Investors Real Estate Trust
Annual Report 2003

Plain-text annual report

C R E AT I N G vvaalluuee F O R S H A R E H O L D E R S IIRR EETT I N V E S TO R S R E A L E S TAT E TRU S T 2003 Annual Report Cover Photo: Byerly’s Grocery - Chanhassen West Village Center - Chanhassen, MN 33years of service C. Morris Anderson Original Trustee since 1970 thank you... Morris has helped IRET, a fledgling North Dakota- based company founded in 1970, grow and expand into the multi-state, publicly traded real estate investment Ask Morris how he feels about IRET and he ponders trust it has become today. for a moment then quietly says, “It’s been a great experience - enjoyable. I am really going to miss IRET.” Morris will always be a part of the IRET family. As Contents Financial Highlights Company Profile President’s Report Investment Portfolio 1 2 3 8 he moves to Trustee Emeritus status, we welcome his Tracking Performance 11 Morris is retiring from the Board of Trustees after continued contributions. serving 33 years as an original Trustee of IRET. His insight and vision have helped develop a foundation for Thank you, Morris, for your years of service and IRET that reflects our commitment - creating value for dedication to IRET. our shareholders. REVENUE in millions of dollars 120.77 93.02 75.77 55.45 39.93 99 00 01 02 03 FUNDS FROM OPERATIONS in millions of dollars 34.18 29.14 22.44 18.33 12.37 99 00 01 02 03 DISTRIBUTIONS per share .55 .51 .47 .59 .63 99 00 01 02 03 TOTAL ASSETS in millions of dollars 885.68 730.21 570.32 432.98 291.49 99 00 01 02 03 SELECTED CONSOLIDATED FINANCIAL DATA The selected consolidated financial data set forth below ended April 30, 2000 and 1999 have been derived from for the fiscal years ended April 30, 2003, 2002 and 2001, audited financial statements not included in this report. has been derived from our financial statements, which have These historical results are not necessarily indicative of the been audited by Brady Martz & Associates, P.C., results to be expected in the future. The following table is independent auditors, whose report is included in the qualified by reference to and should be read in conjunction Company’s form 10-K for the fiscal year ended April 30, with the consolidated financial statements, related notes 2003, as filed with the U.S. Securities and Exchange thereto and other financial data included in the Company’s Commission. The consolidated financial data for the years form 10-K. Years Ended April 30, Consolidated Income Statement Data 2003 2002 2001 2000 1999 Revenue $120,766,665 $ 93,016,069 $ 75,767,150 $ 55,445,193 $ 39,927,262 Income before Gain/Loss on Properties and Minority Interest $ 15,486,435 $ 13,865,934 $ 10,187,812 $ 8,548,558 $ 6,401,676 Gain on Repossession/Sale of Properties 1,594,798 546,927 601,605 1,754,496 1,947,184 Minority Interest Portion of Operating Partnership Income (4,833,072) (3,812,732) (2,095,177) (1,495,209) (744,725) Net Income* Consolidated Balance Sheet Data $ 12,248,161 $ 10,600,129 $ 8,694,240 $ 8,807,845 $ 7,604,135 Total Real Estate Investments $845,324,970 $ 685,346,681 $ 548,580,418 $ 418,216,516 $ 280,311,442 Total Assets Shareholders’ Equity $885,680,521 $ 730,209,018 $ 570,322,124 $ 432,978,299 $ 291,493,311 $214,761,105 $ 145,578,131 $ 118,945,160 $ 109,920,591 $ 85,783,294 Per Share Net Income Distributions $ $ .38 .63 $ $ .42 .59 $ $ .38 .55 $ $ .42 .51 $ $ .44 .47 Funds From Operations** $ 34,178,597 $ 29,143,549 $ 22,440,463 $ 18,327,986 $ 12,368,550 * ** Includes both continuing and discontinued (real estate that we sold) operations for the indicated fiscal years. 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. 1 COMPANY PROFILE ORGANIZATIONAL STRUCTURE 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 diversified portfolio of income-producing real estate. IRET is structured as an Umbrella Partnership Real Estate Investment Trust (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. Chanhassen West Village Center - Chanhassen, MN From its inception in 1970, IRET has sought to: INVESTMENT STRATEGY of deposit; As of April 30, 2003, IRET owned 64 apartment communities containing 8,227 apartment units and 125 commercial properties with 6,083,588 square feet Increase distributions to shareholders at a rate in excess of the inflation rate; of rentable space located primarily in Minnesota and North Dakota as well as Increase the share price by a percentage equal to the distribution rate for a twelve other states. total return to the shareholder at least twice the return of a one-year Pay a cash distribution equal to or better than a bank one-year certificate 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 properties and a variety of commercial properties. In order to meet yield objectives, we generally seek to borrow 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. certificate of deposit. CASH DISTRIBUTION POLICY It is our policy to distribute approximately 65% to 85% of our funds from operations (FFO) (net income reduced by capital gain income and increased by real estate depreciation). We use the remaining FFO to make capital improvements to existing properties and to acquire more properties. By reinvesting a portion of FFO, we expect to enhance the income-producing capability of our portfolio. 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. 2 PRESIDENT’S REPORT To Our Fellow Shareholders, diligently for apartment investments, but at the present time we find most apartments to be priced at a higher level then we deem justified and will April 30, 2003, marked the completion of IRET's 33rd year and, in our continue to choose the most attractive investment, regardless of the type. opinion, the year was one of significant growth and progress for our Company. Of particular importance was the merger of IRET and the T. F. James Company Merger with T. F. James Company of Excelsior, Minnesota, which brings to us the resources and expertise of this In February 2003, we entered into a merger agreement with the T. F. James successful 50-year old real estate firm and gives IRET an office and staff in the Company, a privately held Iowa corporation primarily engaged in the Twin Cities of Minneapolis and St. Paul, Minnesota, our largest market. Also, in development and ownership of retail and commercial real estate in Minnesota and spite of the most difficult economic conditions in a decade, our portfolio surrounding states. As a result of the merger, we acquired 50 retail and performed at a level which allowed us to continue quarterly increases in cash commercial real estate properties containing approximately 881,949 square feet of distributions to our shareholders - a practice we will do our best to continue. rentable space as well as eight undeveloped or primarily vacant parcels of real Some of the highlights of our 33rd year were: estate. The merger increased our real estate portfolio by $71,412,613, and is expected to increase gross rental revenues by $6,356,000 on an annual basis. The Change in Portfolio Mix - More Commercial, Less Apartments eight undeveloped and vacant properties acquired in the merger accounted for IRET has historically sought to weight its real estate portfolio toward approximately $2,760,000 of the total transaction. IRET Office - Excelsior, MN apartment communities, expecting that apartments would make up 65% to 75% of its holdings. However, during the last three years, we have found apartments to be over-priced and have chosen to direct more of our investment dollars to commercial properties because we believe that course will offer the best value for our shareholders. During the past year we acquired only two apartment communities consisting of 132 units for $3,938,053 while we acquired 64 commercial properties for $163,452,292. Likewise, of the $143,280,342 invested to acquire real estate properties during fiscal 2002, $23,950,924 (17%) went to acquire apartment communities and $119,329,418 (83%) was invested in commercial real estate. As a result of this investment direction, our portfolio on April 30, 2003, consisted of more commercial properties (57%) based on our cost, than apartments (43%). While we actively sought to direct more of our equity capital to apartment communities, we were able to identify only a few apartment properties that met our investment criteria. We will continue to search 3 PRESIDENT’S REPORT In order to manage the newly acquired properties, we have continued to 33 Years of Increased Cash Distributions to Shareholders operate the T. F. James Company Minneapolis office. Six employees of the T. F. We again increased the cash distribution paid on our shares of beneficial James Company joined the staff of IRET. Mr. Charles Wm. James, President and interest and operating partnership units during each quarter of fiscal 2003. shareholder of the T. F. James Company, was appointed to fill an open seat on Distributions increased to 62.50¢ per share, compared to 59.45¢ per share paid the Board of Trustees of Investors Real Estate Trust. Mr. James is also Senior in the prior fiscal year, an increase of 5.1%. IRET made its first cash distribution Vice President of Development and Asset Management for the IRET to shareholders on July 1, 1971, and has paid a cash distribution during every Minneapolis Portfolio. IRET Minneapolis Anthony Oxborough Richard Kvanbeck Brian Rose quarter of its existence and has increased its annual distribution every year since that time. Since 1988, we have also increased our distribution every quarter. On July 1, 2003, the cash distribution was increased to 15.85¢ per share and unit and was the 129th consecutive quarterly cash distribution paid. Increase in Equity Capital IRET successfully completed a $34,200,000 public offering of 3,600,000 shares of beneficial interest during fiscal 2003. The proceeds from this public offering of shares, together with the T. F. James Company merger and the proceeds received from the Distribution Reinvestment Plan resulted in shareholder equity increasing to $214,761,105 at fiscal year-end, compared to the year earlier figure of $145,578,131, an increase of $69,182,974 (47.5%). In addition, the minority interest in the operating partnership increased to $80,376,853, compared to the year earlier figure of $76,460,046, an increase of $3,916,807. Also, the minority interest in other partnerships controlled by IRET increased to $14,224,628 from $12,819,077 for a total increase in book equity capital of the operating Sale of Vacant Boise, Idaho Property We sold the furniture retail property in Boise, Idaho which, for the past partnership of $74,505,332. several years, had been vacant and had negatively impacted our earnings. IRET Minneapolis Charles Wm. James 4 P R E S I D E N T ’ S R E P O R T Financial Results commercial leases having periodic rent increases. As a result, we record rent For IRET's 33rd year, which ended on April 30, 2003, financial results were: income that will not actually be collected until later years. The total "straight-line Real estate owned reached $919,780,802 (at cost, without depreciation allowance), compared to the year earlier figure of $740,319,436, an increase of 24.2%. rents" included in the preceding revenue, net income, and FFO figures are $1,391,226 for fiscal 2003 and $1,311,105 for fiscal 2002. Portfolio Expansion Gross revenues were $120,766,665, compared to $93,016,069 for the prior IRET's operating partnership invested $3,938,053 during fiscal 2003 to year, an increase of 29.8%. Funds from operations (FFO) were $34,178,597, compared to $29,143,549 in the prior year, an increase of 17.3%. On a per share basis, FFO was 80.20¢ per share, compared to 86.27¢ per share, a decrease of 7.0%. FFO is a supplemental non-GAAP financial measurement used as a standard in the real estate industry to measure and compare the operating performance of real estate companies. We adhere to the NAREIT definition of FFO. NAREIT defines FFO as net income or loss, excluding gains on losses from sales of depreciated property, plus operating property depreciation and amortization and adjustments for minority interest and unconsolidated companies on the same basis. A reconciliation of FFO to GAAP net income is included in the Company’s form 10-K for the fiscal year ended April 30, 2003, as filed with the U.S. Securities and Exchange Commission. Net income was $12,248,161 compared to $10,600,129 for the prior year. On a per share and unit basis, net income was $.38 compared to $.42 for the prior fiscal year. All per share and unit amounts reported are diluted with basic per share and unit information also included in IRET's 10-K for the period ending April 30, 2003, as filed with the U. S. Securities & Exchange Commission. Straight-Line Rents acquire two apartment communities containing 132 apartment units, $163,452,292 to acquire 64 commercial buildings totaling 2,416,653 square feet of net rentable space and $7,056,438 to expand the Southdale Medical Center. Four apartment communities consisting of 201 apartment units and three commercial properties totaling 119,419 square feet were disposed of during fiscal 2003. The operating partnership ended the year owning 64 apartment communities with 8,227 apartment units and 125 commercial properties totaling 6,083,588 rentable square feet. In addition to our new acquisitions, we invested $13,859,935 in our existing properties for capital improvements and expansions. Share Price The last trade of IRET shares on the NASDAQ National Market on April 30, 2003, was at $9.80 per share. The last trade on April 30, 2002, was at $10.03 per share resulting in a decrease of 2.3% during the fiscal year. The stock price performance for the past fiscal year is in contrast to its performance the prior two fiscal years when shareholders enjoyed a 14.4% increase for fiscal 2002 and an 11.4% increase for fiscal 2001. The slight decrease in our share price this past year should be viewed with the strong increases during the prior two years. The three-year performance is 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% Accounting standards require us to record "straight-line rents" as revenue on per annum. 5 PRESIDENT’S REPORT Despite the slight dip this year, IRET has met this goal on average over its We have primarily used 10-year fixed rate financing to acquire our real estate 33-year history. We will continue to do our best to deliver to our shareholders the assets. Thus, a rapid increase in interest rates would not have an immediate same consistent financial results they have enjoyed over the past 33 years. impact on our operations. The Future For these reasons, we expect to be able to continue our cash distributions IRET is well positioned to build and expand upon our 33-year history of policy and keep pace with inflation. creating value for our shareholders. We have a large, diversified real estate portfolio with an income stream not overly dependent on a single property type, geographic area or exposed to a concentrated tenant credit or lease rollover risk. We have an energetic, talented and experienced staff as well as a growing network of relationships with leading real estate professionals. We expect to be able to acquire additional real estate properties with our UPREIT program, as well as cash acquisitions with existing funds. While the struggling economy will present challenges for all businesses in the short-term, we are optimistic about IRET's long-term future. We will conduct our business using the same principles that we have employed over the past 33 years. Sincerely, Thomas A. Wentz Sr. President & CEO IRET Minneapolis Robert Martin Tonia Sikorski Deb Swanson 6 Central Bank - Eden Prairie, MN 7 North Dakota 2,794 794,959 Minnesota 688,061 Wisconsin 80,958 94,764 1,309 4,069,709 Iowa 132 604,711 South Dakota 739 87,615 Nebraska 498 129,568 Kansas 520 Texas 504 INVESTMENT PORTFOLIO Washington 304 Montana 583,810 770 126,145 Idaho 60 130,629 Colorado 597 Apartment Units Commercial Property Square Footage Undeveloped Land Square Footage Property Investments percentage by state 50.4% Minnesota 17.5% North Dakota 4.3% Colorado 5.2% Montana 4.3% South Dakota 4.2% Texas 4.0% Nebraska 3.0% Kansas 2.1% Washington 2.1% Idaho 1.9% Iowa .4% Georgia .4% Wisconsin .2% Michigan 8 Michigan 16,080 Geogia 29,408 Real Estate Portfolio Mix 56.3% Apartment Communities 43.4% Commercial Real Estate .3% Undeveloped Land Commercial Properties by IRET State Georgia Idaho Iowa Michigan Minnesota Montana Nebraska North Dakota South Dakota Wisconsin Sq. Ft. 29,408 130,629 604,711 16,080 4,069,709 126,145 129,568 794,959 87,615 94,764 $ Investment 3,971,878 15,041,490 12,900,879 2,121,474 401,714,620 7,284,253 14,724,210 49,073,817 8,021,565 3,250,000 Total Commercial Property 6,083,588 $ 518,104,186 Apartment Communities by IRET State Colorado Idaho Iowa Kansas Minnesota Montana Nebraska North Dakota South Dakota Texas Washington Total Apartment Communities Undeveloped Land State Minnesota Montana Wisconsin Total Undeveloped Land Total Real Estate Owned Units 597 60 132 520 1,309 770 498 2,794 739 504 304 8,227 Sq. Ft. 688,061 583,810 80,958 1,352,829 $ Investment 39,758,067 3,894,385 4,765,404 27,526,053 61,110,394 38,482,834 22,132,467 112,084,375 31,500,873 38,097,248 19,564,516 $ 398,916,616 Investment 1,010,000 1,550,000 200,000 2,760,000 919,780,802 $ $ $ Fiscal 2003 Occupancy 100.0% 100.0% N/A 100.0% 96.2% 100.0% 100.0% 96.7% 71.4% N/A 95.4% Fiscal 2003 Occupancy 89.5% 92.5% 91.6% 93.4% 90.0% 93.3% 78.1% 95.2% 87.1% 90.9% 89.7% 91.2% INVESTMENT PORTFOLIO TCF Bank - Chanhassen, MN n/a = non-stabilized property acquired in fiscal 2003. 9 Southdale Medical Center - Edina, MN 10 TRACKING PERFORMANCE 32 Calendar Year History of Increasing Distributions Since its first distribution paid July 1, 1971, IRET has never delayed, omitted or reduced its quarterly distribution. In each of the last 32 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 1971 1975 1985 1995 1996 1997 1998 1999 2000 2001 2002 1.00 $ 1.50 $ 3.15 $ 6.16 $ 6.44 $ 7.13 $ 7.44 $ 7.88 $ 7.88 $ $ 9.35 $ 10.05 1971 1975 1985 1995 1996 1997 1998 1999 2000 2001 2002 2.75¢ 8.00¢ 24.25¢ 35.25¢ 37.38¢ 40.18¢ 43.70¢ 49.25¢ 52.55¢ 57.50¢ 61.20¢ 1971 1975 1985 1995 1996 1997 1998 1999 2000 2001 2002 2.8% 12.9% 19.5% 10.6% 10.6% 17.0% 10.5% 12.5% 6.7% 26.0% 14.0% (End of calendar year bid price per share of beneficial interest of IRET) (Total calendar year distributions paid) Distributions plus share price changes. (Calendar year distributions paid plus change in share bid price divided by previous end of year share bid price.) Price Range of Shares of Beneficial Interest Fiscal Year 2003 Low High Fiscal Year 2002 Low High May 1 to July 31 August 1 to October 31 November 1 to January 31 February 1 to April 30 11.900 11.000 11.000 10.000 8.550 9.050 9.660 8.980 10.490 9.430 10.000 10.450 8.250 8.800 9.000 9.510 Fiscal Year 2001 Low High 8.125 8.250 8.500 8.980 7.375 7.594 7.438 8.000 11 TRACKING PERFORMANCE Calendar Year Tax Status of Distribution Capital gain Ordinary income Return of capital 2002 0.00% 68.30% 31.70% 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% 1997 2.90% 97.10% 0.00% 32 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. $ 8,525 IRET Peer Group $ 3,552 12 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 02 (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. Corporate Headquarters Investors Real Estate Trust 12 South Main Street 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 Gray, Plant & Mooty 3400 City Center 33 South 6th Street Minneapolis, MN 55402-3796 Auditors - through July 23, 2003 Brady Martz & Associates, P.C. Certified Public Accountants 24 West Central Minot, North Dakota 58701 Auditors - beginning July 24, 2003 Deloitte & Touche LLP 400 One Financial Plaza 120 South Sixth Street Minneapolis, MN 55402-1844 Board of Trustees Jeffrey L. Miller, Chairman C. Morris Anderson, Vice Chairman Daniel L. Feist, Vice Chairman John F. Decker Steven B. Hoyt Charles Wm. James Patrick G. Jones Timothy P. Mihalick Stephen L. Stenehjem Thomas A. Wentz, Jr. SHAREHOLDER INFORMATION Executive Officers Thomas A. Wentz, Sr. - President & Chief Executive Officer Timothy P. Mihalick - Senior Vice President & Chief Operating Officer Thomas A. Wentz, Jr. - Senior Vice President & General Counsel Diane K. Bryantt - Senior Vice President & Chief Financial Officer Charles Wm. James - Senior Vice President of Development & Asset Management Michael A. Bosh - Secretary and Associate General Counsel Stock Listing: Nasdaq: IRETS Annual Meeting: Investors Real Estate Trust will hold its 33rd Annual Meeting of Shareholders in the Executive Room, International Inn, 1505 North Broadway, Minot, North Dakota, at 7:00 p.m. CDT on Tuesday, September 23, 2003. SEC Form 10-K: The company’s annual report on form 10-K and corresponding exhibits for the fiscal year ended April 30, 2003, are filed with the U.S. Securities and Exchange Commission and can be accessed in the EDGAR database at the SEC website, www.sec.gov, or through the Investor Relations section of IRET’s website, www.iret.com. Requests for any such items should be made to: IRET, Investor Relations, PO Box 1988, Minot, ND 58702-1988. INVESTORS REAL ESTATE TRUST 12 South Main Street PO Box 1988 Minot, ND 58702-1988 telephone 701.837.4738 fax 701.838.7785 email info@iret.com www.iret.com 

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