Investors Real Estate Trust
Annual Report 2002

Plain-text annual report

creating value for shareholders O U R nd Y E A R fiscal 2002 annual report Report of the Trustees to the Meeting of Shareholders September 24, 2002 C O N T E N T S 1 2 3 6 12 25 25 26 27 31 FISCAL 2002 FINANCIAL HIGHLIGHTS THE COMPANY PRESIDENT’S REPORT INVESTMENT PORTFOLIO MANAGEMENT’S DISCUSSION & ANALYSIS DISTRIBUTION HISTORY PERFORMANCE HISTORY INDEPENDENT AUDITOR’S REPORT CONSOLIDATED FINANCIAL STATEMENTS NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 40 QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS Thresher Square Lobby • Minneapolis, MN SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below for the fiscal years ended April 30, 2002, 2001 and 2000, has been derived from the our financial statements, which have been audited by Brady Martz & Associates, P.C., independent auditors, whose report thereon is included in this report. The consolidated financial data for the years ended April 31, 1999 and 1998 have been derived from audited financial statements not included in this report. These historical results are not necessarily indicative of the results to be expected in the future. The following table is qualified by reference to and should be read in conjunction with the consolidated financial statements, related notes thereto and other financial data included elsewhere in this report. YEARS ENDED APRIL 30, Consolidated Income Statement 2002 2001 2000 1999 1998 Data Revenue $ 93,016,069 $ 75,767,150 $ 55,445,193 $ 39,927,262 $ 32,407,545 Income before Gain/Loss on Properties and Minority Interest $ 13,865,934 $ 10,187,812 $ 8,548,558 $ 6,401,676 $ 4,691,198 Gain on Repossession/Sale of Properties 546,927 601,605 1,754,496 1,947,184 465,499 Minority Interest of Portion of Operating Partnership Income (3,812,732) (2,095,177) (1,495,209) (744,725) (141,788) Net Income $ 10,600,129 $ 8,694,240 $ 8,807,845 $ 7,604,135 Funds From Operations* $ 29,143,549 $ 22,440,463 $ 18,327,986 $ 12,368,550 $ $ 5,014,909 9,483,105 Consolidated Balance Sheet Data Total Real Estate Investments $ 685,346,681 $ 548,580,418 $ 418,216,516 $ 280,311,442 $ 213,211,369 Total Assets Shareholders’ Equity PER SHARE Net Income Distributions Funds From Operations* $ 730,209,018 $ 570,322,124 $ 432,978,299 $ 291,493,311 $ 224,718,514 $ 145,578,131 $ 118,945,160 $ 109,920,591 $ 85,783,294 $ 68,152,626 $ $ $ .42 .59 .86 $ $ $ .38 .55 .79 $ $ $ .42 .51 .75 $ $ $ .44 .47 .65 $ $ $ .32 .42 .60 * Industry analysts generally consider funds from operations to be an appropriate measure of the performance of an equity REIT. Funds from operations is defined as net income increased by non-cash deductions of real estate asset depreciation, and amortization, and reduced by capital gain income and other extraordinary income items. REVENUE in millions of dollars FUNDS FROM OPERATIONS in millions of dollars DISTRIBUTIONS per share TOTAL ASSETS in millions of dollars 93.02 75.77 55.45 39.93 32.41 12.37 9.48 29.14 .59 .55 .51 .47 .42 22.44 18.33 730.21 570.32 432.98 291.49 224.72 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 98 99 00 01 02 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 IRET except when accompanied by a prospectus. 1 INVESTMENT STRATEGY IRET's investment strategy is to own real estate primarily in Minnesota, North Dakota, South Dakota, Montana, and Nebraska and to diversify our investments among multi-family residential and a variety of commercial properties. 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 distribution equal to or better than a bank one-year certificate of deposit; Increase its distributions to shareholders at a rate in excess of the inflation rate; Increase the share price by a percentage equal to the distribution rate for a total return to the shareholder at least twice the return of a one-year certificate of deposit. CASH DISTRIBUTION POLICY It is our policy to distribute approximately 70% of our funds from operations (net income reduced by capital gain income and increased by real estate depreciation). We invest the remaining 30% of FFO to make capital improvements to existing properties and also to acquire more properties. By reinvesting 30% of FFO, we expect income-producing capability of our portfolio. to enhance the THE COMPANY Founded 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 diver- sified portfolio of income-producing real estate. communities As of April 30, 2002, IRET owned 66 apartment containing 8,296 apartment units and 67 commercial properties with 3,796,480 square feet of rentable space located in North Dakota and twelve other states. is IRET structured as an Umbrella Investment Trust Partnership Real Estate (UPREIT) and conducts its business 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 real estate to the operating partnership in exchange for a limited partnership interest generally without the recognition of gain. EXECUTIVE OFFICERS THOMAS A. WENTZ, SR. PRESIDENT & CEO THOMAS A. WENTZ, JR. V I C E P R E S I D E N T & G E N E R A L C O U N S E L TIMOTHY P. MIHALICK S E N I O R V I C E P R E S I D E N T & COO DIANE K. BRYANTT S E C R E TA RY & C H I E F F I N A N C I A L O F F I C E R 2 PRESIDENT’S REPORT TO OUR FELLOW SHAREHOLDERS April 30, 2002, marked the completion of IRET's 32nd year of operations and we are pleased to report financial results that were consistent with our past history and our goals for this year. FINANCIAL RESULTS For IRET's 32nd year which ended on April 30, 2002, revenues, net income, funds from operations and cash distributions to shareholders increased in line with our expectations. Revenues of the operating partnership for fiscal 2002 increased to $93,016,069, compared to the year earlier figure of $75,767,150, an increase of 22.8%. Net income, determined under generally accepted accounting principles, increased to $10,600,129 from $8,694,240 an increase of 21.9%. On a per share basis, net income rose to $.42 from $.38, an increase of 10.5%. for fiscal Funds from operations (net income reduced by capital gain income and increased by real estate depreciation) for the operating partnership 2002 were $29,143,549, compared to $22,440,463 in the prior year, an increase of 29.9%. On a per share basis, funds from operations (FFO) reached 86.27¢ per share compared to 78.52¢ per share in the prior year, an increase of 9.9%. Cash distributions to IRET shareholders and the holders of operating partnership units increased to 59.45¢ per share for fiscal 2002, compared to 55¢ paid in the prior fiscal year, an increase of 8%. The cash distribution paid on July 1, 2002, was again increased to 15.4¢ per share and unit compared to the 15.2¢ paid on April 1, 2002. STRAIGHT-LINE RENTS Dakota Hill at Valley Ranch • Irving, TX Beginning with fiscal year 2000, an accounting pronouncement requires us to record as revenue “straight-line rents” on commercial leases having periodic rent increases. Thus, we are required to record rent income that will not actually be collected until later years. The total “straight-line rents” included in the above revenue, net income, and FFO figures are $1,311,105 for fiscal 2002 and $1,214,379 for fiscal 2001. PORTFOLIO EXPANSION IRET's operating partnership invested $143,280,342 during fiscal 2002 to complete construction of one apartment community and acquire four apartment communities containing 517 apartment units and 10 commercial buildings totaling 1,276,603 square feet of net rentable space. In addition, the operating partnership invested $8,708,331 to make capital improvements to existing properties. Two apartment complexes consisting of 48 apartment units and three commercial properties totaling 13,574 square feet were disposed of during fiscal 2002. The operating partnership ended the year owning 66 apartment communities with 8,296 apartment units and 67 commercial properties totaling 3,796,480 rentable square feet. 3 PRESIDENT’S REPORT CHANGE IN PORTFOLIO MIX - MORE COMMERCIAL, LESS APARTMENTS IRET has historically sought to weight its real estate portfolio toward apartments and we expected that apartments would make up 65% to 75% of our holdings. However, during the last three years, we have chosen to direct more of our investment dollars to commercial properties because we thought that course offered the best value for our shareholders. For example, of the $143,280,342 invested to acquire real estate properties during fiscal 2002, only $23,950,924 (17%) went to acquire apartment communities. While we have actively sought to direct more of our equity capital to apartments, we have been unable to locate very many apartment properties that meet our investment criteria. We will continue to search diligently for apartment investments, but at the present time we find apartments to be priced at a higher level then we deem justified and will continue to choose the most attractive investment, regardless of the type. INCREASE IN EQUITY CAPITAL IRET successfully completed two public offerings of its shares of beneficial interest during fiscal 2002 and the first month of its current year. The proceeds from these public offering of shares, together with proceeds received from the Distribution Reinvestment Plan resulted in shareholder equity increasing to $145,578,131 at year-end, compared to the year earlier figure of $118,945,160, an increase of $26,632,971 (22.4%). In addition, the minority interest in the operating partnership increased to $76,460,046, compared to the year earlier figure of $59,003,194, an increase of $17,456,852, for a total increase in equity capital available to the operating partnership of $44,089,824. 32 YEARS OF INCREASED CASH DISTRIBUTIONS TO SHAREHOLDERS IRET again increased the cash distribution paid on its shares of beneficial interest and operating partnership units during each quarter of fiscal year 2002. For the fiscal year, distributions increased to 59.45¢ per share, compared to 55¢ per share paid in the prior fiscal year, an increase of 8%. IRET made its first cash distribution to shareholders on June 30, 1971, and has paid a cash distribution during every quarter of its existence and has increased its annual distribution every year since that time. Since 1988, IRET has also increased its distribution every quarter. On July 1, 2002, the cash distribution was increased to 15.4¢ per share and unit and was the 125th consecutive quarterly cash distribution paid by IRET. Mendota Northland Center • Mendota Heights, MN 4 PRESIDENT’S REPORT INCREASED SHARE PRICE The last trade of IRET shares on the NASDAQ National Market on April 30, 2002, was at a price of $10.03 per share. The last trade on April 30, 2001, was at a price of $8.77 resulting in an increase of 14.4% during the fiscal year. This was on top of a similar increase during fiscal year 2001 when the price increased to $8.77 from the year earlier figure of 7.875¢ per share for an increase of 11.4%. These increases were substantially in excess of our goal of increasing our share price an average of 6% per year which, together with a cash distribution to shareholders of 6% per year, will produce a total annual return to our shareholders of 12% per annum. IRET has met this goal on average over its 32-year history. While it is gratifying to see the sharp increase in our share price, we must realize that a very important reason for this increase has been the decrease in the attractiveness of competing investments. Because of the decline in interest income available on bank deposits and bonds and the disappointment experienced by many investors in common stocks, it is our opinion that there has been a willingness to pay a higher price to purchase IRET shares because of IRET’s past performance. In the near future, we do not expect a continuation of the recent double-digit percentage increases in the price of IRET shares. When interest rates paid on bank deposits and government and corporate bonds return to higher levels and common stocks regain their attractiveness to investors, some of the money that has flowed into real estate, including IRET shares, will be re-deployed into these competing investments. We will do our best to continue to deliver to our shareholders the same consistent financial results they have enjoyed over the past 32 years. IRET ON THE NASDAQ NATIONAL MARKET As of April 9, 2002, IRET's application to have its shares of beneficial interest listed and traded on the National NASDAQ Market became effective. INCREASE IN INSURANCE COSTS IRET's portfolio-wide general liability and property insurance policies expired on April 30, 2002, and were renewed at similar coverage levels. IRET's new policy excludes coverage for terrorist attacks. We estimate that our property and causality insurance premiums will be approximately $500,000 higher than during the prior fiscal year (approximately 17% of the insurance premiums paid by IRET is billed back to commercial tenants). Of course, we are insuring approximately $150,000,000 of additional properties so a portion of this premium increase is due to the additional properties added to our portfolio, but the remainder is a result of the insurance industry's implementation of premium increases due to the September 11, 2001, terrorist attacks and other stress on the insurance industry. THE FUTURE We will continue to devote our efforts to build and expand upon IRET's 32-year history of creating value for our shareholders. We have an attractive portfolio of real estate assets that we feel will continue to deliver consistent financial results. We have funds on hand to acquire additional real estate properties and will do so by using the same criteria to evaluate new investments that we have used throughout the past 32 years. Sincerely, Thomas A. Wentz Sr. President & CEO 5 INVESTMENT PORTFOLIO WASHINGTON 304 IDAHO 69,599 60 MONTANA 67,548 770 NORTH DAKOTA 675,455 2,995 MINNESOTA 2,721,207 1,309 SOUTH DAKOTA 87,615 607 NEBRASKA 129,568 498 IOWA 132 MICHIGAN 16,080 COLORADO 597 KANSAS 520 Apartment Units Commercial Property Square Footage TEXAS 504 GEORGIA 29,408 PROPERTY INVESTMENTS percentage by state REAL ESTATE PORTFOLIO MIX 53% Apartment Units 47% Commercial Real Estate 43.7% Minnesota 21.9% North Dakota 5.3% Colorado 5.8% Montana 5.1% Texas 4.8% Nebraska 4.7% South Dakota 3.7% Kansas 2.4% Washington 1.2% Idaho .6% Iowa .5% Georgia .3% Michigan P R O P E R T Y M A N AG E M E N T D O N A L D V. P E T E R S O N AVP, A S S E T M A N AG E M E N T E R I C M. S C H A E F F E R AVP, A S S E T M A N AG E M E N T S H E I L A R. E VA N O F F P R O P E RT Y M A N AG E M E N T AC C O U N T I N G M I C H A E L T. M U E L L E R A S S I S TA N T F I N A N C I A L O F F I C E R DA N I E L J. L E I D H O LT AVP, F I N A N C I A L R E P O RT I N G 6 ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● ● INVESTMENT PORTFOLIO APARTMENT COMMUNITIES BY IRET STATE LOCATION UNITS INVESTMENT FISCAL 2002 OCCUPANCY COLORADO MiraMont Neighborhood Pine Cone Colorado Total IDAHO Clearwater Idaho Total IOWA Ridge Oaks Iowa Total KANSAS Crown Colony Sherwood Kansas Total MINNESOTA Eastgate Heritage Manor Lancaster Place Park Meadows Sunset Trail I Sunset Trail II & III West Stonehill Woodridge Minnesota Total MONTANA Castle Rock Country Meadows I Country Meadows II Olympic Village Pinehurst Rimrock West Rocky Meadows Montana Total NEBRASKA Ft. Collins Colorado Springs Ft. Collins Boise Sioux City Topeka Topeka Moorhead Rochester St. Cloud St. Cloud Rochester Rochester St. Cloud Rochester Billings Billings Billings Billings Billings Billings Billings Applewood on the Green Thomasbrook Omaha Lincoln Nebraska Total NORTH DAKOTA 408 South Main Beulah Condominiums Bison Properties Candlelight Century Century Chateau Colton Heights Minot Beulah Carrington & Cooperstown Fargo Dickinson Williston Minot Minot n/a - non-stabilized property acquired in fiscal 2002. 210 192 195 597 60 60 132 132 220 300 520 116 182 84 360 73 73 313 108 1,309 165 67 67 274 21 78 98 770 234 264 498 -- 26 35 44 120 192 64 18 $ $ $ $ $ $ $ $ $ $ $ $ $ $ $ 14,458,518 11,556,236 13,322,465 39,337,219 3,873,512 3,873,512 4,595,627 4,595,627 10,881,547 16,268,055 27,149,602 2,521,483 7,897,920 3,260,739 12,010,183 7,772,834 7,187,759 11,970,748 6,849,155 59,470,821 5,828,773 4,371,416 4,364,972 11,983,207 751,310 3,987,318 6,772,511 38,059,507 10,810,426 10,155,696 20,966,122 46,907 488,324 624,590 1,031,859 2,448,472 4,230,209 2,522,589 971,797 94.90% 94.35% 92.14% 93.17% 90.75% 90.75% 92.70% 92.70% 93.31% 93.64% 93.50% 95.99% 93.51% 92.74% 96.47% 87.24% 73.01% 98.47% 97.56% 95.60% 92.38% 96.42% 93.65% 96.34% n/a 99.13% 97.40% 95.57% n/a 95.91% 95.91% -- 74.64% 79.74% 96.08% 96.28% 86.39% 83.84% 96.03% 7 INVESTMENT PORTFOLIO APARTMENT COMMUNITIES BY IRET STATE LOCATION UNITS INVESTMENT FISCAL 2002 OCCUPANCY NORTH DAKOTA - CONTINUED Cottonwood Lake Crestview Dakota Arms Eastwood Forest Park Estates Jenner Properties Kirkwood Manor Legacy I & II Legacy IV Lonetree Manor Magic City North Pointe Oak Manor Park East Parkway Apartments Pebble Springs Prairiewood Meadows South Pointe Southview Southwinds Sweetwater Properties The Meadows I & II The Meadows III Valley Park Manor Westwood Park North Dakota Total SOUTH DAKOTA Canyon Lake Pointe West Oakmont Oxbow Prairie Winds Rosewood/Oakwood South Dakota Total TEXAS Bismarck Bismarck Minot Dickinson Grand Forks Grand Forks Bismarck Grand Forks Grand Forks Harvey Minot Bismarck Dickinson Fargo Beulah Bismarck Fargo Minot Minot Grand Forks Devils Lake & Grafton Jamestown Jamestown Grand Forks Bismarck Rapid City Rapid City Sioux Falls Sioux Falls Sioux Falls Sioux Falls Dakota Hill at Valley Ranch Irving Texas Total WASHINGTON Ivy Club Van Mall Woods Washington Total Vancouver Vancouver 201 152 18 37 270 107 108 183 67 12 220 49 27 122 36 16 85 195 24 164 90 54 27 168 64 2,995 109 90 80 120 48 160 607 504 504 204 100 304 $ 13,851,674 5,075,589 633,823 539,559 7,640,288 2,266,932 3,790,492 11,095,774 7,084,888 237,579 5,040,460 2,449,895 404,129 5,196,596 181,421 796,799 2,896,253 10,381,859 733,498 6,088,737 1,705,184 3,759,313 2,198,016 5,171,931 2,253,752 $ 113,839,188 $ $ $ $ $ $ 4,280,120 4,314,422 5,257,468 5,063,044 2,027,036 5,794,377 26,736,467 37,814,473 37,814,473 11,896,204 6,191,712 18,087,916 92.37% 99.04% 99.21% 88.14% 96.51% 95.40% 94.24% 98.00% 98.27% 68.91% 96.86% 98.96% 96.58% 99.19% 82.48% 99.08% 95.37% 95.03% 95.18% 97.04% 81.92% 98.11% 89.98% 95.53% 99.79% 95.27% n/a 93.10% n/a 95.39% 93.96% 93.32% 94.00% 91.30% 91.30% 90.14% 96.81% 92.40% TOTAL APARTMENT COMMUNITIES 8,296 $ 389,930,454 94.40% n/a - non-stabilized property acquired in fiscal 2002. 8 INVESTMENT PORTFOLIO COMMERCIAL PROPERTIES BY IRET STATE GEORGIA LOCATION SQUARE FOOTAGE INVESTMENT FISCAL 2002 OCCUPANCY Wedgewood Retirement Center Georgia Total Lithia Springs IDAHO America's Best Warehouse Idaho Total Boise MICHIGAN Comp USA Michigan Total MINNESOTA 2030 Cliff Road Bloomington Business Center Burnsville Bluffs Cold Spring Center Cottage Grove Center Dewey Hill Business Center East Grand Station Edgewood Vista I & II Edgewood Vista I & II Edgewood Vista Flying Cloud Drive HealthEast I & II Hospitality Associates Interlachen Corporate Center Lexington Commerce Lindberg Building Maplewood Square Mendota Center I Mendota Center II Mendota Center III Mendota Center IV Mendota Northland Center Morgan Chemical Nicollet VII Northgate II Pillsbury Business Center Pioneer Seed Company Plymouth Tech IV & V Southdale Medical Center Southeast Tech Center Sterner Lighting Stone Container Stone Container Thresher Square East Thresher Square` West ViroMed Wayroad Wirth Corporate Center Minnesota Total Kentwood Eagan Bloomington Burnsville St. Cloud Cottage Grove Edina East Grand Forks Duluth East Grand Forks Virginia Eden Prairie Maplewood & Woodbury Minnetonka Edina Eagan Eden Prairie Rochester Mendota Heights Mendota Heights Mendota Heights Mendota Heights Mendota Heights New Brighton Burnsville Maple Grove Bloomington Moorhead Plymouth Edina Eagan Winsted Roseville Waconia Minneapolis Minneapolis Eden Prairie Minnetonka Golden Valley n/a - non-stabilized property acquired in fiscal 2002. 29,408 29,408 69,599 69,599 16,080 16,080 13,374 121,064 45,158 77,533 15,217 73,338 16,103 74,984 16,392 70,313 62,585 114,316 4,000 105,084 89,840 41,880 118,398 59,852 88,398 60,776 72,231 146,808 49,620 125,385 25,999 42,220 13,600 126,809 195,983 58,300 38,000 229,072 29,440 57,891 54,945 48,700 62,383 75,216 2,721,207 $ $ $ $ $ $ 3,971,878 3,971,878 4,788,294 4,788,294 2,121,474 2,121,474 $ 982,763 7,445,108 2,453,911 8,397,336 1,116,089 4,869,054 1,392,251 7,183,519 1,430,136 6,958,383 5,160,600 21,600,999 405,548 16,691,307 5,486,349 1,608,535 11,906,217 10,196,443 8,014,563 6,853,818 8,604,537 17,610,899 2,428,810 7,360,670 2,357,893 1,842,601 653,876 14,347,790 32,588,538 6,115,854 1,000,789 8,265,239 1,666,518 6,560,775 4,559,183 4,863,634 5,394,985 8,629,281 $ 265,004,801 100.00% 100.00% 0.00% 0.00% 100.00% 100.00% 100.00% n/a 100.00% 100.00% n/a 100.00% 100.00% 100.00% 100.00% n/a 93.97% 100.00% 100.00% n/a 76.66% 100.00% 94.08% n/a n/a n/a n/a n/a n/a 100.00% 100.00% 67.09% 0.00% 100.00% 100.00% 100.00% 100.00% n/a 100.00% n/a n/a 100.00% n/a n/a 97.44% 9 LOCATION SQ. FT. INVESTMENT FISCAL 2002 OCCUPANCY INVESTMENT PORTFOLIO COMMERCIAL PROPERTIES BY IRET PROPERTY MONTANA Creekside Office Park Edgewood Vista Edgewood Vista Edgewood Vista Edgewood Vista Montana Total NEBRASKA Ameritrade Headquarters Barnes & Noble Edgewood Vista Edgewood Vista Edgewood Vista Edgewood Vista Edgewood Vista Nebraska Total NORTH DAKOTA 1st Avenue Building 12 South Main 17 South Main 401 South Main Arrowhead Shopping Center Barnes & Noble Carmike Theatre Edgewood Vista Great Plains Software MedPark Mall Minot Plaza Petco Stone Container North Dakota Total SOUTH DAKOTA Conseco Edgewood Vista South Dakota Total Billings Belgrade Billings Kalispell Missoula Omaha Omaha Columbus Fremont Grand Island Hastings Omaha Minot Minot Minot Minot Minot Fargo Grand Forks Minot Fargo Grand Forks Minot Fargo Fargo Rapid City Sioux Falls 34,603 5,100 11,800 5,895 10,150 67,548 73,742 27,500 5,100 6,042 5,100 6,042 6,042 129,568 15,357 10,126 3,250 8,597 76,424 30,000 28,528 97,821 122,040 59,177 11,020 18,040 195,075 675,455 75,815 11,800 87,615 $ $ $ $ $ $ $ $ 2,045,789 453,494 980,218 588,113 962,429 5,030,043 8,348,798 3,699,197 455,626 552,172 455,626 571,538 641,252 14,724,209 537,189 411,487 90,000 617,282 3,005,419 3,274,996 2,545,737 6,270,707 15,375,154 5,696,588 519,615 1,278,934 7,105,566 46,728,674 7,044,870 974,739 8,019,609 TOTAL COMMERCIAL PROPERTY 3,796,480 $ 350,388,982 n/a - non-stabilized property acquired in fiscal 2002. MORTGAGE LOANS RECEIVABLE MORTGAGES Other Mortgages $501,000 and higher $100,000 to $500,000 $50,000 to $99,999 $20,000 to $49,999 Less than $20,000 Total 10 04/30/02 BALANCE $ $ 3,200,000 713,212 0 39,550 0 3,952,762 100.00% 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% 52.70% 93.50% 100.00% 83.04% 95.94% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 100.00% 98.32% 100.00% 100.00% 100.00% 96.84% RATE 10% 8-11% n/a 8% n/a INVESTMENT PORTFOLIO Sunset Trail Apartment Unit • Rochester, MN SUMMARY OF INVESTMENT PORTFOLIO REAL ESTATE INVESTMENTS Property owned Less accumulated depreciation Mortgage loans receivable Total real estate investments OTHER ASSETS Cash Marketable securities - available-for-sale Rent receivable Prepaid and other assets Notes receivable Tax, insurance and other escrow Real estate deposits Furniture and fixtures Goodwill Deferred charges and leasing costs Total Assets $ $ $ $ 740,319,436 (58,925,517) 681,393,919 3,952,762 685,346,681 12,333,426 10,500,000 3,233,765 3,513,791 3,500,000 6,210,450 422,045 209,121 1,440,817 3,498,922 730,209,018 ACCOUNTING S TAC Y A. H U M P H R E Y S AVP, F I N A N C I A L R E P O RT I N G N A N C Y C. S C O F I E L D AVP, F I N A N C I A L R E P O RT I N G K I M A. O H L H AU S E R S H A R E H O L D E R R E L AT I O N S 11 MANAGEMENT’S DISCUSSION & ANALYSIS MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS GENERAL 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 restructured 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 IRET and had furnished office space, employees, and equipment to conduct all of the day-to-day operations of IRET. 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 eco- nomic 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. Thresher Square • Minneapolis, MN RESULTS FROM OPERATIONS FOR THE FISCAL YEARS ENDED APRIL 30, 2002, 2001, AND 2000 IRET operates on a fiscal year ending on April 30. The following discussion and analysis is for the fiscal years ended April 2002, 2001, and 2000. REVENUES Total revenues of the operating partnership for fiscal 2002 were $93,016,069, compared to $75,767,150 in fiscal 2001 and $55,445,193 in fiscal 2000. The increase in revenues received during fiscal 2002 in excess of the prior year revenues was $17,248,919. This increase resulted from: Rent from 28 properties acquired in fiscal 2001 in excess of that received in 2001 Rent from 14 properties acquired in fiscal 2002 Increase in rental income on existing properties An increase in interest income An increase in straight-line rents An increase in ancillary income A decrease in rent - properties sold Total 12 $ 11,236,492 4,737,866 1,086,695 309,122 96,726 1,917 (219,899) $ 17,248,919 MANAGEMENT’S DISCUSSION & ANALYSIS The increase in revenues received during fiscal 2001 in excess of that received in fiscal 2000 was $20,321,957. This increase resulted from: Rent from 27 properties acquired in fiscal 2000 in excess of that received in 2000 Rent from 28 properties acquired/completed in fiscal 2001 An increase in ancillary income An increase in rents An increase in rental income on existing properties An increase in interest income A decrease in Boise Warehouse rent (bankruptcy of tenant) A decrease in rent - properties sold during 2001 Total $ 12,888,919 6,890,585 506,308 383,015 93,420 (371,585) (36,301) (32,404) $ 20,321,957 As shown by the above analysis, the fiscal 2002 and 2001 increases in revenues resulted primarily from the addition of new real estate properties to the operating partnership's portfolio. Rents received on properties owned at the beginning of fiscal 2001 increased by $11,236,492 in fiscal 2002 and $12,888,919 in fiscal 2001. Thus, new properties generated most of the new revenues during the past two years. STRAIGHT-LINE RENTS Beginning with our fiscal year 2000, an accounting rule required us to record as revenue "straight-line rents" on our commercial property leases that contain future rental increases. This rule requires us to calculate the total rents that the tenant has contracted to pay us for the entire term of the lease and to divide that total by the lease and to record as revenue each month the resulting average number of months of the monthly rent. The result is that, in the beginning years of a lease, we must record as revenue an amount that exceeds the actual cash rent we have collected. In the later years of such leases, we, of course, will record as revenue an amount less than the actual cash then being received. The amount of "straight-line rents" (that is, the amount that the recorded rent is greater than the actual cash rent we have collected) we have recorded in the past three years is: Straight-line Rents 2002 1,311,105 $ 2001 1,214,379 $ 2000 831,364 $ Our revenues, net income and funds from operations shown in this report are increased by the above described "straight-line rents." CAPITAL GAIN INCOME The operating partnership realized capital gain income for fiscal 2002 of $546,927. This compares to $601,605 of capital gain income recognized in fiscal 2001 and the $1,754,496 recognized in fiscal 2000. A list of the properties sold during each of these years showing sales price, depreciated cost plus sales costs and net gain (loss) is included in a later section of this discussion. EXPENSES AND NET INCOME The operating partnership's operating income for fiscal year 2002 increased to $13,865,934 from $10,187,812 earned in fiscal 2001 and $8,548,558 earned in fiscal 2000. IRET's net income for generally accepted accounting purposes for fiscal 2002 was $10,600,129, compared to $8,694,240 in fiscal 2001 and $8,807,845 in fiscal 2000. On a per share basis, net income was $.42 per share in fiscal 2002 compared to $.38 in fiscal 2001 and $.42 in fiscal 2000. 13 MANAGEMENT’S DISCUSSION & ANALYSIS These changes in operating income and net income result from the changes in revenues and expenses detailed below: For fiscal 2002, an increase in net income of $1,905,889, resulting from: An increase in net rental income (rents, less utilities, maintenance, taxes, insurance and management) A increase in interest income An increase in ancillary income An increase in interest expense An increase in depreciation expense An increase in minority interest of operating partnership income An increase in operating expenses, administrative, advisory & trustee services An increase in minority interest of other partnership An increase in amortization expense A decrease in gain on sale of investments Total For fiscal 2001, a decrease in net income of $113,605, resulting from: An increase in net rental income A decrease in loss on impairment An increase in ancillary income An increase in interest expense An increase in depreciation expense A decrease in gain from sale of investments An increase in minority interest of operating partnership A decrease in interest income An increase in amortization expense An increase in operating expenses, administrative, advisory & trustee services Total $ 12,413,637 309,122 1,917 (5,373,448) (3,215,636) (1,518,991) (336,458) (198,564) (121,012) (54,678) $ 1,905,889 $ 12,572,228 1,319,316 506,308 (8,217,228) (3,839,420) (1,152,891) (598,968) (371,585) (212,091) (119,274) (113,605) $ 14 Wirth Corporate Center • Golden Valley, MN MANAGEMENT’S DISCUSSION & ANALYSIS Mendota Heights Office Complex II • Mendota Heights, MN 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 tele-communication services over a 12-year period. Of this payment, $110,979 was recognized as income by IRET during fiscal 2001 and $65,959 in fiscal 2002. The balance of $692,567 will be recognized ratably over the remaining portion of the contract period and there is a possibility of a refund of these monies if IRET should violate the contractual terms of the agreement. COMPARISON OF RESULTS FROM COMMERCIAL AND RESIDENTIAL PROPERTIES The following is an analysis of the contribution by each of the two categories of real estate owned by IRET - residential and commercial: FISCAL YEARS ENDED 4/30 2002 2001 2000 Real Estate Investments (net of accumulated depreciation) Commercial Residential Total $ 333,092,927 348,300,992 $ 681,393,919 49% $ 218,261,880 329,281,443 51% 100% $ 547,543,323 40% $ 112,511,467 304,175,471 60% 100% $ 416,686,938 27% 73% 100% Gross Real Estate Rental Revenues Commercial Residential Total $ 32,685,652 59,052,950 $ 91,738,602 37% $ 18,994,010 55,806,712 63% 100% $ 74,800,722 25% $ 11,878,026 42,379,855 75% 100% $ 54,257,881 22% 78% 100% Expenses (before depreciation - see Note 11 to Financial Statement for detail) Commercial Residential Total $ 18,456,441 40,939,389 59,395,830 $ 31% $ 10,649,488 39,500,071 69% 100% $ 50,149,559 21% $ 6,417,909 29,288,023 79% 100% $ 35,705,932 18% 82% 100% Segment Gross Profit (before depreciation) Commercial Residential Total $ 14,229,211 18,113,561 $ 32,342,772 44% $ 8,344,522 16,306,641 56% 100% $ 24,651,163 34% $ 66% 5,460,117 13,091,832 100% $ 18,551,949 29% 71% 100% 15 MANAGEMENT’S DISCUSSION & ANALYSIS COMMERCIAL PROPERTIES - ANALYSIS OF LEASE EXPIRATIONS AND CREDIT EXPOSURE The following table shows the annual lease expiration percentages for the commercial properties owned by IRET as of April 30, 2002, for fiscal years 2003 through 2012 and the leases that will expire during fiscal year 2013 and beyond. YEAR OF LEASE EXPIRATION 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 and beyond Total SQUARE FOOTAGE OF EXPIRING LEASES 377,198 215,934 158,690 265,262 99,393 244,985 196,973 171,752 98,325 371,182 996,481 3,196,175 PERCENTAGE OF TOTAL LEASED SQUARE FOOTAGE 11.80% 6.76% 4.96% 8.30% 3.11% 7.66% 6.16% 5.37% 3.08% 11.61% 31.19% 100.00% ANNUALIZED BASE RENT OF EXPIRING LEASES AT EXPIRATION $ 1,317,369 1,420,605 1,390,429 2,400,751 1,132,872 1,849,752 2,511,946 1,470,944 1,056,612 2,419,949 11,984,253 $ 28,955,481 PERCENTAGE OF TOTAL ANNUALIZED BASE RENT 4.55% 4.91% 4.80% 8.29% 3.91% 6.39% 8.68% 5.08% 3.65% 8.36% 41.38% 100.00% The following table shows the percentage of commercial leases by size of leased space in 10,000 square foot increments as of April 30, 2002: SQUARE FEET UNDER LEASE 10,000 or Less 10,001 - 20,000 20,001 - 30,000 30,001 - 40,000 40,001 - 50,000 50,001 + Total PERCENTAGE OF AGGREGATE PORTFOLIO LEASED SQUARE FEET 16.16% 13.76% 11.82% 7.50% 5.79% 44.97% 100.00% ANNUALIZED BASE RENT $ 6,746,536 3,896,629 3,422,639 2,161,604 1,608,402 11,119,671 $ 28,955,481 PERCENTAGE OF AGGREGATE PORTFOLIO ANNUALIZED BASE RENT 23.30% 13.46% 11.82% 7.47% 5.55% 38.40% 100.00% The following table shows the lessees of commercial property that account for five percent or more of the total scheduled rent on May 1, 2002, from all commercial properties owned by IRET: LESSEE MONTHLY RENT % OF TOTAL Step II, Inc. DBA Edgewood Vista HealthEast Medical Great Plains Software, a subsidiary of Microsoft, Inc. All Others Total Scheduled Rent on May 1, 2002 $ 258,668 159,720 156,250 2,451,626 $ 3,026,264 9% 5% 5% 81% 100% 16 MANAGEMENT’S DISCUSSION & ANALYSIS 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 2002 and 2001 for residential and commercial were: SAME-STORE RESIDENTIAL 2002 2001 % CHANGE Scheduled Rent Total Receipts Utilities & Maintenance Management YTD Taxes & Insurance Mortgage Interest Total Expenses Net Operating Income SAME-STORE COMMERCIAL Scheduled Rent Total Receipts Utilities & Maintenance Management YTD Taxes & Insurance Mortgage Interest Total Expenses Net Operating Income $ 54,486,817 $ 53,613,453 $ 52,910,814 $ 52,451,090 9,464,313 5,357,847 6,862,813 14,441,214 $ 36,126,187 $ 16,784,627 10,450,515 5,309,518 6,113,675 14,170,529 $ 36,044,237 $ 16,406,853 $ 6,439,820 $ 6,298,261 $ 6,318,864 $ 6,146,533 336,672 73,638 210,145 2,799,274 $ 3,419,729 $ 2,899,135 285,478 58,356 200,784 2,831,082 $ 3,375,700 $ 2,770,833 1.6% .9% -9.4% .9% 12.3% 1.9% .2% 2.3% 2.2% 2.8% 17.9% 26.2% 4.7% -11.2% 1.3% 4.6% S H A R E H O L D E R R E L AT I O N S L I N DA D. F E L D N E R S E C R E TA RY/R E C E P T I O N I S T M I C H A E L J. H A L E AVP, S E C U R I T Y S A L E S DA R L A J. S T R I L C OV AVP, S H A R E H O L D E R R E L AT I O N S 17 MANAGEMENT’S DISCUSSION & ANALYSIS FUNDS FROM OPERATIONS IRET considers funds from operations ("FFO") a useful measure of performance for an equity REIT. FFO herein is defined as net income available to shareholders determined in accordance with generally accepted accounting principles (GAAP), excluding gains (or losses) from debt restructuring and sales of property, plus depreciation of real estate assets, and after adjustment for unconsolidated partnerships and joint ventures. IRET uses the National Association of Real Estate Investment Trust’s ("NAREIT") definition of FFO as amended by NAREIT to be effective January 1, 2000. FFO presented herein is not necessarily comparable to FFO presented by other real estate companies because not all real estate companies use the same definition. FFO should not be considered as an alternative to net income (determined in accordance with GAAP) as a measure of IRET's liquidity, nor is it necessarily indicative of sufficient cash flow to fund all of IRET's needs or its ability to service indebtedness or make distributions. FFO for the operating partnership increased to $29,143,549 for fiscal 2002, compared to $22,440,463 for fiscal 2001, and $18,327,986 for fiscal 2000. Calculations of funds from operations for the operating partnership are as follows: ITEM 2002 2001 2000 Net Income available to IRET shareholders and unitholders from operations and capital gains Less gain from property sales Operating income Less minority interest portion - other partnerships Net operating income Funds from operations Weighted average shares and units outstanding - basic and diluted (2) Cash distributions paid to shareholders/unitholders (3) $ 14,412,861 (546,927) $ 13,865,934 $ 10,789,417 (601,605) $ 10,187,812 $ 11,622,370 (1,754,496) $ 9,867,874 (198,564) $ 13,667,370 $ 29,143,549 0 $ 10,187,812 12,252,651 $ 22,440,463 0 $ 9,867,874 8,460,112 $ 18,327,986 33,781,369 $ 20,272,212 28,577,700 $ 15,732,399 24,476,984 $ 12,492,067 plus real estate depreciation and amortization (1) 15,476,179 (1) Depreciation on office equipment and other assets used by IRET are excluded. Amortization of financing and other expenses are excluded, except for amortization of leasing commissions which are included. (2) Limited partnership units of the operating partnership are exchangeable for shares of beneficial interest of IRET only on a one-for-one basis. (3) Cash distributions are paid equally on shares and units. It is our intent to distribute approximately 70% of FFO to our shareholders and unitholders. 18 MANAGEMENT’S DISCUSSION & ANALYSIS 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 IRET since its inception in 1970. IRET obtained an independent appraisal of the value of the advisory business and assets from certified public accountants not otherwise employed by either IRET or the advisory company. The purchase price for the business and assets was $2,083,350 allocated as follows: Real Estate Furniture, Fixtures & Vehicles Good Will Less Real Estate Mortgages Assumed $ $ 475,000 193,350 1,645,000 (230,000) 2,083,350 IRET Properties issued 255,000 of its limited partnership units in exchange for the above-described assets. Except for Roger R. Odell, who retired on July 1, 2000, all officers and employees of Odell-Wentz and Associates, L.L.C. were retained by IRET Properties. PROPERTY ACQUISITIONS The operating partnership added $143,280,342 of real estate investments to its portfolio during fiscal 2002, compared to $143,042,292 added in fiscal 2001 and $155,284,745 in fiscal 2000. The fiscal 2002 and 2001 additions are detailed below: FISCAL 2002 PROPERTY ACQUISITIONS COMMERCIAL LOCATION PROPERTY TYPE NET RENTABLE SQUARE FEET PURCHASE PRICE Mendota Heights Office Complex Interlachen Thresher Square E & W Wirth Corporate Center Stone Container Bloomington Bus. Plaza Edgewood Vista Wayroad Morgan Chemical Cottage Grove Center Total Commercial Mendota Heights, MN Multi-tenant Office Bldg. Multi-tenant Office Bldg. Edina, MN Multi-tenant Office Bldg. Minneapolis, MN Commercial Office Golden Valley, MN Industrial Building Roseville, MN Multi-tenant Office Bldg. Bloomington, MN Assisted Living Center Virginia, MN Commercial Office Minnetonka, MN Industrial Building New Brighton, MN Strip Mall Cottage Grove, MN RESIDENTIAL LOCATION PROPERTY TYPE Applewood on the Green Oakmont Apartments Canyon Lake Apartments Pinehurst Apartments Sunset Trail Phase II* Total Residential Omaha, NE Sioux Falls, SD Rapid City, SD Billings, MT Rochester, MN Apartment Community Apartment Community Apartment Community Apartment Community Apartment Community TOTAL FISCAL 2002 PROPERTY ACQUISITIONS * Represents costs to complete a project started in year ending April 30, 2001. 428,065 105,084 113,736 75,216 229,072 114,819 70,313 62,383 49,620 15,217 1,263,525 UNITS 234 80 109 21 73 517 $ 51,280,260 16,691,306 11,119,958 8,629,281 8,265,238 7,445,108 6,958,383 5,394,985 2,428,810 1,116,089 $ 119,329,418 PURCHASE PRICE $ 10,810,426 5,257,468 4,280,120 751,310 2,851,600 $ 23,950,924 $ 143,280,342 19 MANAGEMENT’S DISCUSSION & ANALYSIS FISCAL 2001 PROPERTY ACQUISITIONS COMMERCIAL LOCATION PROPERTY TYPE NET RENTABLE SQUARE FEET PURCHASE PRICE 12 South Main 17 South Main 2030 Cliff Road Burnsville Bluffs Cold Springs Center Conseco Financial Bldg. Dewey Hill Business Ctr. 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 (60.31% part int.) Total Commercial Office Minot, ND Office/Apartments Minot, ND Office Eagan, MN Office Burnsville, MN Office St. Cloud, MN Office Rapid City, SD Office Edina, MN Duluth, MN Assisted Living East Grand Forks, MN Assisted Living Assisted Living Fremont, NE Assisted Living Hastings, NE Assisted Living Kalispell, MT Omaha, NE Assisted Living Woodbury & Maplewood, MN Minnetonka, MN Burnsville, MN Bloomington, MN Plymouth, MN Winsted, MN Fargo, ND Waconia, MN Medical Office Office Office Office Office Manufacturing Manufacturing Warehouse Edina, MN Medical Office 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 $ 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 1,666,500 195,983 1,047,321 32,421,070 $ 110,199,692 RESIDENTIAL LOCATION PROPERTY TYPE UNITS Cottonwood Phase III Meadows, Phase III Olympic Village Prairiewood Meadows Ridge Oaks Sunset Trail, Phase I Sunset Trail, Phase II Total Residential Bismarck, ND*** Jamestown, ND*** Billings, MT Fargo, ND Sioux City, IA Rochester, MN Rochester, MN** TOTAL FISCAL 2001 PROPERTY ACQUISITIONS ** Property not placed in service at April 30, 2001. Additional costs are still to be incurred. *** Represents costs to complete a project started in year ending April 30, 2000. 20 67 27 274 85 132 73 n/a 658 PURCHASE PRICE $ 1,854,800 1,865,182 11,616,500 2,811,000 4,195,036 6,493,150 4,006,932 $ 32,842,600 $143,042,292 MANAGEMENT’S DISCUSSION & ANALYSIS Sunset Trail Community Center • Rochester, MN PROPERTY DISPOSITIONS Real Estate assets sold by the operating partnership during fiscal 2002 and 2001 were as follows: PROPERTY SOLD SALES PRICE BOOK VALUE & SALES COSTS GAIN 2002 Sunchase Apartments Lester Chiropractic Clinic Carmen Court - Magic City Apartments Walter's Building Corner Express Total Fiscal 2002 Gain 2001 Evergreen Shopping Center Chalet Apartments Hill Park aka Garden Grove Total Fiscal 2001 Gain CASH DISTRIBUTIONS $ 1,100,000 317,500 295,000 0 1,714,713 $ 803,591 232,221 291,654 35,062 1,460,403 $ 1,450,000 390,000 2,400,000 $ 1,448,310 366,566 1,823,518 $ 296,409 85,279 3,346 (35,062) 254,310 $ 604,282 $ 1,689 23,434 576,482 $ 601,605 The following cash distributions were paid to IRET shareholders and IRET Properties limited partners during fiscal years 2002, 2001, and 2000: DATE July 1, October 1, January 15, April 1, Total 2002 2001 2000 $ .1450 .1475 .1500 .1520 $ .5945 $ .1325 .1350 .1400 .1425 .5500 $ $ .1240 .1260 .1280 .1300 $ .5080 The fiscal 2002 cash distributions increased 8.1% over the cash distributions paid during fiscal year 2001 and 17.0% over fiscal 2000. 21 MANAGEMENT’S DISCUSSION & ANALYSIS LIQUIDITY AND CAPITAL RESOURCES Important equity capital and financing events in fiscal 2002 were: As a result of the sale of additional shares of beneficial interest, shareholder equity increased during fiscal 2002 by $31,227,781 and, in addition, the equity capital of the operating partnership was increased by $17,456,852 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 $48,684,633. Cash and marketable securities on April 30, 2002, totaled $22,833,426 compared to $9,368,176 on the same date in 2001 and $6,623,495 in 2000. Mortgage loan indebtedness increased due to the acquisition of new investment properties to $459,568,905 on April 30, 2002, from $368,956,930 on April 30, 2001, and $265,056,767 on April 30, 2000. The weighted interest rate on these loans decreased to 7.41% per annum from 7.56% on April 30, 2001, and compared to 7.59% at the end of fiscal 2000. The issuance of investment certificates was discontinued in April of 2002 and the $25,186,582 of certificates outstanding on April 30, 2002, will be redeemed upon maturity as follows: CERTIFICATES MATURING Fiscal 2003 Fiscal 2004 Fiscal 2005 Fiscal 2006 Fiscal 2007 Total FACE AMOUNT $ 16,484,256 1,995,822 2,221,533 2,177,886 2,307,085 $ 25,186,582 New real estate investments of $143,280,342 were made by the operating partnership in fiscal 2002, compared to $143,042,292 in fiscal 2001 and $155,284,745 in fiscal 2000. Net cash provided from operating activities increased to $26,918,213 from $22,328,745 due to the addition of new investments to our real estate portfolio. Net cash used in investing activities decreased to $75,862,027 from the $76,165,151 used in fiscal 2001. This decrease resulted because less cash was needed to acquire new investment properties. Net cash provided from financing activities also decreased to $54,921,177 from the year earlier figure of $56,743,205 because of a small decrease in our activity in acquiring new properties using 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, maturing investment certificates, construction and development activities, and property acquisitions through long-term secured borrowings and the issuance of additional equity securities 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 cash distributions to its shareholders in accordance with REIT requirements in both the short and long term. Budgeted expenditures for ongoing maintenance and capital improvements and renovations to its real estate portfolio are expected to be funded from cash flow generated from operations of these properties. 22 MANAGEMENT’S DISCUSSION & ANALYSIS Of the $459,568,905 of mortgage indebtedness on April 30, 2002, $31,003,091 is represented by variable rate mortgages on which the future interest rate will vary based on changes in the interest rate index for each respective loan and the balance of fixed rate mortgages was $428,565,814. The principal payments due on all of the mortgage indebtedness are as follows: YEAR ENDING APRIL 30 2003 2004 2005 2006 2007 Later Years Total MORTGAGE PRINCIPAL DUE $ 19,162,590 10,630,799 11,517,237 12,356,777 13,260,789 392,640,713 459,568,905 $ In addition to its cash and marketable securities, IRET Properties has unsecured line of credit agreements with First International Bank & Trust, Bremer Bank, and First Western Bank & Trust, all of Minot, North Dakota, totaling $19,000,000, none of which were in use on April 30, 2002 and 2001. On April 30, 2000, $6,452,420 was in use. INCREASED COSTS AND ECONOMIC SLOWDOWN In fiscal 2001, IRET experienced a sharp increase in the cost of utilities (primarily natural gas) in its apartment communities. Since that time, natural gas prices have retreated, but it is possible that IRET's apartment communities will again experience a sharp increase in utility expenses which may not be recoverable in the form of increased rent. Maintenance and other rental expenses also continue to increase at the general inflationary rate of 2-3%. In most cases, IRET has been able to increase rental income sufficient to cover the normal inflationary increases in rental expenses, but did experience a substantial loss as a result of increased natural gas and snow removal expenses in fiscal 2001. With respect to IRET's commercial properties, in virtually all cases, the tenant is responsible to pay utilities and most other rental expenses. However, commercial leases tend to be of a longer term and IRET is precluded from increasing rent to compensate for inflationary changes in currency values. In the case of residential properties, no leases are longer than one year and the majority are for six months or less and thus IRET may raise rent to cover inflationary changes in expenses and the value of its capital investment, subject to market conditions. IRET’s insurance costs will increase substantially during the coming year. This increase in insurance costs, prior to September 2001, was not anticipated by management. Given the weakened economic state, it is unlikely IRET will be able to increase rents sufficiently to fully offset its increased costs. As a result, our expectation is that net income and FFO will still increase over the prior year, but at a lower rate than the 10% per share FFO growth of fiscal 2002. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Our exposure to market risk is limited to fluctuations in the general level of interest rates on its current and future fixed and variable rate debt obligations. Even though our philosophy is to maintain a fairly low exposure to interest rate fluctuation risk, we are still vulnerable to significant fluctuations in interest rates on its variable rate debt, on any future repricing or refinancing of its fixed rate debt and on future debt. We primarily use long-term (more than ten years) and medium-term (five to seven years) debt as a source of capital. We do not currently use derivative securities, interest-rate swaps or any other type of hedging activity to manage our costs of capital. As of April 30, 2002, we had the following amount of future principal payments on mortgages secured by our real estate: LONG TERM DEBT 2003 2004 2005 2006 2007 THEREAFTER TOTAL Fixed Rate Variable Rate $ 17,573,189 1,589,401 $ $ 8,922,038 $ 1,708,761 $ 9,698,550 $ 1,818,687 $ 10,420,601 $ 1,936,176 $ 11,199,027 $ 2,061,761 Average Interest Rate (%) (1) (1) (1) (1) 21,888,305 $ $ 370,752,409 $ 428,565,814 31,003,091 $ $ 459,568,905 (1) (1) (1) The weighted average interest rate as of April 30, 2002, was 7.41%. Any fluctuations on the variable interest rates could increase or decrease our interest expenses. For example, an increase of one percent per annum on our $31,003,091 of variable rate indebtedness would increase our annual interest expense by $310,000. 23 MANAGEMENT’S DISCUSSION & ANALYSIS INCREASING OWNERSHIP OF COMMERCIAL PROPERTIES Historically, the assets in our investment portfolio consisted predominantly of multi-family residential properties, as compared to commercial properties. More recently, our investment activities have caused this bal- ance to shift so that the percentage of commercial properties held in our portfolio has increased significantly. Within the past two years, approximately 80% of our property acquisitions have been commercial properties due to the greater availability of these properties on terms that meet our financial and strategic objectives. If current market conditions continue, we anticipate that the percentage of commercial properties could equal or exceed the percentage of multi-family residential properties during fiscal 2003. This may not, however, be a long-term trend as in future periods we may purchase a greater percentage of multi-family residential properties depending on market conditions. Our historical experience in acquiring multi-family residential properties may not be directly applicable to the acquisition of a greater percentage of commercial properties. Commercial properties involve different risks than multi-family residential properties, including: direct exposure to business and economic downturns; exposure to tenant lease terminations or bankruptcies; and competition from real estate investors with greater experience in developing and owning commercial properties. CURRENT AND FUTURE VACANCIES In the twelve months subsequent to April 30, 2002, leases covering approximately 11.80% of our total commercial square footage will expire. At April 30, 2002, approximately 2.1% of our total commercial square footage was vacant. Of that vacancy, approximately 54.04% is represented by the warehouse in Boise, Idaho, which has been vacant for the last 24 months. At April 30, 2002, approximately 6.96% of the units in our multi-family stabilized residential properties were vacant. Due to the overall general economic slowdown, we are expecting that our vacancy rates will increase over the next 12 to 18 months. Additionally, rent rates for commercial property in the Minneapolis area have stagnated at current levels with little possibility for increases in the next 12 to 18 months. GEOGRAPHIC CONCENTRATION IN NORTH DAKOTA AND MINNESOTA The majority of our assets are presently invested in real estate properties in North Dakota and Minnesota. For the year ended April 30, 2002, we received 68% of our commercial gross revenue from commercial properties in Minnesota and 20% of our commercial gross revenue from commercial properties in North Dakota. Minnesota accounts for 72% of our commercial real estate portfolio by square footage, while North Dakota accounts for 18%. For the year ended April 30, 2002, we received 17% of our apartment gross revenue from multi- family residential properties in Minnesota and 32% of our apartment gross revenue from multi-family properties in North Dakota. As of that same date, we owned 1,309 apartment units, 16% of our total number of apartment units, in Minnesota, and 2,995 apartment units, 36% of our total number of apartment units, in North Dakota. We intend to continue focusing on real estate activities in the state of Minnesota which will result in an increase to our current concentration in the upper midwest. Interlachen Corporate Center • Edina, MN 24 TRACKING PERFORMANCE 31 CALENDAR YEAR HISTORY OF INCREASING DISTRIBUTIONS Since its first distribution paid July 1, 1971, IRET has never delayed, omitted or reduced its quarterly distribution and in each of the last 31 calendar years, the annual distribution has increased over the amount paid in the preceding year. SHARE BID PRICE HISTORY DISTRIBUTION HISTORY TOTAL RETURN PER YEAR $1.00 1971 1.50 1975 3.15 1985 6.16 1995 6.44 1996 7.13 1997 7.44 1998 7.88 1999 7.88 2000 9.35 2001 (End of calendar year bid price per share of beneficial interest of IRET) 1971 1975 1985 1995 1996 1997 1998 1999 2000 2001 (Total calendar year distributions paid) 2.75¢ 8.00¢ 24.25¢ 35.25¢ 37.38¢ 40.18¢ 43.70¢ 49.25¢ 52.55¢ 57.50¢ PRICE RANGE OF SHARES OF BENEFICIAL INTEREST May 1 to July 31 August 1 to October 31 November 1 to January 31 February 1 to April 30 FISCAL YEAR 2002 LOW 8.250 8.800 9.000 9.510 HIGH 10.490 9.430 10.000 10.450 2.8% 12.9% 19.5% 10.6% 10.6% 17.0% 10.5% 12.5% 6.7% 26.0% 1971 1975 1985 1995 1996 1997 1998 1999 2000 2001 Distributions plus share price changes. (Calendar year distributions paid plus change in share bid price divided by previous end of year share bid price.) FISCAL YEAR 2001 LOW 7.375 7.594 7.438 8.000 HIGH 8.125 8.250 8.500 8.980 CALENDAR YEAR TAX STATUS OF DISTRIBUTION Capital gain Ordinary income Return of capital 2001 0.00% 65.98% 34.02% 2000 .72% 86.76% 12.52% 1999 30.25% 69.75% 0.00% 1998 6.30% 76.00% 17.70% 31 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 distributions. No commissions or income tax impact are reflected in this comparison. IRET Peer Group 1997 2.90% 97.10% 0.00% $ 7,559 $ 3,421 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 01 (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. 25 25 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, 2002, and 2001, and the related consolidated statements of operations, shareholders' equity, and cash flows for the years ended April 30, 2002, 2001, and 2000. These consolidated financial statements are the responsibility of the Trust's management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis of our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Investors Real Estate Trust and Subsidiaries as of April 30, 2002, and 2001, and the consolidated results of its operations and cash flows for the years ended April 30, 2002, 2001, and 2000, in conformity with accounting principles generally accepted in the United States of America. BRADY, MARTZ & ASSOCIATES, P.C. Minot, North Dakota May 22, 2002 26 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS Years Ended April 30, 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 Notes receivable Prepaid and other assets Tax, insurance, and other escrow Furniture and fixtures Goodwill Deferred charges and leasing costs Total Assets LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Accounts payable and accrued expenses Mortgages payable Investment certificates issued Total Liabilities Commitments and Contingencies (Note 14) Minority interest in partnerships Minority interest of unit holders in operating partnership Shareholder’s Equity Shares of beneficial interest (unlimited authorization, no par value, 27,847,079 shares outstanding in 2002 and 24,068,346 shares outstanding in 2001) Accumulated distributions in excess of net income Accumulated other comprehensive loss Total shareholders' equity Total Liabilities and Shareholders’ Equity The accompanying notes are an integral part of these financial statements. 2002 2001 $ 740,319,436 (58,925,517) $ 681,393,919 $ 591,636,468 (44,093,145) $ 547,543,323 3,952,762 $ 685,346,681 1,037,095 $ 548,580,418 $ 12,333,426 0 10,500,000 3,233,765 422,045 3,500,000 3,513,791 6,210,450 209,121 1,440,817 3,498,922 $ 730,209,018 $ 6,356,063 2,351,248 660,865 1,925,429 522,500 0 799,973 4,323,960 187,313 1,550,246 3,064,109 $ 570,322,124 $ 10,596,277 459,568,905 25,186,582 $ 495,351,764 $ 8,252,758 368,956,930 11,876,417 $ 389,086,105 $ $ 12,819,077 76,460,046 $ $ 3,287,665 59,003,194 $ 163,376,549 (17,798,418) 0 $ 145,578,131 $ 730,209,018 $ 132,148,768 (13,073,157) (130,451) $ 118,945,160 $ 570,322,124 27 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF OPERATIONS Years Ended April 30, 2002 2001 2000 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 - other partnerships Minority interest portion - operating $ 91,738,602 1,277,467 $ 93,016,069 $ 74,800,722 966,428 $ 75,767,150 $ 54,257,881 1,187,312 $ 55,445,193 $ 30,604,846 15,515,168 12,709,614 9,184,599 1,352,622 6,985,542 0 1,569,853 112,889 565,802 549,200 $ 79,150,135 $ 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 $ 13,865,934 546,927 $ 10,187,812 601,605 $ 8,548,558 1,754,496 (198,564) 0 0 partnership (3,614,168) (2,095,177) (1,495,209) NET INCOME Net income per share (basic and diluted) $ 10,600,129 .42 $ $ 8,694,240 .38 $ $ 8,807,845 .42 $ The accompanying notes are an integral part of these financial statements. 28 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 MAY 1, 1999 19,066,954 $ 93,095,819 $ (7,255,958) $ (56,567) $ 85,783,294 BALANCE APRIL 30, 2000 22,452,069 $ 119,233,172 $ (9,094,076) $ (218,505) $ 109,920,591 Comprehensive Income Net income Unrealized loss on securities available for sale Total comprehensive income Distributions Distribution reinvestment plan Sale of shares Shares repurchased Comprehensive income Net income Unrealized gain on securities available for sale Total comprehensive income Distributions Distribution reinvestment plan Sale of shares Fractional shares repurchased Comprehensive income Net income Unrealized gain on securities available for sale Total comprehensive income Distributions Distribution reinvestment plan Sale of shares Fractional shares repurchased 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 $ (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) 0 0 0 0 10,600,129 0 10,600,129 0 130,451 0 832,708 2,947,986 (1,961) 0 7,297,694 23,949,523 (19,436) (15,325,390) 0 0 0 BALANCE APRIL 30, 2001 24,068,346 $ 132,148,768 $( 13,073,157) $ ( 130,451) $ 118,945,160 BALANCE APRIL 30, 2002 27,847,079 $ 163,376,549 $(17,798,418) $ The accompanying notes are an integral part of these financial statements. 0 0 0 0 0 $ 130,451 10,730,580 (15,325,390) 7,297,694 23,949,523 (19,436) $ 145,578,131 29 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Years Ended April 30, 2002 2001 2000 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, insurance and other escrow Increase in deferred charges Increase (decrease) in accounts payable $ 10,600,129 $ 8,694,240 $ 8,807,845 16,064,368 12,727,720 8,676,209 3,812,732 0 (546,927) 0 486,198 1,062,876 (1,308,336) (2,850,807) (1,886,489) (874,584) 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) and accrued expenses Net cash provided from operating activities 2,359,053 $ 26,918,213 1,909,163 $ 22,328,745 1,955,325 $ 16,277,085 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 Investment in notes 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 Proceeds from sale of minority interest units Repurchase of shares and minority interest units Distributions paid Distributions paid to minority interest unitholders Distributions paid to other minority partners Redemption of investment certificates Principal payments on mortgage loans Net increase (decrease) in short-term lines of credit Net cash provided from financing activities NET INCREASE (DECREASE) IN CASH CASH AT BEGINNING OF YEAR CASH AT END OF YEAR The accompanying notes are an integral part of these financial statements. $ 3,085,208 5,591,429 269,501 $ 250,172 613,934 0 $ 363,014 492,547 7,326,563 (62,301,069) (10,500,000) (8,507,096) (3,500,000) $ (75,862,027) (72,319,419) 0 (4,709,838) 0 $ (76,165,151) (121,931,571) 0 (6,291,617) 0 $(120,041,064) $ 13,520,867 24,109,305 43,093,345 345,603 (29,868) (8,362,657) (4,476,875) (150,082) (2,195,531) (10,932,930) 0 $ 54,921,177 $ 5,977,363 6,356,063 $ 12,333,426 $ 11,001,509 3,257,574 79,369,000 0 (5,497,952) (5,963,290) (3,059,078) 0 (1,828,594) (14,083,544) (6,452,420) $ 56,743,205 $ $ 2,906,799 3,449,264 6,356,063 $ 24,022,246 3,769,003 93,969,098 0 (4,832,012) (4,315,662) (1,846,104) 0 (5,815,818) (7,902,981) 6,452,420 $ 103,500,190 $ $ (263,789) 3,713,053 3,449,264 30 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS • continued Years Ended April 30, 2002 2001 2000 SUPPLEMENTARY SCHEDULE OF NON-CASH INVESTING AND FINANCING ACTIVITIES Distribution 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 and goodwill acquired through the issuance of minority interest units in the operating partnership Minority partner interest in Southdale Medical Center Minority partner interest in Mendota Properties Interest reinvested directly in investment certificates Investment certificates transferred to shares UPREIT units converted to shares SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION Cash paid during the year for: Interest paid on mortgages Interest paid on investment certificates Interest paid on margin account and other The accompanying notes are an integral part of these financial statements. $ 7,297,694 $ 2,230,445 $ 6,330,301 59,650,208 38,611,547 4,049,568 0 4,709,838 15,000,000 856,411 4,093,684 0 19,793,183 0 9,482,931 325,063 9,089,807 1,338,849 25,543,524 3,287,655 0 360,181 0 0 21,602,841 0 0 363,935 0 0 $ 27,318,816 663,774 1,438 $ 27,984,028 $ 23,763,584 745,391 0 $ 24,508,975 $ 15,670,488 544,977 0 $ 16,215,465 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS NOTE 1 • NATURE OF OPERATIONS AND SIGNIFICANT ACCOUNTING POLICIES NATURE OF OPERATIONS - Investors Real Estate Trust ("IRET") qualifies under Section 856 of the Internal Revenue Code as a real estate investment trust. IRET has real estate properties located primarily throughout the upper Midwest, with its principal office located in Minot, North Dakota. IRET invests in commercial and residential real estate, real estate mortgages, governmental backed securities and equity securities in other real estate investment trusts. Gross rental revenues were derived 64% from residential property assets and 36% from commercial property assets. Effective February 1, 1997, IRET reorganized its structure in order to convert to Umbrella Partnership Real Estate Investment Trust (UPREIT) status. IRET established an operating partnership (IRET Properties, a North Dakota Limited Partnership) with a wholly owned corporate subsidiary acting as its sole general partner (IRET, Inc., a North Dakota corporation). IRET transferred substantially all of its assets and liabilities to the operating partnership in exchange for general partnership units. The general partner has full and exclusive management responsibility for the real estate investment portfolio owned by the operating partnership. The partnership is operated in a manner that allows IRET to continue its qualification as a real estate investment trust under the Internal Revenue Code. All limited partners of IRET Properties have certain exchange rights allowing the exchange of limited partnership units for IRET shares on a one-for-one basis. The exchange rights are subject to certain restrictions including no exchanges for at least one year following the acquisition of the limited partnership units. Each limited partnership unit is entitled to receive a cash distribution equal to any distribution paid on a share of IRET stock. 31 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Effective July 1, 2000, IRET became self-administered as a result of the acquisition of its former advisory company, Odell-Wentz & Associates, LLC. Virtually all officers and employees of Odell-Wentz & Associates, LLC were retained by IRET. Please refer to Note 9 for information concerning the impact of this acquisition on the accompanying financial statements. BASIS OF PRESENTATION - The consolidated financial statements include the accounts of IRET and all of its subsidiaries in which it maintains a controlling interest. IRET is the sole shareholder of IRET, Inc., which is the general partner of the operating partnership, IRET Properties. IRET is also the sole shareholder of Miramont IRET Inc. and Pine Cone IRET Inc., both Colorado business corporations. IRET is the sole shareholder of the following entities: Forest Park - IRET, Inc., Thomasbrook -IRET, Inc., Dakota - IRET, Inc., MedPark - IRET, Inc., Flying Cloud - IRET, Inc., Meadows II - IRET, Inc., IRET - Ridge Oaks, LLC, and Applewood - IRET, Inc. The entities in the preceding sentence are the sole general partners and IRET Properties is the sole limited partner for the following limited partnerships, respectively: Forest Park Properties, a North Dakota limited partnership; Thomasbrook Properties, a Nebraska limited limited partnership; Dakota Hill Properties, a Texas partnership; MedPark Properties, a North Dakota limited partnership; and 7901 Properties LP, a Minnesota limited partnership, Meadows 2 Properties, LP, a North Dakota limited partnership, Ridge Oaks, LP, an Iowa limited partnership, and Applewood - IRET Properties, a Nebraska limited partnership. IRET Properties is also the sole owner of Health Investors Business Trust, a Delaware business trust and IRET - Oakmont, LLC. These entities are all invested in real estate and are formed and acquired solely so the underlying real estate may be encumbered by mortgage indebtedness. The consolidated financial statements also include the ownership by IRET of a 60.31% in Minnesota Medical Investors LLC, SMB Operating Company LLC, and SMB MM LLC, collectively known as Southdale Medical Center and a 51% ownership interest in Mendota Properties, LLC, a Minnesota limited liability company. Mendota Properties, LLC, is the holder of all of the issued and outstanding membership interests in Mendota Office Holding LLC, a Minnesota limited liability company and Mendota Office Three and Four, LLC, a Minnesota limited liability company. The three Mendota LLCs are the owner of five multi-tenant commercial real estate properties in Dakota County, Minnesota. These companies are consolidated into the IRET's other operations with minority interests reflecting the minority partners' share of ownership and income and expenses. All material inter-company transactions and balances have been eliminated in the consolidated financial statements. ACCOUNTING POLICIES NEW ACCOUNTING PRONOUNCEMENTS - Statement of Financial Accounting Standards (SFAS) No. 133, Accounting for Derivative Instruments and Hedging Activities, established accounting and reporting standards requiring that every derivative instrument be recorded on the balance sheet as either an asset or liability measured at its fair value. The statement requires that changes in the derivative's 32 fair value be recognized currently in earnings unless specific hedge accounting criteria are met. Certain provisions of SFAS 133 were amended by SFAS 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities" an amendment of Statement 133. The impact of SFAS 133 is not significant. In 2001 the FASB issued SFAS No. 141 "Business Combinations" ("SFAS 141") which requires all business combinations initiated after June 30, 2001, to be accounted for using the purchase method, SFAS No. 142 "Goodwill and Other Intangible Assets" ("SFAS 142") which provides new guidance in accounting for goodwill and intangible assets and SFAS No. 144 "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144") which addresses financial accounting and reporting for the impairment or disposal of long-lived assets. The adoption of SFAS 141 had no effect of IRET's financial position or results of operations. IRET is required to adopt SFAS 142 and SFAS 144 on May 1, 2002. The impact of the adoption of SFAS 142 and SFAS 144 is not expected to have a significant impact. USE OF ESTIMATES - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. for and renewals improvements PROPERTY OWNED - Real estate is stated at cost. Expenditures that significantly add to the productive capacity or extend the useful life of an asset are capitalized. Refurbishment type costs such as property-wide painting, carpeting, wallpaper, tiling, replacement of worn out appliances, replacement of worn out bathroom fixtures, replacement of worn out windows, siding, roofs, walkways, parking lots or landscaping, and any other type of refurbishment activity is capitalized. Interest, real estate taxes, and other development costs relating to the acquisition and development of certain qualifying properties are also capitalized. Expenditures for routine maintenance and repairs, such as individual apartment painting, wallpapering, cleaning, and appliance repair, which do not add to the value or extend useful lives are charged to expense as incurred. IRET assesses whether there has been impairment in the value of its real estate by comparing its carrying amount to the aggregate undiscounted future cash flows without interest charges. Such cash flows consider factors such as expected future operating income, trends and prospects, as well as the effects of demand, competition and other economic factors. Such market factors include a lessee's ability to pay rent under the terms of the lease. If a property is leased at a significantly lower rent, IRET may recognize a loss if the income stream is not sufficient to recover its investment. If impairment is determined to be present, the loss is measured as the amount by which the carrying value exceeds the property's fair value. The fair value of the property is the amount which would be recoverable upon the disposition of the property. Techniques used to establish fair value include: present value of estimated expected future cash flows using a discount rate commensurate with the risks involved, the appraised value, and recent sales of comparable assets in close proximity to IRET's property. INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES IRET's acquisitions for the fiscal year 2002 in order of size: Property Mendota Heights Office Complex Interlachen Location Type Cost Date Acquired Mendota Heights, Multi-tenant MN Edina, MN Thresher Square - East & West Applewood on the Green Minneapolis, MN Omaha, NE Wirth Corporate Center Stone Container Bloomington Business Plaza Bloomington, MN Multi-tenant Golden Valley, MN Commercial Office Industrial Building Roseville, MN Edgewood Vista Wayroad Oakmont Apartments Virginia, MN Minnetonka, MN Sioux Falls, SD Canyon Lake Apartments Rapid City, SD Sunset Trail Phase II* Rochester, MN Morgan Chemical Cottage Grove Center Pinehurst Apartments New Brighton, MN Industrial Building Cottage Grove, MN Strip Mall Billings, MT 21-unit Apt Community TOTAL * Represents costs to complete a project started in year ending April 30, 2001. Office Building Multi-tenant Office Building Multi-tenant Office Building 234-unit Apt Community $ 51,280,260 04/30/02 16,691,306 08/10/01 11,119,958 01/02/02 10,810,426 8,629,281 8,265,238 10/31/01 04/01/02 12/20/01 Office Building 7,445,108 Assisted Living Center 6,958,383 Commercial Office 5,394,985 80-unit Apt Community 109-unit Apt Community 73-unit Apt Community 4,280,120 5,257,468 2,851,600 2,428,810 1,116,089 751,310 $143,280,342 10/01/01 04/30/02 04/01/02 04/30/02 09/27/01 04/01/02 04/30/02 07/06/01 02/28/02 REAL ESTATE HELD FOR SALE is stated at the lower of its carrying amount or estimated fair value less disposal costs. Depreciation is not recorded on assets classified as held for sale. In the normal course of business IRET will receive offers for sale of its properties, either solicited or unsolicited. For those offers that are accepted, the prospective buyer will usually acquire a due diligence period before completion of the transaction. It is not unusual for matters to arise that result in the withdrawal or rejection of the offer during this process. As a result, real estate is not classified as "held-for-sale" until it is likely, in the opinion of management, that a property will be disposed of in the near term, even if sale negotiations for such property are currently under way. FURNITURE AND FIXTURES consists of office furniture, fixtures, and equipment located at IRET's operational headquarters and is stated at cost net of accumulated depreciation. Accumulated depreciation was $289,089 and $215,757 as of April 30, 2002, and 2001, respectively. 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, and 20 - 40 years for buildings and improvements. MORTGAGE LOANS RECEIVABLE are shown at cost. Interest income is accrued and reflected in the related balance. MARKETABLE SECURITIES - IRET's investments in securities are classified as securities "held-to-maturity" and securities "available-for-sale." The securities classified as "available-for-sale" as of April 30, 2002, represents an investment in a Merrill Lynch money market mutual fund and is stated at fair value. As of April 30, 2001, the "available-for- sale" investments consisted of equity shares in other real estate investment trusts which were also stated at fair value. Unrealized gains and losses on securities “available-for-sale” are recognized as direct increases or decreases in shareholders' equity. The securities classified as "held-to-maturity" consist of Government National Mortgage Association securities. In June 2001, IRET sold these GNMA securities. They are reported at cost, adjusted by amortization of premiums and accretion of discounts which are recognized in interest income using the straight-line method over the period to maturity which approximates the effective interest method. Cost of securities sold is recognized on the basis of specific identification. TAX, INSURANCE, AND OTHER ESCROW - includes reserve for replacement funds to be used for replacement of structural elements and mechanical equipment of certain projects. The funds are under the control of the lender. Disbursements are made after supplying written documentation to the lender. REAL ESTATE DEPOSITS consist of funds held by an escrow agent to be applied toward the purchase of real estate qualifying for gain deferral as a like-kind exchange of property under Section 1031 of the Internal Revenue Code. It also consists of earnest money, or "good faith deposits," to be used by IRET toward the purchase of property or the payment of loan costs associated with loan placement or refinancing. GOODWILL has been amortized on a straight-line basis over a period of 15 years. IRET periodically reviews goodwill for impairment and if a permanent decline in value has occurred, IRET will reduce its goodwill balance to fair value. Accumulated amortization of goodwill was $200,620 and $91,191 as of April 30, 2002, and 2001, respectively. See previous note for the impact of the new accounting pronouncement SFAS No. 142 "Goodwill and Other Intangible Assets." DEFERRED LEASING AND LOAN ACQUISITION COSTS - Costs and commissions incurred in obtaining tenant leases are amortized on the straight-line method over the terms of the related leases. Costs incurred in obtaining long-term financing are amortized over the life of the loan and charged to amortization expense over the terms of the related debt agreements. MINORITY INTEREST - Interests in the operating partnership held by limited partners are represented by operating partnership units. The operating partnerships' income is allocated to holders of units based upon the ratio of their holdings to the total units outstanding during the period. Capital contributions, distributions, and profits and losses are allocated to minority interests in accordance with the terms of the operating partnership agreement. IRET reflects minority interests in the Southdale Medical Center and Mendota Heights Office Complex on the balance sheet for the portion of properties consolidated by IRET that are not wholly owned by IRET. The earnings or losses from these properties attributable to the minority interests are reflected as limited partner minority interests in the consolidated statements of operations. NET INCOME PER SHARE - IRET adopted Statement of Financial Accounting Standard No. 128 - Earnings Per Share. Basic net income per share is computed using the weighted average number of shares outstanding over the earnings period in question. 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. 33 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES INCOME TAXES - IRET intends to continue to qualify as a real estate investment trust as defined by the Internal Revenue Code and, as such, will not be taxed on the portion of the income that is distributed to the shareholders, provided at least 90% of its real estate investment trust taxable income is distributed and other requirements are met. IRET intends to distribute all of its taxable income and realized capital gains from property dispositions within the prescribed time limits and, accordingly, there is no provision or liability for income taxes shown on the financial statements. IRET conducts all of its business activity as an umbrella real estate investment trust through its operating partnership, IRET Properties. This UPREIT status allows IRET to accept the contribution of real estate in exchange for limited partnership units. Generally, such a contribution to a limited partnership allows for the non-recognition of gain by an owner of appreciated real estate. The UPREIT concept is based on the combination of the non-recognition provisions of Section 721 of the Internal Revenue Code and the limited partnership conversion rights which allow the contributing partner to exchange the limited partnership interest received in exchange for the appreciated real estate for IRET's stock. Upon conversion of the partnership units to IRET shares, a taxable event occurs for that limited partner. Income or loss of the operating partnership shall be allocated among its partners in compliance with the provisions of the Internal Revenue Code Section 701(b) and 704(c). REVENUE RECOGNITION - Residential rental properties are leased under operating leases with terms generally of one year or less. Commercial properties are leased under operating leases to tenants for various terms exceeding one year. Lease terms often include renewal options. Rental revenue is recognized on the straight-line basis, which averages minimum required rents over the terms of the leases. Rents recognized in advance of collection is reflected as rent receivable, net of allowance for doubtful accounts. IRET evaluates the need for an allowance for doubtful accounts periodically. In performing its evaluation, management assesses the recoverability of individual real estate mortgage loans and rent receivables by a comparison of their carrying amount with their estimated net realizable value. A summary of the changes in the allowance for doubtful accounts for the years ended April 30, 2002, and 2001, are as follows: Years Ending April 30, Balance at beginning of year Provisions for doubtful accounts Write-offs Balance at close of year 2002 120,315 30,000 (9,530) 140,785 $ $ 2001 0 120,315 0 120,315 $ $ Reimbursements from tenants for real estate taxes and other recoverable operating expenses are recognized as revenue in the period the applicable expenditures are incurred. IRET receives payments for these reimbursements from substantially all its multi-tenant commercial tenants throughout the year based on estimates. Differences between estimated recoveries and the final billed amounts, which are immaterial, are recognized in the subsequent year. A number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. These percentage rents are recorded once the required sales level is achieved and are included in rental income at that time. Profit on sales of real estate shall be recognized in full when the real estate is sold, provided the collectibility of the sales price is reasonably assured or the amount that will be collectible can be estimated and the seller is not obliged to perform significant activities after the sale to earn the profit. Any gain or loss on a sale or disposition is recognized in accordance with accounting principles generally accepted in the United States of America. Interest on mortgage loans receivable is recognized in income as it accrues during the period the loan is outstanding. In the case of non-performing loans, income is recognized as discussed in Note 4. RECLASSIFICATIONS - Certain previously reported amounts have been reclassified to conform with the current financial statement presentation. THE DISTRIBUTION REINVESTMENT PLAN is available to all shareholders of IRET and all limited partners of IRET Properties. Under the Distribution Reinvestment Plan, shareholders or limited partners may elect to have all or a portion of their distribution used to purchase additional IRET shares. NOTE 2 • OFF-BALANCE-SHEET RISK IRET had deposits at First Western Bank, Bremer Bank, First International Bank, Associated Bank and Washington County Bank which exceeded Federal Deposit Insurance Corporation limits by $8,517,162, $454,088, $2,748,210, $934,773 and $150,383, respectively, as of April 30, 2002. As of April 30, 2002, IRET has agreements whereby First Western Bank provides additional coverage through repurchase agreements totaling $15,075,000. First Western Bank has pledged U.S. Government Securities or U.S. Government Agency Securities under the repurchase agreements. The repurchase agreements have no impact on the fair market value of the underlying bank account balances since IRET is entitled to recover only up to the par value of their accounts, subject to the above maximum threshold. NOTE 3 • PROPERTY OWNED UNDER LEASE Property consisting principally of real estate owned under lease is stated at cost less accumulated depreciation and is summarized as follows: Residential Less accumulated depreciation Commercial Less accumulated depreciation Remaining Cost April 30, 2002 $ 389,930,454 (41,629,462) $ 348,300,992 $ 350,388,982 (17,296,055) $ 333,092,927 $ 681,393,919 April 30, 2001 $ 361,577,622 (32,296,179) $ 329,281,443 $ 230,058,846 (11,796,966) $ 218,261,880 $ 547,543,323 There were no repossessions during the years ended April 30, 2002, and 2001. The above cost of residential real estate owned included construction in progress of $0 and $6,307,018 as of April 30, 2002, and 2001, respectively. As of April 30, 2002, IRET had no plans to fund any construction projects other than an expansion of the Southdale Medical Center in Edina, Minnesota, at an estimated cost of $13,000,000 and to finance a $5,000,000 addition to the existing facility of Edgewood Vista, in Hermantown, Minnesota. As of year end April 30, 2002, IRET committed to purchase the Three Paramont office 34 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES building in Bloomington, Minnesota, for $7,350,000. In addition, as of April 30, 2002, IRET has outstanding offers to purchase selected properties as part of their normal operations. IRET committed to sell Oak Manor Apartments in Dickinson, North Dakota for $420,000 (book value of $306,856), Oak Park Apartments in Dickinson, North Dakota for $275,000 (book value of $257,715), and Eastwood Apartments in Dickinson, North Dakota for $620,000 (book value of $406,512). Construction period interest of $99,668, $316,644, and $404,089 has been capitalized for the year ended April 30, 2002, 2001, and 2000, respectively. Residential apartment units are rented to individual tenants with lease terms up to one year. Gross revenues from residential rentals totaled $59,052,950, $55,806,712, and $42,379,855 for the year ended April 30, 2002, 2001, and 2000, respectively. Gross revenues from commercial property rentals totaled $32,685,652, $18,994,010 and $11,878,026 for the year ended April 30, 2002, 2001, and 2000, respectively. Commercial properties are leased to tenants under terms expiring at various dates through 2024. Lease terms often include renewal options and, in limited instances, buyout options. In addition, a number of the commercial leases provide for a base rent plus a percentage rent based on gross sales in excess of a stipulated amount. Rents based on a percentage of sales totaled $116,239, $124,092, and $102,659 for the years ended April 30, 2002, 2001, and 2000, respectively. The future minimum lease payments to be received under leases for commercial properties as of April 30, 2002, assuming that no options to renew or buy out the lease are exercised, are as follows: Year Ending April 30, 2003 2004 2005 2006 2007 Thereafter $ 27,628,991 26,707,051 25,120,322 23,093,777 21,511,722 133,182,414 $ 257,244,277 Loss on impairment of two commercial properties totaled $1,319,316 for the year ended April 30, 2000. Impairment losses were determined based on present value of estimated expected future cash flows from each property. The carrying value of the First Avenue Building, located in Minot, North Dakota, was reduced by $311,202. The carrying value of a commercial building located in Boise, Idaho was reduced by $1,008,114. There were no losses on impairment of properties for the years ended April 30, 2002, and 2001. NOTE 4 • MORTGAGE LOANS RECEIVABLE Mortgage loans receivable consists of five separate loans which are secured by real estate. Contract terms call for monthly payments of principals and interest. Interest rates range from 7% to 11%. Mortgage loans receivable have been evaluated for possible losses considering repayment history, market value of underlying collateral, and economic conditions. Future principal payments due under the mortgage loans contracts as of April 30, 2002, are as follows: Year Ending April 30, 2003 2004 Later years $ 3,783,217 39,545 130,000 $ 3,952,762 There were no significant non-performing mortgage loans receivable as of April 30, 2002, or 2001. Non-performing loans are recognized as impaired in conformity with FASB Statement No. 114, Accounting by Creditors for Impairment of a Loan. The average balance of impaired loans for the years ended April 30, 2002, and 2001, was not significant. For impairment recognized in conformity with FASB Statement No. 114, the entire change in present value of expected cash flows is reported as bad debt expense in the same manner in which impairment initially was recognized or as a reduction in the amount of bad debt expense that otherwise would be reported. Additional interest income that would have been earned on loans if they had not been non-performing was not significant in fiscal 2002, 2001, or 2000. There was no interest income on non-performing loans recognized on a cash basis for fiscal 2002, 2001, and 2000. NOTE 5 • MARKETABLE SECURITIES The amortized cost and estimated market values of marketable securities held-to-maturity at April 30, 2001, are as follows: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value 2001 ISSUER GNMA $ 2,351,248 $ 80,159 $ 77,389 $ 2,354,018 Marketable securities held-to-maturity consists of Governmental National Mortgage Association (GNMA) securities. During the first quarter ended July 31, 2001, IRET sold its GNMA securities to use these proceeds to acquire real estate properties. IRET held no marketable securities as of April 30, 2002, that were classified as held-to-maturity. There was a realized gain on sales of securities held-to- maturity at the year ended April 30, 2002, of $11,525. There were no realized gains or losses for the years ended April 30, 2001, and 2000. The amortized cost and estimated market values of marketable securities available-for-sale at April 30, 2002, and 2001, are as follows: Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value 2002 ISSUER Merrill Lynch $10,500,000 $ 0 $ 0 $10,500,000 2001 Equity shares in other REIT's $ 791,316 $ 97,209 $ 227,660 $ 660,865 There was a $68,881 realized loss on sales of securities available-for-sale for the year ended April 30, 2002. There were no realized gains or losses for the years ended April 30, 2001, and 2000. 35 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES NOTE 6 • NOTES PAYABLE As of April 30, 2002, IRET had lines of credit available from three financial institutions. The first unsecured line of credit is with First Western Bank & Trust in the amount of $5,000,000 carrying a variable interest rate equal to prime and maturing August 15, 2002. The weighted average interest rate for the year ended April 30, 2002, was 6.46%. The second unsecured line of credit is with First International Bank & Trust in the amount of $4,000,000 with a variable interest rate equal to prime and maturing October 15, 2002. The weighted average interest rate for year ended April 30, 2002, was 6.46%. The third unsecured line of credit is with Bremer Bank in the amount of $10,000,000 with a variable interest rate equal to Bremer's reference rate and maturing September 30, 2002. The weighted average interest rate for the year ended April 30, 2002, was 6.50%. Interest payments are due monthly on all three notes. As of April 30, 2002, and April 30, 2001, IRET had no unpaid balances on any of their lines of credit. NOTE 7 • MORTGAGES PAYABLE Mortgages payable as of April 30, 2002, included mortgages on properties owned totaling $459,568,905. The carrying value of the related real estate owned was $716,964,492. Mortgages payable as of April 30, 2001, included mortgages on properties owned totaling $368,956,930. The carrying value of the related real estate owned was $577,045,712. Monthly installments are due on the mortgages with interest rates ranging from 5.80% to 9.8854% and with varying maturity dates through November 30, 2036. Of the mortgages payable, the balances of fixed rate mortgages totaled $428,565,814 and $337,364,781, and the balances of variable rate mortgages totaled $31,003,091 and $31,592,149 as of April 30, 2002, and 2001, respectively. Most of the fixed rate mortgages have substantial pre-payment penalties. As of April 30, 2002, IRET did not plan to prepay any of its mortgage obligations. The aggregate amount of required future principal payments on mortgages payable as of April 30, 2002, is as follows: Year Ending April 30, 2003 2004 2005 2006 2007 Later years Total payments $ 19,162,590 10,630,799 11,517,237 12,356,777 13,260,789 392,640,713 $ 459,568,905 NOTE 8 • INVESTMENT CERTIFICATES ISSUED IRET has sold investment certificates to the public. The interest rates vary from 6% to 9% per annum, depending on the term of the security. Interest is paid annually, semiannually, or quarterly on the anniversary date of issuance. In April of 2002, IRET discontinued the sale of investment certificates and the outstanding certificates will be redeemed at maturity as follows: Year Ending April 30, 2003 2004 2005 2006 2007 $ 16,484,256 1,995,822 2,221,533 2,177,886 2,307,085 $ 25,186,582 NOTE 9 • TRANSACTIONS WITH RELATED PARTIES Acquisition of Odell-Wentz & Associates, L.L.C. - On July 1, 2000, IRET Properties acquired assets from Odell- Wentz & Associates, L.L.C. in exchange for limited partnership units having a value of $2.1 million. The acquired assets included real estate, furniture, fixtures, equipment and other assets valued at $675,000, goodwill of approximately $1.6 million, and the assumption of mortgages and other liabilities of approximately $236,000. Included in such transactions was the assumption of a note receivable from Timothy Mihalick, an executive officer, in the amount of $101,002. The proceeds of such note were used to purchase shares. The note bears interest at New York Prime less 1% and is payable upon demand. The note is current. With the exception of Roger R. Odell, who retired, all officers and employees of Odell-Wentz and Associates, L.L.C. were retained by IRET. Odell-Wentz & Associates, L.L.C. was owned equally by Thomas A. Wentz, Sr., IRET's current President and Chief Executive Officer, and Roger R. Odell, who, as of the acquisition date of July 1, 2000, was the President. Mr. Odell retired in July 2000, and he did not seek re-election to the Board of Trustees in August 2000. Currently, Mr. Odell has no relationship with the company as an employee, officer or trustee. Prior to the acquisition, Odell-Wentz & Associates, L.L.C. acted as the sole advisor to IRET. Pursuant to an advisory contract, IRET paid an advisor's fee based on its net assets and a percentage fee for investigating and negotiating the acquisition of new investments. No fees were paid for fiscal year ended April 30, 2002. For the fiscal year ended April 30, 2001, IRET paid $265,573 to Odell-Wentz & Associates L.L.C. under such contract. For the fiscal year ended April 30, 2000, IRET paid $1,400,973 under such contract. PROPERTY MANAGEMENT SERVICES - Investors Management and Marketing, Inc. ("IMM") provides property management services to IRET Properties and IRET. Roger R. Odell is a shareholder in IMM. From May 1, 2000, through June 30, 2000, (the last full month in which Mr. Odell served as President and as a member of the Board of Trustees), IRET paid $114,421 to IMM for services rendered. For the fiscal year ended April 30, 2000, IRET paid $649,729 to IMM for management services. With the exception of Hoyt Properties, Inc., none of the firms engaged to provide property management services are affiliated with IRET, its officers, or members of its Board of Trustees. Hoyt Properties, Inc. is owned 100% by Steven B. Hoyt, a member of the Board of Trustees, and by his wife, Michelle E. Hoyt. As of April 30, 2002, Hoyt Properties managed the following commercial buildings pursuant to written management contracts: 36 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES Cold Spring Center . . . . . . . . . . . . . . .St. Cloud, MN 2030 Cliff Road . . . . . . . . . . . . . . . . . .Eagan, MN Plymouth IV & V . . . . . . . . . . . . . . . .Plymouth, MN Nicollet VII . . . . . . . . . . . . . . . . . . . . .Burnsville, MN Burnsville Bluffs . . . . . . . . . . . . . . . . . .Burnsville, MN Pillsbury Business Center . . . . . . . . . . .Bloomington, MN Bloomington Business Plaza . . . . . . . . .Bloomington, MN Thresher Square . . . . . . . . . . . . . . . . . .Minneapolis, MN Wirth Corporate Center . . . . . . . . . . . .Golden Valley, MN As compensation for its services, Hoyt Properties, Inc. receives a monthly fee of 5% of the gross rental income, provided that such management fee is reimbursable by the building's tenants pursuant to the tenant's lease agreement. In the event IRET is not reimbursed for such fee by a tenant and must pay such fee from rent proceeds, the management fee declines to 3.5% of the gross rental proceeds. Each of the written management contracts with Hoyt Properties commenced on April 1, 2001, with the exception of the contracts for Bloomington Business Plaza, which commenced on October 1, 2001, Thresher Square, which commenced on January 2, 2002, and Wirth Corporate Center, which commenced on April 1, 2002. All such management contracts may be terminated by either party on 30 days written notice for any reason and without penalty. For the year ending April 30, 2002, IRET paid management fees to Hoyt Properties in the amount of $321,348, 100% of which has been reimbursed by IRET tenants. Additionally, during the same period, IRET paid leasing commissions to Hoyt Properties in the amount of $27,324. It is management's opinion that all of the terms of the management contracts are commercially reasonable and are on terms no less favorable than what could be obtained from unrelated property management firms. Acquisition of Bloomington Business Plaza, Thresher Square and Wirth Corporate Center - During the year ended April 30, 2002, IRET acquired two commercial buildings from affiliates of Steven B. Hoyt, a member of the Board of Trustees. In October 2001, IRET acquired the Bloomington Business Plaza, a 121,063 square foot multi-tenant, office/warehouse from a general partnership owned by Mr. Hoyt. In January 2002, IRET acquired Thresher Square, a 113,736 square foot, seven-story office building from WPT I, LLC, a limited liability company that is 78% owned by Mr. Hoyt. Although the purchase agreements for the acquisition of each of these properties were negotiated and executed prior to the time that Mr. Hoyt became a member of the Board of Trustees, such acquisitions were closed after Mr. Hoyt had become a member of the Board. The acquisition of the Bloomington Business Plaza was approved by the Board of Trustees, based on an independent appraisal of the property and the determination that such acquisition was fair and reasonable to IRET. The acquisition of Thresher Square was approved by the Board, other than Mr. Hoyt, who abstained from such vote, based on the determination by such members of the Board that the acquisition was fair and reasonable to IRET. Such members of the Board further determined, based on an internal current appraisal of such property, that substantial justification existed to pay a value greater than the cost of the property. On April 1, 2002, IRET acquired Wirth Corporate Center, an 89,384 square foot, four-story office building from Mr. Hoyt. The Board of Trustees, other than Mr. Hoyt, who abstained from the vote approved the transaction as being fair and reasonable to IRET. The purchase price was based on an appraisal from an independent third-party who determined the value of the property to be $8.6 million. In addition to these acquisitions, on April 1, 2001, prior to the time that Mr. Hoyt was elected to the Board of Trustees, IRET acquired a group of six commercial properties from Mr. Hoyt, or affiliates of Mr. Hoyt. Such properties included 2030 Cliff Road, a 13,374 square foot, multi-tenant office building located in Eagan, Minnesota; Burnsville Bluffs, a 26,186 square foot, multi-tenant office building located in Burnsville, Minnesota; Cold Spring Center, a 77,533 square foot, multi- tenant office building located in St. Cloud, Minnesota; Nicollet VII, a 118,400 square foot, multi-tenant office building located in Burnsville, Minnesota; Pillsbury Business Center, a 42,220 square foot, multi-tenant office building located in Bloomington, Minnesota; and Plymouth IV and V, two multi-tenant office buildings having an aggregate of 126,809 square feet and located in Plymouth, Minnesota. The aggregate purchase price for these commercial properties was $34.4 million. The acquisition of these commercial properties was approved by the Board of Trustees. UPREIT UNIT LOAN PROGRAM - On January 16, 2002, the Board of Trustees authorized an UPREIT unit loan program that is available to persons that hold $1.0 million or more of IRET Properties limited partnership units. Under such loan program, IRET may lend up to 50% of the value of the borrower's limited partnership units, with such value to be based on the closing price of IRET shares on the NASDAQ National Market on the date of the loan. Such loans will be for terms of two years or less, they will be secured by the borrower's limited partnership units in IRET Properties and they will be at a variable interest rate of 1.5% over the interest rate charged to us by a participating lender. The interest rate will adjust on the first of each month. In connection with such loans, IRET will charge a .5% loan fee. On January 30, 2002, a loan in the amount of $3.5 million was made to Steven B. Hoyt, a member of the Board of Trustees. The Board of Trustees approved such loan. The terms of the loan require Mr. Hoyt to make quarterly interest payments beginning April 1, 2002, with the full balance of the principal sum due on or before January 31, 2004. The initial interest rate is equal to the Wall Street Journal Prime Rate as of January 31, 2002, plus 1.5%, which is equal to 6.25%. Mr. Hoyt paid a $17,500 loan fee on the date of the loan. UPREIT CONTRIBUTION - On April 30, 2002, Edgeview Estate I, Ltd., a North Dakota limited partnership contributed the proceeds from the sale of real estate pursuant to IRET Properties UPREIT Contribution Program. The total amount contributed to IRET Properties by Edgeview in exchange for limited partnership units was $386,168.17. A total of 38,908.632 units were allocated to the partnership at a price of $9.925 per unit. The unit price of $9.925 was determined using the average NASDAQ closing price for the 14 trading days prior to April 30, 2002, excluding the highest close and the lowest close during the 14-day period. 37 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES No commissions, fees or other costs were paid or incurred by IRET Properties. Edgeview Estates I, Ltd is owned by current officers as well as current trustees and past trustees of IRET as follows: Thomas A. Wentz Sr., 6.67% - President, Investors Real Estate Trust; Thomas A. Wentz Jr., 26.67% - Vice President and Trustee of Investors Real Estate Trust; Roger R. Odell, 33.33%, Past President and former Trustee of Investors Real Estate Trust until July 1, 2000, and Mike F. Dolan, 33.33%, former Trustee of Investors Real Estate Trust until August, 1999. SECURITY SALES AND SERVICE - Inland National Securities is a corporation that provides underwriting services in connection with the sale of IRET shares. Roger R. Odell is a shareholder in Inland National Securities. From May 1, 2000, through June 30, 2000, (the last full month in which Mr. Odell served as President and as a member of the Board of Trustees), IRET paid $6,861 in fees to Inland National Securities for security sales services. For the fiscal year ended April 30, 2000, IRET paid $100,081 for such services. D.A. Davidson & Co. is a corporation that has, and may in the future, on a best-efforts basis, participate in offerings of IRET securities. John F. Decker, a member of the Board of Trustees, is an employee of D.A. Davidson. D.A. Davidson participated in IRET's share offering and sold a total of 700,000 shares. During the year ended April 30, 2002, IRET paid D.A. Davidson commissions in the amount of $490,000, and reimbursed them for legal and travel expenses in the amount of $4,814. Of this amount, Mr. Decker personally received $26,117 in compensation from D.A. Davidson in connection with such offerings. During the fiscal year ended April 30, 2001, IRET paid D.A. Davidson $50,000 for certain investment banking services. For IRET's most recent offering on April 25, 2002, D.A. Davidson sold 600,000 shares and received $402,000 in commission and $13,761 for legal and travel expenses paid in May, 2002. LEGAL SERVICES - In the past, IRET paid fees and expense reimbursements to Pringle & Herigstad, P.C., the law firm in which Thomas A. Wentz, Jr., IRET's Vice President and General Counsel, was a partner until December 31, 1999. For the year ended, April 30, 2000, such fees and expense reimbursements totaled $89,497. Thomas A. Wentz, Jr. has been a member of the Board of Trustees since 1996 and Vice President and General Counsel since June 2000. NOTE 10 • MARKET PRICE RANGE OF SHARES For the year ended April 30, 2002, a total of 7,644,522 shares were traded on the NASDAQ in 12,798 separate trades. The high was $10.49, low $8.25 and closing price on April 30, 2002, was $10.03. For the year ended April 30, 2001, a total of 3,668,819 shares were traded in 4,692 separate trades. The high trade price during the period was $8.980, the low was $7.375, and the closing price on April 30, 2001, was $8.770. For the year ended April 30, 2000, a total of 4,058,018 shares were traded in 3,414 separate trades. The high trade price during the period was $17.875, the low was $7.681, and the closing price on April 30, 2000, was $7.875. NOTE 11 • OPERATING SEGMENTS Operating segments are defined as components of an enterprise about which separate financial information is available that is evaluated by the chief decision makers in 38 distribution methods, in assessing deciding how to allocate resources and performance. Operating segments of IRET are determined to be commercial and residential rental operations. All properties falling into these categories have similar economic characteristics, as well as similar production processes, type of regulatory customers, environments. Although information is available on a property-by-property basis, including rental income and operating expenses, most analysis and decisions are primarily made based on residential and commercial segments. Generally, segmental information follows the same accounting policies utilized for consolidated reporting except certain expenses such as depreciation are not allocated to segments for reporting purposes. and YEAR ENDING APRIL 30, 2002 Segment Revenue Rental revenue Segment Expenses COMMERCIAL RESIDENTIAL TOTAL $ 32,685,652 $ 59,052,950 $ 91,738,602 Mortgage interest Utilities and maintenance Taxes Insurance Property management Total Segment Expense Segment Gross Profit 12,475,652 2,117,993 2,685,880 236,814 940,102 $ 18,456,441 $ 14, 229,211 16,687,801 10,591,621 6,498,719 1,115,808 6,045,440 $ 40,939,389 $ 18,113,561 29,163,453 12,709,614 9,184,599 1,352,622 6,985,542 $ 59,395,830 $ 32,342,772 Reconciliation to consolidated operations: Interest discounts and fee revenue Other interest expense Depreciation Administration, advisory, and trust fees Operating expenses Amortization $ 1,277,467 (1,441,393) (15,515,168) (1,682,742) (565,802) (549,200) Consolidated income before gain/loss on properties and minority interest $ 13,865,934 APRIL 30, 2002 Segment Assets Property owned Less accumulated depreciation $ 350,388,982 (17,296,055) Total consolidated property owned $ 333,092,927 $ 389,930,454 (41,629,462) $ 348,300,992 $ 740,319,436 (58,925,517) $ 681,393,919 YEAR ENDING APRIL 30, 2001 Segment Revenue Rental revenue Segment Expenses COMMERCIAL RESIDENTIAL TOTAL $ 18,994,010 $ 55,806,712 $ 74,800,722 Mortgage interest Utilities and maintenance Taxes Insurance Property management Total Segment Expense Segment Gross Profit 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: Interest discounts and fee revenue Other interest expense Depreciation Administration, advisory, and trust fees Operating expenses Amortization 966,428 (789,973) (12,299,532) (1,480,696) (431,390) (428,188) Consolidated income before gain/loss on properties and minority interest $ 10,187,812 $ INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES APRIL 30, 2001 Segment Assets Property owned Less accumulated depreciation $ 230,058,846 (11,796,966) Total consolidated property owned $ 218,216,880 $ 361,577,622 (32,296,179) $ 329,281,443 $ 591,636,468 (44,093,145) $ 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 Utilities and maintenance Taxes Insurance Property management Loss on impairment of properties $ $ Total Segment Expense Segment Gross Profit 3,980,450 452,229 481,191 52,288 132,435 1,319,316 6,417,909 5,460,117 12,312,038 7,592,301 4,801,170 424,674 4,157,840 0 29,288,023 13,091,832 16,292,488 8,044,530 5,282,361 476,962 4,290,275 1,319,316 $ 35,705,932 $ 18,551,949 $ $ Reconciliation to consolidated operations: Interest discounts and fee revenue Other interest expense Depreciation Administration, advisory and trust fees Operating expenses Amortization $ Consolidated income before gain/loss on properties and minority interest $ 1,187,312 (721,682) (8,460,112) (1,159,120) (633,692) (216,097) 8,548,558 APRIL 30, 2000 Segment Assets Property owned Less accumulated depreciation $ 120,714,774 (8,203,307) Total consolidated property owned $ 112,511,467 $ 329,205,116 (25,029,645) $ 304,175,471 $ 449,919,890 (33,232,952) $ 416,686,938 NOTE 12 • EARNINGS PER SHARE Basic earnings per share are computed by dividing the earnings available to stockholders by the weighted average number of shares outstanding during the period. Diluted earnings per share reflect per share amounts that would have resulted if potential dilutive securities had been converted to shares. Operating partnership units can be exchanged for shares on a one-for-one basis after a holding period of one to two years. The following tables reconciles amounts reported in the consolidated financial statements for the years ended April 30, 2002, 2001, and 2000: NUMERATOR Net income applicable to shares Numerator for basic earnings per 2002 2001 2000 $ 10,600,129 $ 8,694,240 $ 8,807,845 share 10,600,129 8,694,240 8,807,845 Minority interest portion of operating partnership income 3,614,168 2,095,177 1,495,209 Numerator for diluted earnings per share $ 14,214,297 $ 10,789,417 $ 10,303,054 DENOMINATOR Denominator for basic earnings per share Weighted average shares Effect of dilutive securities Convertible operating partnership units Denominator for diluted earnings per share Basic earnings per share Diluted earnings per share 25,492,282 23,071,500 20,899,848 8,289,087 5,506,200 3,577,136 33,781,369 0.42 0.42 $ $ 28,577,700 .38 24,476,984 $ $ .42 $ .38 $ .42 NOTE 13 • RETIREMENT PLAN As part of the acquisition on July 1, 2000, of Odell-Wentz & Associates, LLC, IRET assumed a defined contribution profit sharing retirement plan and a defined contribution 401K retirement plan. Employees over the age of 21 and after completion of one year of service are eligible to participate in the profit sharing plan. Contributions to the profit sharing plan are at the discretion of the management. All employees are immediately eligible to participate in the 401K plan and may contribute up to 15% of their compensation subject to maximum levels. IRET matches up to 3% of participating employees' wages. Plan expenses to IRET for the years ended April 30, 2002, and 2001, were $90,455 and $45,301, respectively. NOTE 14 • COMMITMENTS AND CONTINGENCIES INSURANCE - IRET's portfolio-wide general liability and property insurance policies expired on April 30, 2002. IRET renewed these policies at similar coverage levels, but at a price of $495,268 or 44.29% higher than the prior fiscal year's cost due to the addition of more property to IRET's portfolio as well as the general price increases for insurance coverage implemented by the insurance industry. A portion of IRET's insurance costs are passed through to certain commercial tenants pursuant to the terms of the applicable lease agreement. Of IRET's total insurance costs of $1,613,552, $281,737 or 17.46% will be billed back to IRET's commercial tenants. For fiscal 2002, all of IRET's real estate properties are insured against the customary casualty and liability claims except for acts of terrorism, which are excluded under IRET's new insurance policy. Management believes that IRET is in compliance with all insurance provisions of its debt agreements with the exception of one loan pertaining to an apartment complex in Rochester, Minnesota, held by Jefferson Pilot Financial in the amount of $3,807,590 as of April 30, 2002. IRET has requested a waiver from the terror insurance requirement. This waiver request is pending with the lender. If the waiver is not granted, the increased cost to IRET for terrorism coverage on the apartment complex is expected to be $100,000. ENVIRONMENTAL MATTERS - Under various federal, state and local laws, ordinances and regulations, a current or previous owner or operator of real estate may be liable for the costs of removal of, or remediation of, certain hazardous or toxic substances in, on, around or under property. Such laws often impose liability without regard to whether the owner or operator knew of, or was responsible for, the presence of such hazardous or toxic substances. The presence of such substances, or the failure to property remediate any property containing such substances, may adversely affect the owner's or operator's ability to sell or rent the affected property or to borrow using such property as collateral. Persons who arrange for the disposal or treatment of hazardous or toxic substances may also be liable for the costs of removal of, or remediation of, such substances at a disposal or treatment facility, whether or not such facility is owned or operated by such person. Certain environmental laws impose liability for the release of asbestos-containing materials into the air, and third parties may also seek recovery from owners or operators of real properties for personal injury associated with asbestos- containing materials, as well as other hazardous or toxic substances. The operation and subsequent removal of certain 39 INVESTORS REAL ESTATE TRUST AND SUBSIDIARIES underground storage tanks are also regulated by federal and state laws. In connection with the current or former ownership (direct or indirect), operation, management, development and/or control of real properties, IRET may be considered to be an owner or operator of such properties, or to have arranged for the disposal or treatment of hazardous or toxic substances. As such, IRET may be potentially liable for removal or remediation costs, as well as certain other costs, including governmental fines and claims for injuries to persons and property. It is currently IRET's policy to obtain a Phase I environmental study on each property that IRET seeks to acquire. If the Phase I indicated any possible environmental problems, IRET's policy is to order a Phase II study, which involves testing the soil and ground water for actual hazardous substances. No assurance can be given that the Phase I or Phase II environmental studies, or any other environmental studies undertaken with respect to any of IRET's current or future properties, will reveal the full extent of potential environmental liabilities, that any prior owner or operator of a property did not create any material environmental condition unknown to IRET, that a material environmental condition does not otherwise exist as to any one or more of such properties or that environmental matters will not have a material adverse effect on IRET, IRET's ability to make distributions to shareholders and IRET's ability to pay amounts due on debt. IRET currently does not carry insurance for environmental liabilities. Certain environmental laws impose liability on a previous owner of property to the extent that hazardous or toxic substances were present during the prior ownership period. A transfer of the property does not relieve an owner of such liability. As a result, in addition to any liability that IRET may have with respect to current properties, IRET may also have liability with respect to properties previously sold by IRET's predecessors or by IRET. To management's knowledge, as of April 30, 2002, IRET does not own and has not sold any properties that contain known material environmental liabilities. NOTE 15 • FAIR VALUE OF FINANCIAL INSTRUMENTS The following methods and assumptions were used to estimate the fair value of each class of financial instruments for which it is practicable to estimate value: Mortgage loans receivable - Fair values are based on the discounted value of future cash flows expected to be received for a loan using current rates at which similar loans would be made to borrowers with similar credit risk and the same remaining maturities. Cash - The carrying amount approximates fair value because of the short maturity. Marketable securities - The fair values of these instruments are estimated based on quoted market prices for the security. Notes payable - The carrying amount approximates fair value because of the short maturity of such notes. Mortgages payable - For variable rate loans that re-price frequently, fair values are based on carrying values. The fair value of fixed rate loans is estimated based on the discounted cash flows of the loans using current market rates. 40 Investment certificates issued - The fair value is estimated using a discounted cash flow calculation that applies interest rates currently being offered on deposits with similar remaining maturities. Accrued interest payable - The carrying amount approximates fair value because of the short-term. The estimated fair values of the company’s financial instru- ments are as follows: 2002 2001 Carrying Amount Fair Value Carrying Amount Fair Value $ 3,952,762 12,333,426 $ 3,952,762 12,333,426 $ 1,037,095 6,356,063 $ 1,037,095 6,356,063 0 0 2,351,248 2,354,018 10,500,000 10,500,000 660,865 660,865 $ 0 459,568,905 $ 0 446,861,536 $ 0 368,956,930 $ 0 356,434,028 25,186,582 3,380,046 24,880,390 3,380,046 11,876,417 2,714,412 11,804,535 2,714,412 FINANCIAL ASSETS Mortgage loan receivable Cash Marketable securities held-to-maturity Marketable securities available-for-sale FINANCIAL LIABILITIES Notes payable Mortgages payable Investment certificates issued Accrued interest payable QUARTERLY RESULTS OF CONSOLIDATED OPERATIONS (unaudited) QUARTER ENDED Revenues Income before gain on properties and minority interest Net gain on sale of properties Minority interest portion of 07-31-01 $ 21,780,094 10-31-01 $ 23,175,041 01-31-02 $ 23,605,772 04-30-02 $ 24,455,162 3,250,866 307,934 3,743,415 3,642,689 3,228,964 16,398 3,346 219,241 operating partnership income (783,073) (813,898) (1,405,783) (809,976) Net Income Per share Net Income 2,775,727 2,945,915 2,240,252 2,638,235 .11 .12 .09 .10 QUARTER ENDED Revenues 07-31-00 $ 17,431,644 10-31-00 $ 18,404,260 01-31-01 $ 19,004,737 04-30-01 $ 20,926,509 Income before gain(loss) on properties and minority interest 2,565,131 2,707,811 2,719,679 2,195,191 Net gain(loss) on sale of properties Minority interest portion of 0 0 25,124 576,481 operating partnership income (425,667) (538,618) (426,316) (704,576) Net Income Per share Net Income QUARTER ENDED Revenues Income before gain on properties and minority interest Net gain on sale of properties Minority interest portion of operating partnership income Net Income Per share Net Income 2,139,464 2,169,193 2,318,487 2,067,096 .09 .10 .10 .09 07-31-99 $ 11,201,913 10-31-99 $ 12,900,697 01-31-00 $ 14,054,660 04-30-00 $ 17,287,923 1,801,322 257,895 2,478,912 1,519,918 2,390,868 1,877,456 0 (23,317) (235,935) 1,823,282 (579,625) 3,419,205 (369,028) 2,021,840 (310,621) 1,543,518 .09 .16 .11 .06 SHAREHOLDER INFORMATION EXECUTIVE OFFICERS Thomas A. Wentz, Sr., President & CEO Timothy P. Mihalick, SVP & COO Thomas A. Wentz, Jr., VP & General Counsel Diane K. Bryantt, Secretary & CFO TRUSTEES Jeffrey L. Miller, Chairman C. Morris Anderson, Vice Chairman Daniel L. Feist, Vice Chairman John F. Decker Steven B. Hoyt Patrick G. Jones Timothy P. Mihalick Stephen L. Stenehjem Thomas A. Wentz, Jr. 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 OUTSIDE ATTORNEYS 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 INFORMATION PROCESSING MICHELLE R. SAARI ASSISTANT VICE PRESIDENT SHARLA J. NESSON I N F O R M AT I O N P R O C E S S O R JULIE A. EBERT A D M I N I S T R AT I V E A S S I S TA N T SEC FORM 10-K405 Copies of Investors Real Estate Trust’s Annual Report on Form 10-K405 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 32nd Annual Meeting of Shareholders in the Executive Room, International Inn, 1505 North Broadway, Minot, North Dakota, at 7:00 P.M. on Tuesday, September 24, 2002. STOCK TRADING INFORMATION Investors Real Estate Trust shares trade on the NASDAQ National Market under the symbol IRETS. DISTRIBUTION REINVESTMENT PLAN Investors Real Estate Trust offers to its shareholders the option to automatically reinvest their distributions through the Distribution Reinvestment Plan. For additional information, please contact Darla J. Strilcov, Shareholder Relations, at Investors Real Estate Trust. COMMON SHAREHOLDERS OF RECORD/SHARES OUTSTANDING As of August 1, 2002, Investors Real Estate Trust had approximately 5,186 shareholders of record and 31,646,599 shares outstanding. Investors Real Estate Trust 12 South Main Street, Suite 100 PO Box 1988 Minot, ND 58702-1988 www.iret.com 

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