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