesota 19 Investors Real Estate Trust and Subsidiaries LIQUIDITY AND CAPITAL RESOURCES Important equity capital and financing events in Fiscal 2001 were: As a result of the sale of additional Shares of Beneficial Interest, shareholder equity increased by $9,024,569 and, in addition, the equity capital of the Operating Partnership was increased by $23,885,524 as a result of contributions of real estate in exchange for Operating Units, resulting in a total increase in equity capital for the Operating Partnership of $32,910,093. Mortgage loan indebtedness increased substantially due to the acquisition of new investment properties to $368,956,930 on 04/30/01 from $265,056,767 on 04/30/00, and $175,071,069 on 04/30/99. The weighted interest rate on these loans decreased to 7.56% per annum from 7.59% on 04/30/00 compared to 7.12% at the end of Fiscal 1999. Of new real estate investments, $143,042,292 was made by the Operating Partnership, compared to $155,284,745 in Fiscal 2000 and $62,455,508 in Fiscal 1999. Net cash provided from operating activities increased to $22,328,745 from $16,277,085 due to the addition of new investments to our real estate portfolio. Net cash used in investing activities declined to $76,165,151 from the $120,041,064 used in Fiscal 2000. This decrease resulted from the lesser amount of cash used to acquire new investment properties. Net cash provided from financing activities also declined to $56,743,205 from the year earlier figure of $103,500,190, again due to the lower activity in acquiring new properties for cash and borrowed funds. IRET expects that its short-term liquidity requirements will be met through the net cash provided by its operations and also expects that it will meet its long-term liquidity requirements including scheduled debt maturities, construction and development activities, and property acquisitions through long-term secured borrowings and the issuance of additional equity securities by the Operating Partnership, including Shares of Beneficial Interest of the company as well as limited partnership units of the Operating Partnership to be issued in connection with acquisitions of improved real estate properties. 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 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 $368,956,930 of mortgage indebtedness on April 30, 2001, $31,592,149 was variable rate mortgages on which the future interest rate will vary based on changes in the interest rate index for each such loan and the balance of fixed rate mortgages was $337,364,781. The principal payments due on all of the mortgage indebtedness are as follows: Year Ending April 30 2002 2003 2004 2005 2006 Later Years Total Payments Mortgage Principal Payments Due $ 14,474,108 8,298,146 8,940,912 9,746,970 13,133,365 314,363,429 $ 368,956,930 20 Investors Real Estate Trust and Subsidiaries IRET has the following properties under construction: a 73-unit apartment complex in Rochester, Minnesota and, as of April 30, 2001, the estimated cost of completing this complex is $2,500,000, and a 27-unit apartment complex in Jamestown, North Dakota with an additional estimated cost of completion at April 30, 2001, of $500,000. In addition, as of April 30, 2001, IRET is committed to provide construction financing for an assisted living and Alzheimer care facility in Virginia, Minnesota for $7,000,000. IRET had no other commitments for the development of new real estate properties on April 30, 2001. IRET considers its existing cash and borrowing capacities to be ade- quate to fund its existing development activities. The following is a summary of IRET's equity capital and liability conditions at the end of Fiscal 2001 as compared to prior periods: IRET's shareholder equity increased to $118,945,160 from $109,920,591 on April 30, 2000, and from $85,783,297 on April 30, 1999. These increases resulted from the sale of Shares of Beneficial Interest and the reinvestment of dividends in new shares. Liabilities of the Operating Partnership increased to $389,086,105 from $287,940,038 on April 30, 2000, and $191,229,475 as of April 30, 1999. These increases resulted from increased mortgage loans to finance the acquisition of real estate properties. Total assets of the Operating Partnership increased to $570,322,124 from $432,978,299 on April 30, 2000, and $291,493,311 as of April 30, 1999, again, as a result of investments in additional real estate properties. Cash and marketable securities were $9,368,176, compared to $6,623,495 on April 30, 2000, and $7,412,236 on April 30, 1999. 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 $17,500,000, none of which were in use on April 30, 2001. On April 30, 2000, $6,452,420 was in use. Credit lines in Fiscal 1999 totaling $11,500,000 were not in use at the end of 1999. IMPACT OF INFLATION In Fiscal 2001, IRET experienced a sharp increase in the cost of utilities (primarily natural gas) in its apartment communities. Of the $3,502,036 total increase in utility and maintenance expense in Fiscal 2001 over the prior year, it is estimated that approximately $800,000 was increased natural gas and snow removal expense. 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. COMPETITION All of IRET's properties, both residential and commercial, are located in developed areas that include other competing properties. The competitive properties in a particular area could have a material effect on IRET's ability to lease its existing properties or any newly developed or acquired properties and on the rents charged. IRET may be competing with others that have greater resources. In addition, with respect to IRET apartment communities, other forms of properties, including single-family housing, provide housing alternatives to potential residents of IRET apartment communities. 21 Investors Real Estate Trust and Subsidiaries AMERICANS WITH DISABILITIES ACT All IRET properties must comply with Title III of the Americans with Disabilities Act (the "ADA") to the extent that such properties are "public accommodations" and/or "commercial facilities" as defined by the ADA. Compliance with the ADA requirements could require removal of structural barriers to handicapped access in certain public areas of the IRET properties where such removal is readily achievable. The ADA does not, however, consider residential properties, such as apartment communities, to be public accommodations or commercial facilities, except to the extent portions of such facilities, such as the leasing office, are open to the public. IRET believes that its properties comply with all present requirements under the ADA and applicable state laws. Noncompliance could result in imposition of fines or an award of damages to private litigants. If required to make material additional changes, IRET's results of operations could be adversely affected. ENVIRONMENTAL REGULATIONS IRET is subject to federal, state and local environmental regulations that apply to the development of real property, including construction activities, the ownership of real property, and the operation of commercial and multi-family apartment communities. In developing properties and constructing apartments, IRET utilizes environmental consultants to deter- mine whether there are any flood plains, wetlands or environmentally sensitive areas that are part of the property to be developed. If flood plains are identified, development and construction is planned so that flood plain areas are preserved or alternative flood plain capacity is created in conformance with federal and local flood plain management requirements. Storm water discharge from a construction facility is evaluated in connection with the requirements for storm water permits under the Clean Water Act. This is an evolving program in most states. IRET currently anticipates it will be able to obtain storm water permits for existing or new development. The Comprehensive Environmental Response, Compensation and Liability Act, 42 U.S.C. sec. 9601 et seq. ("CERCLA"), and applicable state superfund laws subject the owner of real property to claims or liability for the costs of removal or remediation of hazardous substances that are disposed of on real property in amounts that require removal or remediation. Liability under CERCLA and applicable state superfunds laws can be imposed on the owner of real property or the operator of a facility without regard to fault or even knowledge of the disposal of hazardous substances on the property or at the facility. The presence of hazardous substances in amounts requiring response action or the failure to undertake remediation where it is necessary may adversely affect the owner's ability to sell real estate or borrow money using such real estate as collateral. In addition to claims for cleanup costs, the presence of hazardous substances on a property could result in a claim by a private party for personal inquiry or a claim by an adjacent property owner for property damage. IRET has a policy that requires an environmental investigation of each property that it considers for pur- chase or that it owns and plans to develop. The environmental investigation is conducted by a qualified envi- ronmental consultant. If there is any indication of contamination, sampling of the property is performed by the environmental consultant. The environmental investigation report is reviewed by IRET prior to purchase of any property. If necessary, remediation of contamination, including underground storage tanks, is undertaken prior to development. IRET has not been notified by any governmental authority of any noncompliance, claim, or liability in connection with any of its properties, nor of a claim for personal injury or property damage by a private party in connection with environmental conditions and is not aware of any other environmental condition with respect to any of its properties that could be considered to be material. 22 Investors Real Estate Trust and Subsidiaries 30 Calendar Year History of Increasing Dividends Since its first dividend paid July 1, 1971, IRET has never delayed, omitted or reduced its quarterly dividend and in each of the last 30 calendar years, the annual dividend has increased over the amount paid in the preceding year. SHARE BID PRICE HISTORY DIVIDEND HISTORY TOTAL RETURN PER YEAR 1971 1972 1973 1974 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001* $1.00 1.10 1.30 1.40 1.50 1.80 3.15 4.50 6.16 6.44 7.13 7.44 7.88 7.88 8.80 1971 1972 1973 1974 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001* 2.75¢ 6.20¢ 6.55¢ 7.10¢ 8.00¢ 13.25¢ 24.25¢ 29.90¢ 35.25¢ 37.38¢ 40.18¢ 43.70¢ 49.25¢ 52.55¢ 56.50¢ 1971 1972 1973 1974 1975 1980 1985 1990 1995 1996 1997 1998 1999 2000 2001* 2.8% 16.2% 24.1% 13.2% 12.9% 13.7% 19.5% 12.1% 10.6% 10.6% 17.0% 10.5% 12.5% 6.7% 18.8% (End of calendar year bid price per share of beneficial interest of IRET) (Total calendar year dividends paid) * Annualized as of 06/30/01 - Conversion of actual financial results for the first six months of the calendar year as of June 30, 2001, into a rate calculation and then annualized into an annual equivalent rate of return. Dividends plus share price changes. (Calendar year dividends paid plus change in share bid price divided by previous end of year share bid price.) 30 Calendar Year Performance Comparison The graph below provides an indicator of the cumulative shareholder returns for the Trust compared to our peer group (1). The comparison assumes the investment of $100.00 in the stock of IRET and in the stock of our peer group, and the reinvestment of all dividends. No commissions or income tax impact are reflected in this comparison. IRET Peer Group $6,448 $3,003 72 73 74 75 76 77 78 79 80 81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 (1) The peer group consists of the real estate investment trusts included by the National Association of Real Estate Investment Trusts in its Equity Total Return Index. 23 Investors Real Estate Trust and Subsidiaries INDEPENDENT AUDITOR'S REPORT Board of Trustees Investor Real Estate Trust and Subsidiaries Minot, North Dakota We have audited the accompanying consolidated balance sheets of Investors Real Estate Trust and Subsidiaries as of April 30, 2001 and 2000, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 2001, 2000 and 1999. 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 mis-statement. 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, 2001 and 2000, and the consolidated results of its operations and cash flows for the years ended April 30, 2001, 2000 and 1999, in conformity with accounting principles generally accepted in the United States of America. BRADY, MARTZ & ASSOCIATES, P.C. Minot, North Dakota May 23, 2001 24 Investors Real Estate Trust and Subsidiaries CONSOLIDATED BALANCE SHEETS Years Ended April 30, 2001 2000 ASSETS Real estate investments Property owned Less accumulated depreciation Mortgage loans receivable Total Real Estate Investments Other Assets Cash Marketable securities - held-to-maturity Marketable securities - available-for-sale Rent receivable Real estate deposits Prepaid and other assets Tax and insurance escrow Furniture and fixtures Goodwill Deferred charges and leasing costs Total Assets LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Accounts payable and accrued expenses Notes payable Mortgages payable Investment certificates issued Total Liabilities $ 591,636,468 (44,093,145) $ 547,543,323 $ 449,919,890 (33,232,952) $ 416,686,938 1,037,095 $ 548,580,418 1,529,578 $ 418,216,516 $ 6,356,063 2,351,248 660,865 1,925,429 522,500 799,973 4,323,960 187,313 1,550,246 3,064,109 $ 570,322,124 $ 3,449,264 2,601,420 572,811 1,055,922 768,850 577,624 3,218,603 0 0 2,517,289 $ 432,978,299 $ 8,252,758 0 368,956,930 11,876,417 $ 389,086,105 $ 6,343,595 6,452,420 265,056,767 10,087,256 $ 287,940,038 Minority interest in partnerships Minority interest of unit holders in operating partnership $ 3,287,665 $ 59,003,194 $ $ 0 35,117,670 Shareholder’s Equity Shares of beneficial interest (unlimited authorization, no par value, 24,068,346 shares outstanding in 2001 and 22,452,069 shares outstanding in 2000) Accumulated distributions in excess of net income Accumulated other comprehensive income/loss Total shareholders’ equity Total Liabilities and Shareholders’ Equity The accompanying notes are an integral part of these financial statements. 25 $ 132,148,768 (13,073,157) (130,451) $ 118,945,160 $ 570,322,124 $ 119,233,172 (9,094,076) (218,505) $ 109,920,591 $ 432,978,299 Investors Real Estate Trust and Subsidiaries CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended April 30, 2001 2000 1999 REVENUE Real estate rentals Interest, discounts and fees Total Revenue EXPENSES Interest Depreciation Utilities and maintenance Taxes Insurance Property management expenses Loss on impairment of properties Administrative expenses Advisory and trustee services Operating expenses Amortization Total Expenses Income before gain/loss on properties and minority interest Gain on sale of properties Minority interest portion of $ 74,800,722 966,428 $ 75,767,150 $ 54,257,881 1,187,312 $ 55,445,193 $ 38,785,287 1,141,975 $ 39,927,262 $ 25,231,398 12,299,532 11,546,566 7,545,182 831,963 5,784,423 0 1,057,469 423,227 431,390 428,188 $ 65,579,338 $ 17,014,170 8,460,112 8,044,530 5,282,361 476,962 4,290,275 1,319,316 0 1,159,120 633,692 216,097 $ 46,896,635 $ 12,101,981 5,966,874 6,356,483 4,025,559 384,203 3,288,267 0 0 844,901 402,641 154,677 $ 33,525,586 $ 10,187,812 601,605 $ 8,548,558 1,754,496 $ 6,401,676 1,947,184 operating partnership income (2,095,177) (1,495,209) (744,725) NET INCOME Net income per share (basic and diluted) $ 8,694,240 $ .38 $ 8,807,845 .42 $ $ 7,604,135 .44 $ The accompanying notes are an integral part of these financial statements. 26 Investors Real Estate Trust and Subsidiaries CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY SHARES OF NUMBER OF BENEFICIAL INTEREST SHARES DISTRIBUTIONS IN EXCESS OF NET INCOME ACCUMULATED OTHER TOTAL COMPREHENSIVE SHAREHOLDER’S INCOME (LOSS) EQUITY BALANCE APRIL 30, 1998 16,391,412 $ 74,708,559 $ (6,666,555) $ 110,622 $ 68,152,626 BALANCE APRIL 30, 1999 19,066,954 $ 93,095,819 $ (7,255,958) $ (56,567) $ 85,783,294 Comprehensive Income Net income Unrealized loss on securities available for sale Total comprehensive income Dividends distributed Dividends reinvested Sale of shares Shares repurchased Comprehensive income Net income Unrealized loss on securities available for sale Total comprehensive income Dividends distributed Dividends reinvested Sales of shares Shares repurchased Comprehensive income Net income Unrealized loss on securities available for sale Total comprehensive income Dividends distributed Dividends reinvested Sales of shares Fractional shares repurchased 0 0 0 0 7,604,135 0 7,604,135 0 (167,189) 0 762,051 2,368,504 (455,013) 0 5,389,464 16,284,684 (3,286,888) (8,193,538) 0 0 0 0 0 0 0 0 0 0 0 8,807,845 0 8,807,845 0 (161,938) 0 803,192 3,115,789 (533,866) 0 6,330,301 24,022,246 (4,215,194) (10,645,963) 0 0 0 0 0 0 0 0 0 0 0 8,694,240 0 8,694,240 0 (88,054) 0 273,155 1,383,908 (40,786) 0 2,230,445 11,001,509 (316,358) (12,673,321) 0 0 0 0 0 0 0 $ (167,189) 7,436,946 (8,193,538) 5,389,464 16,284,684 (3,286,888) $ (161,938) 8,645,907 (10,645,963) 6,330,301 24,022,246 (4,215,194) $ (88,054) 8,782,294 (12,673,321) 2,230,445 11,001,509 (316,358) BALANCE APRIL 30, 2000 22,452,069 $ 119,233,172 $ (9,094,076) $ (218,505) $ 109,920,591 BALANCE APRIL 30, 2001 24,068,346 $ 132,148,768 $(13,073,157) $ (130,451) $ 118,945,160 The accompanying notes are an integral part of these financial statements. 27 Investors Real Estate Trust and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended April 30, 2001 2000 1999 CASH FLOWS FROM OPERATING ACTIVITIES Net Income Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Minority interest portion of operating partnership income Accretion of discount on contracts Gain on sale of properties Loss on impairment of properties Interest reinvested in investment certificates Effects on operating cash flows due to changes in: (Increase) decrease in real estate deposits (Increase) decrease in rent receivable (Increase) decrease in other assets Increase in tax and insurance escrow Increase in deferred charges Increase (decrease) in accounts payable $ 8,694,240 $ 8,807,845 $ 7,604,135 12,727,720 8,676,209 6,121,551 2,095,177 0 (601,605) 0 360,181 246,350 (990,213) (201,547) (1,105,357) (805,364) 1,495,209 (1,506) (1,754,496) 1,319,316 363,935 (467,950) (1,055,922) (283,838) (1,457,408) (1,319,634) 744,725 (2,920) (1,947,184) 0 408,097 2,192,813 0 (11,884) (507,127) (480,413) and accrued expenses Net cash provided from operating activities 1,909,163 $ 22,328,745 1,955,325 $ 16,277,085 1,541,190 $ 15,662,983 CASH FLOWS FROM INVESTING ACTIVITIES Proceeds from maturity of marketable securities held-to-maturity Principal payments on mortgage loans receivable Proceeds from sale of property Payments for acquisitions and improvement of properties Purchase of marketable securities available-for-sale Investment in mortgage loans receivable Net cash used for investing activities CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from sale of shares, net of issue costs Proceeds from investment certificates issued Proceeds from mortgages payable Repurchase of shares and minority interest units Dividends paid Distributions paid to minority interest unitholders Redemption of investment certificates Principal payments on mortgage loans Net increase (decrease) in short-term lines of credit Net cash provided from financing activities $ 250,172 613,934 0 $ 363,014 492,547 7,326,563 $ 572,104 372,155 435,787 (72,319,419) 0 (4,709,838) $ (76,165,151) (121,931,571) 0 (6,291,617) $(120,041,064) (45,325,061) (181,250) (7,655,061) $ (51,781,326) $ 11,001,509 3,257,574 79,369,000 (5,497,952) (5,963,290) (3,059,078) (1,828,594) (14,083,544) (6,452,420) $ 56,743,205 $ 24,022,246 3,769,003 93,969,098 (4,832,012) (4,315,662) (1,846,104) (5,815,818) (7,902,981) 6,452,420 $ 103,500,190 $ 16,284,684 4,591,528 32,326,973 (3,534,813) (2,804,074) (791,458) (3,599,050) (3,774,614) (1,000,000) $ 37,699,176 NET INCREASE (DECREASE) IN CASH CASH AT BEGINNING OF YEAR CASH AT END OF YEAR $ $ 2,906,799 3,449,264 6,356,063 $ $ (263,789) 3,713,053 3,449,264 $ $ 1,580,833 2,132,220 3,713,053 The accompanying notes are an integral part of these financial statements. 28 Investors Real Estate Trust and Subsidiaries CONSOLIDATED STATEMENTS OF CASH FLOWS • continued Years Ended April 30, 2001 2000 1999 SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Dividend reinvestment plan Real estate investment and mortgage loans receivable acquired through assumption of mortgage loans payable and accrual of costs Mortgage loan receivable transferred to property owned Proceeds from sale of properties deposited directly with escrow agent Properties acquired through the issuance of minority interest units in the operating partnership Minority partner interest in Southdale Medical Center Interest reinvested directly in investment certificates SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest paid on mortgages Interest paid on investment certificates $ 2,230,445 $ 6,330,301 $ 5,389,464 38,611,547 4,049,568 12,458,735 4,709,838 15,000,000 0 4,093,684 0 6,863,691 25,543,524 3,287,655 360,181 21,602,841 0 363,935 6,485,927 0 408,097 $ 23,763,584 745,391 $ 24,508,975 $ 15,670,488 544,977 $ 16,215,465 $ 10,998,722 895,214 $ 11,893,936 The accompanying notes are an integral part of these financial statements. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 • NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Investors Real Estate Trust qualifies under Section 856 of the Internal Revenue Code as a real estate investment trust. The Trust has properties located primarily throughout the Upper Midwest, with principal offices located in Minot, North Dakota. The Company invests in commercial and residential real estate, real estate contracts, real estate related governmental backed securities (GNMA), and equity securities in other real estate investment trusts. Rental revenue from residential properties represents the major source of revenues for the Trust. Effective February 1, 1997, the Trust reorganized its structure in order to convert to Umbrella Partnership Real Estate Investment Trust (UPREIT) status. The Trust 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). At that date, the Trust 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 the operating partnership have "exchange rights" allowing them, at their option, to exchange their limited partnership units for shares of the Trust 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. The operating partnership distributes cash on a quarterly basis in the amounts determined by the Trust, which results in each limited partner receiving a distribution equivalent to the dividend received by a Trust shareholder. Effective July 1, 2000, the Trust became self-administered as a result of the acquisition of its former advisory company, 29 Investors Real Estate Trust and Subsidiaries Odell-Wentz & Associates, LLC. Virtually all officers and employees of Odell-Wentz & Associates, LLC were retained by the Trust. 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 Investors Real Estate Trust and all of its subsidiaries in which it maintains a controlling interest. The Trust is the sole shareholder of IRET, Inc., which is the general partner of the operating partnership, IRET Properties. The trust is also the sole shareholder of Miramont IRET Inc. and Pine Cone IRET Inc., both of which are invested in real estate. The Trust 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 2 -IRET, Inc., and IRET -Ridge Oaks, LLC. These entities 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 L.P., a Minnesota Limited Partnership, Meadows 2 Properties, LP, a North Dakota Limited Partnership, and Ridge Oaks, LP an Iowa Limited Partnership. IRET Properties is also the sole owner of Health Investors Business Trust. These entities are all invested in real estate and are primarily formed and acquired for the beneficial ownership of certain properties that may be encumbered by mortgage indebtedness. The consolidated financial statements also include the ownership of a controlling interest in Minnesota Medical Investors LLC, SMB Operating Company LLC, and SMB MM LLC, collectively known as Southdale Medical Center. These companies are accounted for under the consolidation method of accounting with minority interests reflecting the minority partners' share of ownership and income and expenses being recorded on a 30-day lag basis. All material inter-company transactions and balances have been eliminated in the consolidated financial statements. ACCOUNTING POLICIES NEW ACCOUNTING PRONOUNCEMENTS - The Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition," which provides guidance on the recognition, presentation, and disclosure of revenue in financial statements. The Trust's accounting policies comply with SAB 101 in all material respects. Statement of Financial Accounting Standards ("SFAS") No. 133, Accounting for Derivative Instruments and Hedging Activities, establishes 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." SFAS 133 has no impact as the Trust does not currently use derivatives. USE OF ESTIMATES - The preparation of financial statements in conformity with generally accepted accounting principles 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. for improvements PROPERTY OWNED - Real estate is stated at cost. Expenditures that renewals and significantly add to the productive capacity or extend the useful life of an asset are capitalized. Interest, real estate taxes, and other development costs relating to the acquisition and development of certain qualifying properties are also capitalized. Expenditures for maintenance and repairs which do not add to the value or extend useful lives are charged to expense as incurred. The Trust assesses whether there has been an 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, the Trust 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. 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, or appraised value. 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 the Trust 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 consummation 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 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. There were no properties considered "held for sale" at April 30, 2001 or 2000. FURNITURE AND FIXTURES consists of office furniture, fixtures, and equipment located at the Trust's operational head quarters and are stated at cost net of accumulated depreciation. Accumulated depreciation was $215,757 and $0 at April 30, 2001 and 2000, respectively. DEPRECIATION is 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 to 20 - 40 years for buildings and improvements. MORTGAGE LOANS RECEIVABLE - are shown at cost. Interest income is accrued and reflected in the related balance. 30 Investors Real Estate Trust and Subsidiaries ALLOWANCE FOR DOUBTFUL ACCOUNTS - The Trust 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. MARKETABLE SECURITIES - The Trust's investments in securities are classified as securities "held-to-maturity" and securities "available-for-sale." The securities classified as "available-for-sale" consist of equity shares in other real estate investment trusts and are stated at fair value. Unrealized gains and losses on securities available-for-sale are recognized as direct increases or decreases in shareholders' equity. Cost of securities sold are recognized on the basis of specific identification. The securities classified as "held-to-maturity" consist of Government National Mortgage Association securities for which the Trust has positive intent and ability to hold to maturity. 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. 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 the Trust toward the purchase of property or the payment of loan costs associated with loan refinancing. GOODWILL is amortized on a straight-line basis over a period of 15 years. The Trust periodically reviews goodwill for impairment and if a permanent decline in value has occurred, the Trust will reduce its goodwill balance to fair value. Accumulated amortization of goodwill was $91,191 and $0 at April 30, 2001 and 2000, respectively. 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. The Trust reflects minority interests in the Southdale Medical Center on the balance sheet for the portion of properties consolidated by the Trust that are not wholly owned by the Trust. 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. 31 NET INCOME PER SHARE - Effective May 1, 1998, the Trust 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. 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 - The Trust 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. The Trust 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. UPREIT status allows non-recognition of gain by an owner of appreciated real estate if that owner contributes the real estate to a partnership in exchange for a partnership interest. The UPREIT concept was born when the non- recognition provisions of Section 721 of the Internal Revenue Code were combined with "Exchange Rights" which allow the contributing partner to exchange the limited partnership interest received in exchange for the appreciated real estate for the Trust stock. Upon conversion of the partnership units to Trust 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 of $120,314 and $0 as of April 30, 2001 and 2000, respectively. 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. These leases also typically provide for tenant reimbursement of common area maintenance and other operating expenses. Profit on sales of real estate shall be recognized in full when real estate is sold, provided the profit is determinable, that is, the collectibility of the sales price is reasonably assured or the amount that will be collectible can be estimated and the earnings process is virtually complete, that is, the seller is not obliged to perform significant activities after the sale to earn the profit. Any gain or loss on the sale of disposition is recognized in accordance with accounting principles generally accepted in the United States of America. Investors Real Estate Trust and Subsidiaries 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 DIVIDEND REINVESTMENT PLAN is available to all shareholders of the Trust. Under the Dividend Reinvestment Plan, shareholders may elect for their dividends to be used by the plan administrator to acquire additional shares on the NASDAQ Small Cap Market or, if not available, directly from the Trust. Amounts are deposited with the plan administrator in advance of the dividend date to acquire shares for dividend reinvestment. NOTE 2 • OFF-BALANCE-SHEET RISK The Trust had deposits at First Western Bank, Bremer Bank, and First International Bank which exceeded Federal Deposit Insurance Corporation limits by $3,844,663, $785,073 and $561,155, respectively, at April 30, 2001. 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: Years Ending April 30, Residential 2001 2000 $ 361,577,622 $ 329,205,116 Less accumulated depreciation (32,296,179) ( 25,029,645) $ 329,281,443 $ 304,175,471 Commercial $ 230,058,846 $ 120,714,774 Less accumulated depreciation (11,796,966) ( 8,203,307) Remaining Cost $ 218,261,880 $ 112,511,467 $ 547,543,323 $ 416,686,938 There were no repossessions during the years ended April 30, 2001 and 2000. The above cost of residential real estate owned included construction in progress of $6,307,018 and $6,190,287 as of April 30, 2001 and 2000, respectively. As of April 30, 2001, the trust expects to fund approximately $3,500,000 during the upcoming year to complete these construction projects. The Trust also has outstanding offers to purchase selected properties as part of their normal operations. As of April 30, 2001, significant signed purchase commitments are estimated at $23,400,000 for the upcoming year. Construction period interest of $316,644, $404,089 and $211,882 has been capitalized for the years ended April 30, 2001, 2000 and 1999, respectively. Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $55,806,712, $42,379,855 and $33,010,126 for the years ended April 20, 2001, 2000 and 1999, respectively. Gross revenues from commercial property rentals totaled $18,994,010, $11,878,026 and $5,775,161 for the years ended April 30, 2001, 2000 and 1999, respectively. Commercial properties are leased to tenants under terms of leases expiring at various dates through 2024. Lease terms often include renewal 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 $124,092, $102,659 and $101,032 for the years ended April 30, 2001, 2000 and 1999, respectively. The future minimum lease payments to be received under these operating leases for the commercial properties as of April 30, 2000, are as follows: Year Ending April 30, 2002 2003 2004 2005 2006 Thereafter $ $ 20,379,372 19,239,427 18,626,368 17,681,872 16,268,305 126,659,158 218,854,502 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 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, 2001 and 1999. NOTE 4 • MORTGAGE LOANS RECEIVABLE Mortgage loans receivable consists of seven 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 loans contracts as of April 30, 2001, are as follows: Year Ending April 30, 2002 2003 2004 2005 2006 Later Years 32 $ $ 765,530 98,252 43,313 0 0 130,000 1,037,095 Investors Real Estate Trust and Subsidiaries There were no significant non-performing mortgage loans receivable as of April 30, 2001 and 2000. 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, 2001 and 2000 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 2001, 2000, or 1999. There was no interest income on non-performing loans recognized on a cash basis for 2001, 2000, and 1999. NOTE 5 • MARKETABLE SECURITIES The amortized cost and estimated market values of marketable securities held-to-maturity at April 30, 2001 and 2000 are as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value $ 2,351,248 $ 80,159 $ 77,389 $ 2,354,018 $ 2,601,420 $ 34,608 $ 159,785 $ 2,476,243 2001 ISSUER GNMA 2000 ISSUER GNMA The amortized costs and estimated market values of marketable securities available-for-sale at April 30, 2001 and 2000 are as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value 2001 Equity shares in other REITs $ 2000 Equity shares in other REITs $ 791,316 $ 97,209 $ 227,660 791,316 $ 65,338 $ 283,843 $ $ 660,865 572,811 There were no realized gains or losses on sales of securities for the years ended April 30, 2001, 2000 and 1999. Marketable securities held-to-maturity consists of Governmental National Mortgage Association (GNMA) securities bearing interest from 6.5% to 9.5% with maturity dates ranging from May 15, 2016, to September 15, 2023. The following is a summary of the maturities of securities held-to-maturity at April 30, 2001 and 2000: AMORTIZED FAIR COST VALUE Due After 10 years $2,351,248 $2,354,018 AMORTIZED FAIR VALUE $2,476,243 COST $2,601,420 2001 2000 A second unsecured line of credit from First International Bank & Trust was issued in the amount of $3,500,000 carrying an interest rate equal to prime and maturing October 15, 2002, the weighted average interest rate for year ended April 30, 2001 was 8.15%. A third unsecured line of credit from Bremer Bank was issued in the amount of $10,000,000 carrying an interest rate equal to Bremer Financial Corp.'s reference rate and maturing August 1, 2002, the weighted average interest rate for year ended April 30, 2001 was 8.99%. Interest payments are due monthly on all three notes. As of April 30, 2001, the Trust had no unpaid balances on any of their lines of credit. As of April 30, 2000, the trust had an unpaid balance of $6,452,420 on the line of credit at Bremer Bank. NOTE 7 • MORTGAGES PAYABLE 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. Mortgages payable as of April 30, 2000, included mortgages on properties owned totaling $265,054,767. The carrying value of the related real estate owned was $410,776,553. Monthly installments are due on the mortgages with interest rates ranging from 6.47% to 9.75% and with varying maturity dates through November 30, 2036. Of the mortgages payable, the balances of fixed rate mortgages totaled $337,364,781 and $232,919,354, and the balances of variable rate mortgages totaled $31,592,149 and $32,137,413 as of April 30, 2001 and 2000, respectively. The aggregate amount of required future principal payments on mortgages payable is as follows: Year Ending April 30, 2002 2003 2004 2005 2006 Later years Total payments $ $ 14,474,108 8,298,146 8,940,912 9,746,970 13,133,365 314,363,429 368,956,930 NOTE 8 • 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 ending April 30, are shown below. Interest is paid annually, semiannually, or quarterly on the anniversary date of the security. NOTE 6 • NOTES PAYABLE As of April 30, 2001, the trust had lines of credit available from three financial institutions. An unsecured line of credit was issued by First Western Bank & Trust in the amount of $4,000,000 carrying an interest rate equal to prime and maturing August 15, 2002, the weighted average interest rate for year ended April 30, 2001 was 9.46%. Year Ending April 30, 2002 2003 2004 2005 2006 Thereafter 33 $ $ 5,820,502 1,326,062 1,932,291 669,657 2,116,601 11,304 11,876,417 Investors Real Estate Trust and Subsidiaries NOTE 9 • TRANSACTIONS WITH RELATED PARTIES Through June 30, 2000, the advisor to the Trust was Odell-Wentz & Associates, LLC. Roger R. Odell and Thomas A. Wentz, Sr. were the owners of Odell-Wentz & Associates LLC and also officers and shareholders of the Trust. Under the advisory contract between the Trust and Odell-Wentz & Associates, LLC, the Trust paid an advisor's fee based on the net assets of the Trust and a percentage fee for investigating and negotiating the acquisition of new investments. For the year ended April 30, 2001, Odell-Wentz & Associates, LLC received total fees under said agreement of $265,573. The fees for April 30, 2000, were $1,400,973 and for April 30, 1999, were $951,234. For the years ended April 30, 2001, 2000 and 1999, the Trust has capitalized $58,250, $316,458, and $195,019 respectively, of these fees, with the remainder of 207,323, $1,084,515, and $756,215, respectively, expensed as advisory fees on the statement of operations. The advisor was obligated to provide office space, staff, office equipment, computer services and other services necessary to conduct the business affairs of the Trust. On July 1, 2000, IRET Properties acquired assets from Odell-Wentz & Associates, LLC in exchange for operating partnership units at a total purchase price of $2,083,350. This acquisition included real estate, furniture, fixtures, equipment and other assets of approximately $675,000, goodwill of approximately $1,645,000, and the assumption of mortgages and other liabilities of approximately $236,000. Except for Roger R. Odell who retired, all officers and employees of Odell-Wentz & Associates, LLC were retained by IRET Properties. As part of the acquisition of Odell-Wentz & Associates, LLC, IRET Properties acquired a note receivable due from Timothy P. Mihalick of approximately $100,000. Timothy P. Mihalick was an officer of Odell Wentz & Associates, LLC and is currently an officer of the Trust. Investors Management and Marketing (IMM) provides property management services to the Trust. Roger R. Odell is a shareholder in IMM. IMM received $114,421 for services rendered from May 1, 2000 through June 30, 2000, IMM received $649,729, and $609,783 for services rendered for years ended April 30, 2000, and 1999, respectively. Inland National Securities is a corporation that provides underwriting services in the sale of additional shares for the Trust. Roger R. Odell is also a shareholder in Inland National Securities. Fees for services from May 1, 2000 through June 30, 2000 were $6,861. Fees for services totaled $100,081, and $157,392, for the years ended April 30, 2000 and 1999, respectively. The Trust paid fees and expense reimbursements to the law firm in which Thomas A. Wentz, Jr. was, until December 31, 1999, a partner totaling $89,497 and $33,022 for the years ended April 30, 2000, and 1999, respectively. Thomas A. Wentz, Jr. is a trustee of the Trust. Investment certificates issued by the Trust to officers and trustees totaled $80,000, $200,000, and $2,138,758 at April 30, 2001, 2000 and 1999, respectively. Management believes that all activity with related parties were transacted at amounts consistent with current fair market prices. NOTE 10 • MARKET PRICE RANGE OF SHARES 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, 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, low was 7.681, and the closing price on April 30, 2000 was 7.875. For the year ended April 30, 1999, a total of 1,862,187 shares were traded in 1,017 separate trades. The high trade price during the period was 14.00, low was 6.50, and the closing price on April 30, 1999 was 7.50. 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 the Trust 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 regulatory customers, environments. Although information is available on a property-by-property basis, including rental income and operating expenses, 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 management purposes. distribution methods, and The following information summarizes the Trust's segment reporting for residential and commercial properties along with reconciliations to the consolidated financial statements: YEAR ENDING APRIL 30, 2001 Segment Revenue Rental revenue Segment Expenses Mortgage interest Utilities and maintenance Taxes Insurance Property management Total Segment Expenses Segment Gross Profit COMMERCIAL RESIDENTIAL TOTAL $ 18,994,010 $ 55,806,712 $ 74,800,722 8,043,382 1,012,658 1,083,759 161,941 347,748 $ 10,649,488 8,344,522 $ 16,398,046 10,533,905 6,461,423 670,022 5,436,675 39,500,071 16,306,641 24,441,428 11,546,563 7,545,182 831,963 5,784,423 $ 50,149,559 $ 24,651,163 $ $ Reconciliation to consolidated operations: 966,428 Interest discounts and fee revenue (789,973) Other interest expense (12,299,532) Depreciation (1,480,696) Advisory and trust fees (431,390) Operating expenses Amortization (428,188) Consolidated income before gain/loss on properties and minority interest $ 10,187,812 34 Investors Real Estate Trust and Subsidiaries APRIL 30, 2001 Segment Assets Property owned $ 230,058,846 $ 361,577,622 $ 591,636,468 Less accumulated depreciation (11,796,966) (32,296,179) (44,093,145) Total consolidated property owned $ 218,216,880 $ 329,281,443 $ 547,543,323 YEAR ENDING APRIL 30, 2000 Segment Revenue Rental revenue Segment Expenses COMMERCIAL RESIDENTIAL TOTAL $ 11,878,026 $ 42,379,855 $ 54,257,881 Mortgage interest 3,980,450 12,312,038 16,292,488 Utilities and maintenance Taxes Insurance Property management Loss on impairment of properties Total Segment Expenses Segment Gross Profit 452,229 481,191 52,288 132,435 1,319,316 6,417,909 5,460,117 $ $ $ $ 7,592,301 4,801,170 424,674 4,157,840 0 8,044,530 5,282,361 476,962 4,290,275 1,319,316 29,288,023 $ 35,705,932 13,091,832 $ 18,551,949 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. The following tables reconciles amounts reported in the consolidated financial statements for the years ended April 30, 2001, 2000, and 1999: 2001 2000 1999 NUMERATOR Net income applicable to shares $ 8,694,240 $ 8,807,845 $ 7,604,135 Numerator for basic earnings per share 8,694,240 8,807,845 7,604,135 Minority interest portion of operating partnership income 2,095,177 1,495,209 744,725 Reconciliation to consolidated operations: Interest discounts and fee revenue Other interest expense Depreciation Advisory and trust fees Operating expenses Amortization 1,187,312 (721,682) (8,460,112) (1,159,120) (633,692) (216,097) Consolidated income before gain/loss on properties and minority interest $ 8,548,558 APRIL 30, 2000 Segment Assets Property owned Numerator for diluted earnings per share DENOMINATOR Denominator for basic earnings per share $ 10,789,417 $ 10,303,054 $ 8,348,860 Weighted average shares 23,071,500 20,899,848 17,441,976 Effect of dilutive securities Convertible operating partnership units Denominator for diluted earnings per share Basic earnings per share 5,506,200 3,577,136 1,662,489 28,577,700 0.38 0.38 $ $ 24,476,984 0.42 0.42 19,104,465 0.44 0.44 $ $ $ $ $ 120,714,774 $ 329,205,116 $ 449,919,890 Diluted earnings per share Less accumulated depreciation (8,203,307) (25,029,645) (33,232,952) Total consolidated property owned $ 112,511,467 $ 304,175,471 $ 416,686,938 YEAR ENDING APRIL 30, 1999 Segment Revenue Rental revenue Segment Expenses Mortgage interest Utilities and maintenance Taxes Insurance Property management Total Segment Expenses Segment Gross Profit COMMERCIAL RESIDENTIAL TOTAL $ 5,775,161 $ 33,010,126 $ 38,785,287 2,417,316 113,374 192,930 30,067 60,612 8,782,600 6,243,109 3,832,629 354,136 11,199,916 6,356,483 4,025,559 384,203 3,227,655 3,288,267 $ $ 2,814,299 2,960,862 $ $ 22,440,129 $ 25,254,428 10,569,997 $ 13,530,859 Reconciliation to consolidated operations: Interest discounts and fee revenue Other interest expense Depreciation Advisory and trust fees Operating expenses Amortization 1,141,975 (902,065) (5,966,874) (927,063) (320,479) (154,677) Consolidated income before gain/loss on properties and minority interest $ 6,401,676 APRIL 30, 1999 Segment Assets Property owned $ 67,250,863 $ 228,574,976 $ 295,825,839 Less accumulated depreciation (7,109,615) (19,002,784) (26,112,399) Total consolidated property owned $ 60,141,248 $ 209,572,192 $ 269,713,440 NOTE 13 • RETIREMENT PLAN As part of the acquisition on July 1, 2000 of Odell-Wentz & Associates, LLC, the Trust 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. The Trust matches up to 3% of participating employees' wages. Pension expense of the Trust for the year ended April 30, 2001 was $45,301. NOTE 14 • COMMITMENTS AND CONTINGENCIES The Trust, as an owner of real estate, is subject to various environmental laws of Federal and local governments. Compliance by the Trust with existing laws has not had a material adverse effect on the Trust's financial condition and results of operations. However, the Trust cannot predict the impact of new or changed laws or regulations on its current properties or on properties that it may acquire in the future. 35 Investors Real Estate Trust and Subsidiaries 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 that 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 of those instruments. Marketable securities - The fair values of these instruments are estimated based on quoted market prices for these instruments. Notes payable - The carrying amount approximates fair value because of the short maturity of those 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 nature of which interest will be paid. The estimated fair values of the Company’s financial instruments are as follows: QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited) QUARTER ENDED 7-31-00 10-31-00 01-31-01 04-30-01 Revenues Income before gain on properties and minority interest Net gain on sale of properties Minority interest of unitholders in operating partnership Net Income Per share $17,431,644 $18,404,260 $19,004,737 $20,926,509 2,565,131 2,707,811 2,719,679 2,195,191 0 0 25,124 576,481 (425,667) 2,139,464 (538,618) 2,169,193 (426,316) 2,327,262 (704,576) 2,058,321 Income before gain/loss on properties and minority interest Net Income .11 .09 .12 .10 .12 .10 .09 .09 QUARTER ENDED 7-31-99 10-31-99 01-31-00 04-30-00 Revenues Income before gain(loss) on properties and minority $11,201,913 $12,900,697 $14,054,660 $17,287,923 interest 1,801,322 2,478,912 2,390,868 3,196,772 Net gain(loss) on sale of properties Loss on Impairment of Properties Minority interest of unitholders in operating partnership Net Income Per share Income before gain/loss on properties and minority interest Net Income 257,895 1,519,918 0 0 0 0 (23,317) (1,319,316) (235,935) 1,823,282 (579,625) 3,419,205 (369,028) 2,021,840 (310,621) 1,543,518 .10 .09 .12 .16 .11 .11 .14 .06 QUARTER ENDED 7-31-98 10-31-98 01-31-99 04-30-99 Revenues Income before gain on properties and minority interest Net gain on sale of properties Minority interest of unitholders in operating partnership Net Income Per share $ 9,102,179 $ 9,836,370 $10,236,797 $10,151,916 1,327,851 1,760,067 1,732,928 1,580,830 366,017 1,341,899 80,122 158,146 (133,863) 1,560,005 (287,579) 2,814,387 (158,820) 1,654,228 (164,463) 1,575,515 Income before gain on properties and minority interest Net Income .07 .09 .09 .17 .09 .09 .08 .09 2001 2000 Carrying Fair Carrying Fair Amount Value Amount Value 6,356,063 6,356,063 FINANCIAL ASSETS Mortgage loan receivable $ 1,037,095 $ 1,037,095 $ 1,650,284 $ 1,650,284 3,449,264 Cash Marketable securities held-to-maturity Marketable securities available-for-sale FINANCIAL LIABILITIES Notes payable Mortgages payable Investment certificates $ 368,956,930 356,434,028 265,057,767 0 $ 6,452,420 $ 6,452,420 250,897,221 2,351,248 2,354,018 2,476,243 3,449,264 2,601,420 572,811 660,865 660,865 572,811 0 $ issued Accrued interest payable 11,876,417 2,369,454 11,804,535 2,369,454 10,087,256 1,679,000 10,810,160 1,679,000 The following 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. 36 . . . an expression of APPRECIATION to our Founder C O N T E N T S FISCAL2001 FINANCIALHIGHLIGHTS 1 THE COMPANY 2 PRESIDENT’S REPORT 3 6 INVESTMENTPORTFOLIO 13 MANAGEMENT’S DISCUSSION 23 23 24 25 29 & ANALYSIS DIVIDEND HISTORY PERFORMANCE HISTORY INDEPENDENTAUDITOR’S REPORT CONSOLIDATED FINANCIALSTATEMENTS NOTES TO CONSOLIDATED FINANCIALSTATEMENTS 36 QUARTERLYRESULTS OF CONSOLIDATED OPERATIONS Building A Foundation . . . IRET’s mission statement reflects man- agement’s commitment to its shareholders and best expresses Roger’s vision for IRET. The following paragraph from that statement epitomizes Roger’s dedication to IRET. “Creating value for our shareholders requires a Roger R. Odell commitment to excellence in every aspect of our operations - from choosing the real estate investments to purchase and managing those investments in a professional manner, to communicating with and servicing each shareholder account.” Roger wholeheartedly believed in these words and, through his guidance, IRET flourished to where it is today. Few in the United States rival Roger’s foresight and intelligence in the real estate business. Roger helped build IRET from the ground up and he has laid a foundation which will allow continued success for many years to come. While Roger has retired, we at IRET take solace in knowing that his office is only a block away and his phone line and door are always open. As for the past and to the present, we want to say “Thank you, Roger! ” Shareholder Information Trustees Executive Officers Investors Real Estate Trust and Subsidiaries Thomas A. Wentz, Sr. President & CEO Timothy P. Mihalick Senior Vice President & COO Thomas A. Wentz, Jr. Vice President & General Counsel Diane K. Bryantt Secretary & CFO CORPORATE HEADQUARTERS Investors Real Estate Trust 12 South Main Street, Suite 100 PO Box 1988 Minot, North Dakota 58702-1988 Telephone: (701) 837-4738 Fax: (701) 838-7785 email: info@iret.com website: www.iret.com GENERAL COUNSEL Pringle & Herigstad, P.C. 2nd Floor, Bremer Bank Building Minot, North Dakota 58701 Telephone: (701) 852-0381 AUDITORS Brady Martz & Associates, P.C. Certified Public Accountants 24 West Central Minot, North Dakota 58701 Jeffrey L. Miller Chairman & Trustee C. Morris Anderson Vice Chairman & Trustee Daniel L. Feist Vice Chairman & Trustee John F. Decker Trustee Patrick G. Jones Trustee Stephen L. Stenehjem Trustee Timothy P. Mihalick Trustee Thomas A. Wentz, Jr. Trustee Steven B. Hoyt Trustee SEC FORM 10-K Copies of Investors Real Estate Trust’s Annual Report on Form 10-K filed with the Securities and Exchange Commission will be furnished without charge upon written request to Darla J. Strilcov at Investors Real Estate Trust. ANNUAL MEETING Investors Real Estate Trust will hold its 31st Annual Meeting of Shareholders in the Executive Room, International Inn, 1505 North Broadway, Minot, North Dakota, at 7:00 P.M. on Tuesday, September 25, 2001. STOCK TRADING INFORMATION Investors Real Estate Trust shares trade on the NASDAQ Small Cap Market under the symbol IRETS. DIVIDEND REINVESTMENT PLAN Investors Real Estate Trust offers to its shareholders the option to automatically reinvest their dividends through the Dividend Reinvestment Plan. For additional information, please contact Darla J. Strilcov, Shareholder Relations, at Investors Real Estate Trust. COMMON SHAREHOLDERS OR RECORD/SHARES OUTSTANDING As of July 20, 2001, Investors Real Estate Trust had approximately 5,614 shareholders of record and 24,261,256 shares outstanding. 

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